The True Cost of Offering a Small Business 401k Plan

As a business owner, one of the many ways to attract and retain employees is by offering a 401k plan. However, providing this benefit comes with a cost, and that cost is often misconstrued or underestimated. In this blog post, we’ll delve into the details of what it truly costs to offer a small business 401k plan.

The basics of a small business 401k plan

Before we dive into the costs, let’s first establish the basic benefits of offering a small business 401k plan. For starters, it’s a great way to save for retirement as both employers and employees can contribute pre-tax dollars. Additionally, employees are more likely to stay with a company that offers a 401k plan, which reduces turnover and recruiting costs.

The cost of 401k plan administration

Providing a 401k plan involves administrative costs that must be considered. These costs include plan documents, government filings, third-party administrator fees, and record-keeping expenses. According to Human Interest, these administrative fees can range from $1,000 to $2,500 annually.

Employer contribution

In addition to administrative fees, employers must also contribute to the plan. The employer contribution is not mandatory but if an employer chooses to, they can contribute up to 25% of an employee’s salary. It’s important to note that this contribution is tax-deductible for the employer.

Employee contribution

Of course, employees also have a role to play in contributing to their 401k. According to the IRS, the maximum employee contribution for 2021 is $19,500, with an additional $6,500 catch-up contribution allowed for employees aged 50 and above. It is important to note that employee contributions are made with pre-tax dollars, reducing their taxable income.

Matching contributions

Employers can also choose to match employee contributions as an added perk. This is typically done as a percentage of the employee’s contribution, such as 50% of the first 6% of an employee’s salary. This means if an employee were to contribute 6% of their salary, the employer would match 3%. Matching contributions are also tax-deductible for employers.

In conclusion

In summary, offering a 401k plan to small business employees involves administrative fees, employer contributions, employee contributions, and matching contributions. The total cost of offering this benefit can vary depending on the size of the company, the level of matching contributions, and administrative fees. It is important for employers to weigh the cost-benefit of providing a 401k and ensuring that it aligns with their business objectives. However, offering a 401k plan can ultimately help attract and retain top-talent, reduce turnover, and increase employee satisfaction and loyalty.