Are Small Business Retirement Plans Practical?

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Submitted by Life, Inc. Retirement Services on January 17th,2018

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Critics of the new tax law believed that the reduction of corporate rates wouldn't actually benefit those of the working classes. The early returns on the new bill indicate they were wrong. Corporations are lining up to share the benefits of the new bill with their employees, according to this article in the Washington Examiner. The list of companies offering increased participation in retirement programs, wage increases, and bonuses is long and staggering. They include Alaska Airlines, American Airlines, American Bank, Aquesta Financial, Delaware Supermarkets, JetBlue, Jordan Winery, Nationwide Insurance, Flood Insurance, Turning Point Brands, and many, many more. Some of these companies have announced increased charitable giving as well. Also mentioned is that participation in 401(k) programs is on the rise.

The new tax law reduces the corporate tax rate from 35% to 21%. Critics of the law had suggested that corporations would not pass these additional profits through to employees or consumers. The corporations responded by stating that the decreased tax rates would make them more competitive in world markets, and that indeed, employees and customers would benefit. From the response so far, it looks like quite a number of corporations were telling the truth. They are passing the tax windfall on.

There can be a snowball effect to movements like this. As more and more employees receive higher retirement benefits and increased wages, other business entities who may not have participated at first, are encouraged to by the marketplace to compete, since employees naturally gravitate toward firms that pay higher wages and offer better benefits. 

What about smaller companies?

A number of the firms in the list above are smaller companies. Aside from the corporate tax rate decrease, the new law outlines a 20% reduction in taxable income for smaller companies, the pass-through tax reduction. This applies to the entities where taxes are levied on the owners or individuals instead of the business entity. There are restrictions on income for those in service industries such as consultants or doctors to claim the reduction, limits below $157,500 if you are filing single or $315,000 if filing jointly. But below those income amounts anyone who qualifies can file. There are some additional restrictions and reductions that also apply to limit the amounts of the deduction for those others who qualify.

These new provisions should encourage the formation of small businesses. But can small businesses offer participation in the 401(k) programs? They can. Not only that, very often they are a great idea. 401(k) programs shelter income from present taxation, and allow withdrawal after retirement, when tax rates are lower. This permits the small business owner to set up a program which will increase their own savings for retirement, and those of key employees as well. Vesting provisions can specify minimum times of employee service. This allows owners to reduce costs by limiting the plans to permanent, valuable employees. The employee contribution limits for 2018 have been raised to $18,500. The matching provisions permit employers to contribute to the employee 401(k) as well, up to a grand combined total of the lesser of $55,000 or 100% of employee salary, though the employer contribution can be any lesser amount, as desired. This is a hefty possible contribution amount to retirement savings.

Many small business owners are worried about the requirements for 401(k) setup and 401(k)administration. In the past, the paperwork has been considered tedious and restrictive to many. These days it is surprisingly affordable and convenient to have an outside firm like Life, Inc. Retirement Services do the work for you. As in many cases, it makes sense to utilize experts who specialize in the technical aspects of plan provisions and administrative details. The experts at Life, Inc. Retirement Services can tell you how the specific provisions of the 401(k) will work for you and your particular business entity or answer any retirement questions you may have.