Cents and Sensibility
Cents and Sensibility
A 401(k) plan may
be a good choice
for your businessBusiness owners today have many choices in retirement plans. One of the most popular is the 401(k) plan.
A 401(k) plan is a deferred compensation plan that allows employees to put a portion of their salary into a retirement plan. The contributions are exempt from federal and state taxation (in most states); however, they do not avoid Social Security (FICA) tax. The employer also has the option of making matching or profit-sharing contributions that are tax-deductible to the business.
Many business owners think retirement plans such as 401(k) are expensive and difficult to administer, but this is not necessarily true. With 401(k) plans, employers are required to file form 5500 each year and pass certain anti-discrimination tests at least annually. As for the costs, increased demand for these plans has fueled competition among retirement-plan providers, resulting in lower costs to businesses.
The 401(k) is most appropriate for the business owner with more than 25 employees who wants to encourage employees to fund part of their own retirement plan. Any organization, such as a sole proprietorship, partnership, corporation, S-corporation, or nonprofit group can have a 401(k).
For the year 2002, employees may contribute up to $11,000 before taxes. (This amount is subject to cost-of-living adjustments.) They also may make voluntary after-tax contributions up to 10 percent of their pay. For each employee, total contributions from all sources may not exceed the lesser of 25 percent of compensation (up to a maximum salary of $200,000, 2002 figure), or $40,000 per individual. However, only 15 percent of eligible compensation is deductible by the company.
Anyone who is at least 21 years of age and has one year of full-time service is eligible to participate in the 401(k) plan. One year of full-time service equals 1000 hours; employees who work less than 1000 hours may be excluded.
Employers can choose from a wide range of investments for 401(k) assets. Often, businesses will offer several options, enabling employees to choose how their contributions are invested. In addition, business owners may set up a vesting schedule, helping retain employees and reduce turnover.
If you're considering offering a 401(k) plan, consult your tax adviser, and look for a retirement-plan provider who is well-versed in the regulations.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com