Small Business 401k
The 401K plan is one of the most acceptable finance sources among the small business community. Let us first understand what is a 401K plan? Well 401K plan is a retirement plan which is funded by the employer. The plan is called as the 401K plan named after the US Internal Revenue Code. These plans offer the advantage of saving money without paying the income tax on the money that is given towards the 401K plans. It is the sole responsibility of the employee to decide as to how to use the money that is saved in the 401K plans.
Usually the money from the 401K plans can be withdrawn only at the time of retirement but it can also be withdrawn under special conditions like complete disability. In case the money is withdrawn because of any other reason then the person would have to pay a penalty of 10% and would have to pay the normal income tax. But there are a number of programs that allow people to borrow money against the 401K-retirement plan. Usually most of the loan programs would allow people to use the 401K funds as security against which they can borrow money. People are allowed to borrow huge amounts of money against this plan.
Usually it is understood that the 401K plan can be availed only by sole proprietors. But this is not the case. With the help of the Small Business Owner 401K plan (SBO 401K plan) any small business owner is entitled to take loans against the 401K accounts. This type of finance can be obtained either by partnerships, sole proprietors or corporations. But for these programs only the business owner is eligible.
The financial institutions that give out the 401K plan have widened the eligibility criteria for these loans making it possible for more small business owners to participate in this plan. With the widening of the criteria the documentation has reduced and it has become for the businesses to arrange for these documents. The small business 401K plan can be taken by businesses where the only eligible candidate is the business owner. Even in case the partner is employed by the business then also the business owner can be eligible for the business.
In case the small business has non-owner employees then the business owner is not eligible for the small business 401K plan. But if the small business has employees other than the spouse of the owner then the small business owner can be eligible for the 401K plan if the other employees are not eligible for this plan. The eligibility of the person to qualify for the small business 401K plan depends on the plan that he or she selects.
When you select a plan you should make sure that it has the following limitations:
• The age limit of being eligible for the 401K plan should be more than 21 years
• If the employee wishes to a part of the 401K plan then he should be employed with your small business venture for the past one year.
• In order to be eligible for the profit sharing contributions the employee should have been serving in the company for the past 2 years. However there are a number of companies that would make this limit to one year.
For being eligible for the small business 401K plan the employee should have been working for the past one year or for 1000 hours in the past one year. There are a number of companies that would opt for plans that would require less than 1000 working hours of eligibility. When deciding on the eligibility requirements you should not consider people who are non-residents or those people who are getting benefits under the collective bargain agreement.
In comparison to the small business 401K plan the other retirement plans do not have a high contribution limit. The small business 401K plan is the most attractive offer that a small business owner can have. The contributions of the other retirement plans are low in comparison to these plans. The small business 401K plan provides a number of benefits like:
• With the small business 401 K plan you can borrow an amount as much as 50% of the amount that you have in your 401K accounts or up to an amount of $50,000 whichever is lower in value.
• The 5500 filings are not necessary with the small business 401K plan. This is because of the fact that this plan is made available to only the small business owners and they are not required to fill the 5500 return form till their balance exceeds $100,000.
• As compared to the other retirement plans the small business 401K plan would not require the discrimination testing. For the usual 401K plans there is some sort of discrimination testing required to make sure that the business owners and the employees that are highly paid do not get an irregularly high amount of contribution in comparison to the employees that have a lower salary.
• With these small business 401K plans you can have the advantage of deducting contributions, which can be up to 25% of the eligible compensation.
Qualifying for the small business 401K plan is not difficult if you have all the necessary documents ready. You can enjoy a lot of benefits with these plans and also have the benefit of tax deductions. However you should choose the right plan for yourself. It is advised that you consult a financial advisor before signing up for any small business 401K plan.
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