Tag: 401(k) plans

Small Business 401k Provider Alternatives: The Future of Retirement with PRPs

Posted on October 11, 2024 by - Retirement Benefits

As a small business owner, you want to take care of your employees, grow your company, and stay ahead of the competition. But let’s face it: the 401k, especially for small businesses, is outdated. It’s expensive, complicated, and designed for a corporate world that no longer exists. It’s time to rethink retirement benefits, and that’s why the Portable Retirement Plan (PRP) was created. It’s the solution built for the future.

Why the 401k Fails Small Businesses

Here’s the truth: 401k plans were not designed for small businesses. They were created for massive corporations that have the resources to manage the legal hoops, compliance testing, and fiduciary risks. Most small business owners simply don’t have the time, money, or bandwidth to deal with the complexities that come with offering a 401k.

Here’s why small businesses struggle with 401ks:

  • High Costs: From administrative fees to compliance and investment management costs, a 401k plan is expensive to maintain. For small businesses, these fees can eat up precious resources.
  • Complex Regulations: 401k plans require adherence to strict IRS and Department of Labor regulations. This includes annual compliance testing to ensure fairness across all employees. Navigating these regulations is time-consuming and a headache for small business owners.
  • Fiduciary Responsibility: Offering a 401k means you are legally responsible for your employees’ retirement funds. Even if you work with a provider, some fiduciary duties remain on your shoulders, exposing you to potential legal risks.
  • Limited Flexibility: Small businesses tend to have a mobile workforce with high turnover. Traditional 401k plans don’t offer the flexibility needed for employees who frequently switch jobs, and the rollover process can be a hassle.

Safe Harbor 401k Plans: A False Safety Net

Many small businesses turn to Safe Harbor 401k plans because they automatically pass IRS non-discrimination testing, ensuring the plan benefits all employees, not just the top earners. In fact, 70% of SMBs choose Safe Harbor plans to avoid failing compliance tests.

But here’s the catch: Safe Harbor plans require mandatory matching contributions for all employees, regardless of whether your business can afford it. These contributions typically range from 3-4% of each employee’s salary. So, while Safe Harbor plans save you from compliance headaches, they can significantly increase costs, especially as your business grows.

For a small business, that mandatory match can put a serious strain on resources. The more employees you have contributing, the higher the cost burden on your business.

The PRP: The Game-Changer for Small Businesses

This is where the Portable Retirement Plan (PRP) comes in. It’s a modern, flexible, and affordable alternative to the traditional 401k. Here’s why it works for small businesses:

  • Lower Costs: Forget the surprise fees that come with a 401k. PRPs offer predictable, lower costs with simple, flat fees—whether monthly or annually. You’ll never be blindsided by hidden charges or required matching contributions.
  • Simplicity: PRPs remove the administrative burden that comes with 401ks. There’s no need for annual compliance testing, and no complicated IRS regulations to navigate. It’s built for ease of management.
  • No Fiduciary Risk: One of the best things about a PRP is that it eliminates fiduciary responsibility for the employer. When you work with a provider like Icon, they assume fiduciary duties on behalf of your employees, saving you from legal risks and the need for costly fiduciary insurance.
  • Portability for Employees: PRPs address one of the biggest flaws in the 401k—the portability problem. Employees can take their retirement savings with them wherever they go, without needing to roll over accounts.

Why PRPs are the Future

The PRP isn’t just an incremental improvement. It’s a breakthrough. This is what the 401k should have been—a flexible, affordable, and portable retirement solution for the modern workforce. And now, it’s available to every small business, not just the big guys.

By embracing the PRP, you’re not just offering your employees a retirement plan—you’re providing them with a future. And you’re doing it without sacrificing your time, money, or peace of mind.

So, ask yourself: Do you want to keep using the same outdated tools that hold your business back, or do you want to be part of the future of retirement planning?

Understanding the 401k Tax Credit for Small Business Owners

Posted on May 14, 2024 by - Retirement Benefits

If you’re a small business owner considering a 401k plan for your employees, navigating the intricacies of tax credits and setup costs can be daunting. To simplify this process, let’s break down the 401k Setup Tax Credit and what it really means for your business.

1. Eligibility and Covered Expenses:

Small businesses with 100 or fewer employees who earned at least $5,000 last year and have not had a retirement plan in the past three years qualify for this tax credit. The credit can help cover the initial costs associated with setting up the 401k plan, including administrative fees and employee education about the plan.

2. Amount of the Credit:

You can claim 50% of your setup costs, up to a maximum of $5,000 per year for the first three years. This means the total potential savings could reach up to $15,000.

3. Upfront Costs:

Despite the tax credit, you’ll need to pay all initial costs of setting up and administering the plan. These expenses include fees for plan setup, administrative services, and employee training sessions on plan benefits.

4. Claiming the Credit:

After paying these initial costs, you can claim the tax credit when you file your annual business taxes. This credit reduces your tax liability; however, if the credit amount is more than your tax due, the excess won’t be refunded and can’t be carried to other tax years.

5. Ongoing Costs After Credit:

It’s crucial to understand that after the first three years, you’ll be responsible for all ongoing costs of the plan. These include yearly administrative fees and any other expenses necessary for maintaining the plan.

6. Fiduciary insurance:

Employers need fiduciary insurance for their 401k plans to protect themselves against liability for breaches of fiduciary duties. Managing a 401k involves making critical decisions about plan management and investments, and fiduciary insurance helps cover legal fees, settlements, and other costs arising from claims of mismanagement or negligence.

