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Obama Proposes New Rules for 401(k)

Obama Proposes New Rules for 401(k)

Once you’ve hired great employees, how can you be sure they won’t jump ship for another opportunity? The answer: Create an environment that’s conducive to productive and happy work.

This starts by fostering a stable foundation, by offering your employees benefits like retirement plans and robust health insurance.

Crafting a retirement savings plan is easier than most business-owners think, and there are tax advantages to doing so. But it’s important to think through what you can afford to offer based on questions like:

  • Can you afford to match your employees’ contributions?
  • Do you want employees to be able to contribute to their plans?
  • Do you want flexibility so that plan-holders can access their funds before retirement for emergencies?

For a small business, your options boil down to 401(k) plans, SEP IRAs and SIMPLE IRAs.

401(k): High Flexibility and High Contribution Limits

This plan lets employers and employees make tax-deferred monetary contributions to 401(k) accounts over a career. As a business owner, you can elect to match your employee’s contribution, create a vesting schedule or enable access to funds before retirement without any penalty. Employees can contribute up to $16,500 before the age of 50 and $22,000 thereafter.

A type of 401(k) known as a Roth 401(k) taxes plan holders as they pay into the account, but withdrawals are tax-free. Under the regular 401(k), withdrawals are taxed after retirement.

SEP IRAs: Employer-Funded Retirement Plans

Simplified Employee Pensions Individual Retirement Accounts (SEP IRAs) do not have profit sharing, the option to take out a loan, variable tax rates (like the Roth 401(k)) or contribution limits (like the 401(k)). However, all contributions are made by the employer, which are vested immediately to the employee.

SIMPLE IRA: Employer/Employee Matching Plan

Savings Incentive Match Plan for Employees (SIMPLE) is exactly what it sounds like — employers and employees can contribute to their plan, but the business owner must match whatever is added.

This month, President Obama proposed rules to make it easier for small businesses to create joint 401(k) plans with other businesses, no matter the industry. The law was put to Congress in order to reduce burdensome administrative costs and compliance issues for employers, which contribute to high plan costs. Greater than 50 percent of businesses with fewer than 50 workers do not currently offer retirement plans because of these costs. With small and medium businesses driving significant economic growth, the US government must take steps to ensure that these firms can adequately retain employees through incentives like retirement plans.

President Obama’s budget proposal also includes additional retirement benefits, like requiring that businesses with fewer than 10 employees enroll everyone in individual retirement accounts (IRAs) if they can’t offer group plans. There is also proposed funding for experimental initiatives that will help workers move their retirement savings if they change jobs.

If you have a retirement plan, what did you choose and why? Tell us in the comments below or tweet us @KabbageInc!