When to Start a 401(k) for Your Small Business

About the Author

jonathon matson

true Jonathon Matson, CRPS®

Retirement Plan Service Manager
Phoenix–Biltmore, Arizona

Learn the steps to setting up a 401(k) for your small business, from plan design to customization, and discover its benefits for your company and employees.

When to Start a 401(k) for Your Small Business

While you may want to provide a 401(k) to your employees from day one, several factors come into play when determining the right time for your small business to start offering retirement plans to employees. Let’s take a look at some considerations that can help you make an informed decision.

Profitability and Predictable Revenue Streams

First and foremost, your company should be profitable and have somewhat predictable revenue streams before starting a 401(k) plan. There are administrative expenses and potential employer contributions that come with offering a retirement plan, so it's essential to budget for these costs. If your business is struggling to stay afloat or experiencing cash flow issues, it may not be the right time to implement a 401(k).

That being said, there's no one-size-fits-all answer when it comes to the size of your business and starting a retirement plan. A 401(k) plan can be suitable for companies with just a few employees or those with thousands. The key is to understand your objectives (whether it's reducing tax liabilities, attracting and retaining employees, or a combination of both) and work with a professional to design a plan that meets your specific needs and budget.

Employee Interest

Another crucial factor in deciding when to start a 401(k) is employee interest. As a small business owner, you have the advantage of being able to speak directly with your employees about their desire for a retirement plan. Gauging their interest can help you determine if now is the right time to implement a 401(k).

Keep in mind that employee satisfaction and retention can be positively impacted by offering a 401(k), especially if you have a workforce with disposable income to contribute to the plan. Presenting the plan to your employees in a clear and relatable manner can also make a significant difference in their appreciation of this benefit.

Tax Advantages and Timing

When it comes to tax advantages, the Secure Act 2.0 has made it more appealing for small businesses to start a 401(k) plan. Companies with fewer than 50 employees can receive tax credits of up to $5,000 per year for costs incurred in starting a new plan, which can help offset setup expenses.

It can be tempting to wait until the next year to start offering retirement plans to your team, but there’s no one perfect time of year to start a 401(k). Whether it's the start of Q1 or the holiday season is rolling around, the most important factor is that you and your business are ready for it. If you're prepared to take advantage of the tax savings and provide this valuable benefit to your employees, don't hesitate to set up your plan.

Deciding when to start a 401(k) for your small business depends on several factors, including profitability, employee interest, and tax advantages. By taking the time to assess your company's financial stability, gauging your employees' desires, and understanding the available tax credits, you can determine the optimal time to implement this valuable retirement plan.

Remember, a 401(k) is a long-term investment in your employees' financial well-being. The right one can potentially help you attract and retain top talent for years to come. Talk to your financial advisor to discuss your small business financial planning needs today to take the first step.



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