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What is Small Business 401k and how is it different from 401k at a large business?

Home » Small Business » Small Business 401k » What is Small Business 401k and how is it different from 401k at a large business?

A 401k plan is a retirement plan, an account that houses an employee�s savings over the course of an entire career. Unlike other retirement plans, however, a 401k plan is designed by employers and offered as a job benefit to employees. This retirement plan is operated in cooperation between the employer (who designs the plan) and the employee (who contributes to the plan and, in some cases, directs the investments).

Under a 401k plan, an employee has the option of placing pre-tax deductions into a tax-free and interest bearing account. Each employee in a company has a separate account, and in many cases, the employee can maintain one account, even if he switches employers. In many cases, an employer will offer to match employee contributions to the 401k plan, thus doubling the investment.

In 1997, small businesses began to use the SIMPLE 401k plan, which was designed specifically for businesses with less than one hundred employees. SIMPLE 401k plans are ideal for small businesses because they have much lower administrative costs. The primary differences between these plans and traditional 401k plans are the reduced flexibility (employers are required to contribute fully vested funds to employee plans and maximum employee contributions are lower than in traditional plans) and the lack of discrimination tests for enrollees.

Even if your small business elects to use a traditional 401k plan rather than a SIMPLE plan, administration of fifty 401k plans is far easier than that of 50,000 plans. The drawback, however, is that most small businesses do not have expertise in setting up and administering a 401k plan.

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