What does it cost for a small business to start their own 401k

A reader wrote in with some good questions about starting up a 401k for their small business. Shelly wrote the following (edited for clarity):

Hi, Mark,
I have two C corporations, one has employees from time to time, and another has no
other employees except myself. I am thinking about setting up a 401k for the one
which there are no employees in it. My questions are:
1) Is it permissible and economical for a company to setup a 401k plan when it
only has one employee?
2) If so, what is the procedure in doing so?

Thank you in advance for your help.

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Hi Shelly,

I am happy to try and help you. In doing so, I will take some guesses as to what you are getting at, and try and answer that for you. In addition, I will provide some options for those in similar situations, which may include yourself.

First question you had was:

1) Is it permissible and economical for a company to setup a 401k plan when it
only has one employee?

I’m really wondering what you’re asking me Shelly:

So I’ll break your question into two answers, I’ll answer is it ethical, legal and smart for your business to setup a 401k plan for one person, the owner. Next, I’ll tell you if the same is true for an owner of a small business to offer a 401k plan to just one employee, or two, or even more.

To answer your question, we need to setup some basic assumptions though. To see if something for a small business is economical, you need to know what you can afford. For example, for one employee, your annual fixed cost would be no more than an $800 setup fee, and no more than $500 for administration fees, or $1,300 in total fixed. Now, say you offered an average %5 match to the employee, who made $30,000 a year, it would cost another $1,800 per year. So, for that one employee, the cost would be $3,100 to your business per year. Is it worth it? That maybe too hefty a cost for you, or not. If you as an owner are doing this for yourself, I would say you are wasting half of that money in fees, when you can go to a bank and setup a personal IRA, and do the same thing without paying all the fees. Now, if it were for an employee, it maybe a different situation, where you’ll have to compare costs to what you’re getting in return. You would have to tell me.

Now, to answer if it is smart for a single employee or more, here you go. I could tell you that employees are attracted and retained by that offer. It just depends if it is worth it to you and your business. The fixed cost for having up to 50 employees won’t cost more than an $800 setup fee and $2,500 and admin charges, plus match amount times their salary.

Some examples of the different plans available to you include the “Individual(k)”, “Solo 401(k)”, “Uni-K Plan”, “Self-Employed 401(k)”, SBO-401(k), and various others like Keogh plans. Your business is eligible for them all. Not to mention, explore your own options in investing in an IRA through your local bank or investment company.

Something to keep in mind, you do have tax savings to the business that counter those costs, which may help you recover 20% or so of those costs.

These options apply to you as an owner wishing to establish a savings plan for yourself, and or for an employee. They are not only legal and ethical, they are smart if cost effective. Although, without putting the numbers together, nobody could tell you.

How do you do it? You have a number of options: Check them all out for your best price, if it is for an employee.

For the small business owner interested in looking into the benefits of offering a 401k for your employees as a recruitment and retention tool check out:ShareBuilder 401(k) . It’s completely free to get a quote, and there are numerous tax benefits for your company (even if it is only for you).

http://www.401k-easy.com/prices/ is another one found on an easy google search. Try the same and you will find many other options.

If you are doing it for yourself, go setup an IRA or Roth IRA at your local bank or investment bank. They can easily help direct you.

Good luck, and keep asking away.

Your trusty accountant,

Mark


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