7. Shutting down a 401k plan:

Shutting down a 401k plan can be a complex and costly process, requiring meticulous administrative work. This includes filing final forms with the IRS, distributing all assets to participants, and possibly incurring penalties for early termination. The decision to close a 401k is significant, both in terms of procedural burden and financial impact on the employer.

Practical Implications for Small Business Owners:

  • Financial Planning: Ensure you have the necessary upfront cash to cover the initial setup costs. The tax credit is beneficial, but it doesn’t provide immediate cash flow since it only affects your tax liabilities when you file.
  • Long-term Budgeting: Plan financially for the ongoing costs of maintaining the plan beyond the initial three years.
  • Business Cash Flow: Assess your business’s cash flow to ensure it can handle the recurring costs of the 401k plan without relying solely on the tax credit.

Additional considerations:

  • New 401k plans require auto-enrollment of all employees.
  • Matching contributions have to be paid to all employees in a safe-harbor plan.
  • 401k plan audit costs should also be factored into your budgeting considerations.

As you consider setting up a retirement plan for your small business, it’s essential to explore all your options. While the 401k Setup Tax Credit may provide an incentive, it’s worth noting that these plans can still be financially burdensome in the long run. At Icon, we offer an alternative solution with our Portable Retirement Plan (PRP). Designed to be both high-quality and affordable from the start, the PRP eliminates the need for tax credits while still providing your employees with a robust retirement savings option. By choosing the PRP, you can enjoy the benefits of a top-tier retirement plan without the hefty price tag, helping lead your business and your employees to a more secure financial future.

How to Terminate a 401k Plan

Posted on July 7, 2023 by - Retirement Benefits

As an employer, you may have decided to shut down your 401k plan for various reasons. It could be due to financial difficulties, regulatory complexity, or simply because you want to switch to a different retirement plan. 

Whatever the reason may be, here’s a simple overview of what’s generally required to terminate a 401k plan (note: check with your plan provider to understand what’s needed for your particular situation): 

  1. Notify Plan Participants: The first step is to inform your employees about the plan’s termination. This notice should include the date when the plan will terminate, the reason for the termination, and any important details that participants need to know, such as how to withdraw their funds or roll them over to another plan.
  2. Cease Contributions: Once you have notified your employees about the plan’s termination, you need to stop making contributions to the plan. This includes both employer and employee contributions. You can set a deadline for when these contributions will stop, and make sure that all contributions are made before this date.
  3. Distribute Funds: The next step is to distribute the funds in the plan to your employees. You can do this by offering them a lump sum payment or by allowing them to roll over their funds to another qualified retirement plan. You must provide your employees with all the necessary paperwork and information they need to make an informed decision about their funds.
  4. File Form 5500: Finally, you need to file Form 5500 with the IRS to formally terminate the plan. This form includes details about the plan’s assets, participants, and contributions, and it must be filed by the deadline. Failing to file this form could result in penalties and fines.

While terminating a 401k plan can be a difficult decision, there are smart alternatives available. At Icon, we’re helping employers that want a simple and cost-effective way to offer retirement benefits to their employees. With low fees and a user-friendly platform, and no plan testing or federal filings, Icon is a great alternative to traditional 401k plans.

NDT Testing: What Happens if Your Company Fails and How to Remedy It

Posted on May 12, 2023 by - Retirement Benefits

If you’re an employer that sponsors a retirement savings plan, Non-Discrimination Testing (NDT) is an important administrative task you need to perform annually. Failing the test can result in serious financial consequences for the company. In this post, we’ll discuss what NDT is and how to conduct it. We’ll also go over what to do if your company fails the test and some tips to help your plan stay ERISA-compliant.

What is NDT Testing?

NDT testing is a set of tests designed to ensure that your 401k plan is in compliance with ERISA rules and regulations. It measures whether the plan is administered fairly and doesn’t overly benefit highly compensated employees (HCEs) or Key employees. There are three types of NDTs that you must complete annually, except for Safe Harbor plans which are exempt.

Why is NDT Required on an Annual Basis?

NDT was created to prevent company owners and highly compensated employees from unfairly receiving generous tax benefits. Because compensation and contribution levels change annually, it’s important to complete the tests every year to ensure the plan is ERISA-compliant.

What Happens if Your Company Fails the NDT?

Failing the NDT is common but requires immediate action to remedy the situation. Audit your employee classifications to ensure they’re correct. If your plan failed the ADP or ACP, one remedy is to make qualified, non-elective contributions to non-highly compensated employee plans. Here you’ll find remedies provided by the IRS.

Tips to Help Your Plan Stay ERISA-Compliant

If you can afford it, you can implement a Safe Harbor plan to avoid NDT requirements altogether. Also, choose an administrator with an informative dashboard and simple, clear interface to make it easy for employees to engage with their 401k. You can also provide non-highly compensated employees with continuing education on the importance of saving for retirement. Notify HCEs of their contribution limits and monitor contributions throughout the year, communicating any changes. 

The easiest way to avoid NDT? Switch to a Portable Retirement Plan (PRP) like Icon, which is an IRA-based retirement plan that simplifies administration and reduces costs. PRPs are not subject to ERISA rules and regulations – that means no annual reporting and no NDT requirements.

The Bottom Line: 

Even with diligence, it’s common for companies to fail their annual NDT. If this happens to you and your company, take immediate action to remedy the discrepancy and then consider offering a Portable Retirement Plan. A PRP is the most cost-effective way to offer employees the opportunity to save for retirement.