Implementing a 401(k) plan into your construction company can pay off— at tax time and hiring time.
For many construction business owners, the end of tax season feels similar to the conclusion of a long inspection. While an inspection often requires a rigorous review of codes and laws, its completion provides an opportunity to focus on management challenges.
In the same manner, many business owners think about the state of their business after tax season. They use this time to review current investments and investigate different ways to make their companies more competitive. One way to become more competitive is through savings plans that offer tax benefits to both the employer and employees. Many of these plans can make a business more attractive to potential employees and lead to growth.
One of the most widespread retirement plans is a 401(k). The 401(k), named after the Internal Revenue Code subsection 401(k), can offer an appealing option for professionals looking to build a long-term retirement strategy.
The Transamerica Center for Retirement Studies noted in its 11th Annual Retirement Survey (2009-2010) reports that about half of workers with an employee-funded plan believe that having tax breaks and incentives would help them save more for retirement—and a 401(k) can help workers reach this goal.
You do not need a large company to set up a 401(k) plan. In fact, the benefits of a 401(k) plan are far-reaching, from the private sector to the non-profit world. Thanks to the 2006 Pension Protection Act passed by Congress, employers can easily and automatically enroll workers into a 401(k), increase their contributions and make an overall investment to meet employees’ retirement needs. A 401(k) plan can offer employers and their employees many benefits.
Reasonable costs—Companies can often set up a 401(k) plan for less than $10 per employee per month and receive a tax credit of up to $500 per year for the first three years the plan is implemented. This reasonable cost enables almost any small business to afford it, and business owners can enroll eligible employees with little effort. There is also not a limit on how many employees you must have to set up a plan. In fact, many self-employed individuals set up owner-only 401(k) plans for themselves.
Flexibility and compounding—Investing in a 401(k) offers many flexible options. All employer and employee contributions to the plan are tax deductible. Contributions and earnings, including dividend growth, interest and capital gains, are generally not taxed by the federal government or by most state governments until they are distributed at a later time in a person’s life, which is not before age 59½. Pre-tax contributions also reduce the amount of tax taken out of each paycheck. Employees who withdraw 401(k) funds prior to age 59½ are required to pay income taxes and will also incur an additional 10 percent early withdrawal penalty. Plan participants who choose to wait longer to withdraw money from a 401(k) will continue to defer income taxes.
Income deferments—For tax year 2011, the federal limit lets employees defer up to $16,500 of their income. Employees aged 50 or older may contribute an additional $5,500. However, employers are not required to allow such “catch-up contributions” in their plan.
Flexible timing—An employer can implement a 401(k) plan at any time. Many companies choose to do this in conjunction with open enrollment for other available employee benefits.
Transparency of costs—Beginning July 12, 2011, 401(k) plan providers are required to disclose the fees earned in association with providing these services. For 401(k) plans beginning on or after Nov. 1, 2011, federal regulations require plan fiduciaries (an individual, corporation or association holding assets for another party) to make certain fee disclosures available to employee participants. The new disclosure enables plan participants to receive greater transparency and make more informed decisions about their investment options.
Employee matches—Many employers offer the generous option of an employee match—for example, 50 cents on the dollar for the first 6 percent the employee saves. Although many employers offer to match employee contributions, a match is not required to actually implement a 401(k). Employees still reap the tax benefits even if there is no employer match.
Many investment choices—The money an employee contributes to a 401(k) plan may grow through investments in stocks, mutual funds, money market funds and other investment options. Employees can choose where their money will be invested, and they can re-allocate money among the investment choices.
Rollover and portability—As of 2010, 401(k) plans can include a feature that allows plan participants to rollover and convert pre-tax dollars into a Roth 401(k). Employees’ contributions to their Roth accounts are taxed upon initial transfer, but upon withdrawal of the funds, the earnings and principal will be tax-free. Plan participants also have the option of rolling over distributed funds to a traditional IRA (an individual retirement account). Consult with a CPA or another financial professional to determine how the rollover of larger sums may impact an individual’s movement into a higher tax bracket. Many 401(k) plans also allow participants to transfer their benefits into a new employer’s 401(k) plan if they change jobs.
A plan can serve as an attractive offering for new employees, and it can motivate current employees to stay with the company. As construction owners plan for organizational growth into 2011 and beyond, the value of implementing a 401(k) plan provides a positive return on investment for all involved.
Construction Business Owner, April 2011
