At Cole Wealth Management, we believe in empowering our clients with the knowledge they need to make informed decisions about their financial futures. For small business owners, offering a retirement plan can be an effective way to attract and retain top talent while also securing their own retirement. One option to consider is the 408(k) plan, which offers a straightforward and tax-advantaged way to save for retirement.

What Is a 408(k) Plan?

A 408(k) plan, also known as a simplified employee pension (SEP) plan, is a type of qualified retirement plan specifically designed for small businesses. This plan allows employers to contribute to individual retirement accounts (IRAs) set up for each eligible employee. It provides an easy-to-manage, cost-effective alternative to more complex retirement plans like 401(k)s or profit-sharing plans.

SEP IRAs are governed by IRS code section 408(k), hence the name 408(k) plan.

Benefits of a 408(k) Plan

The 408(k) plan offers several advantages for small business owners and their employees:

1. Easy to Set Up and Administer: Unlike other retirement plans, a 408(k) plan has minimal administrative requirements. It doesn’t involve the extensive reporting or testing required of other retirement plans, making it ideal for smaller businesses.
2. Tax Benefits: Contributions made by the employer are tax-deductible, reducing the overall taxable income of the business. Additionally, funds within the SEP IRA grow tax-deferred until they are withdrawn in retirement.
3. Flexibility in Contributions: The 408(k) plan allows employers to determine how much they will contribute each year, making it an attractive option for businesses with fluctuating income. However, employers must contribute the same percentage of compensation for each eligible employee, including themselves.
4. Higher Contribution Limits: Compared to traditional IRAs, SEP IRAs allow for much higher contribution limits. For 2024, the maximum employer contribution to a SEP IRA is the lesser of 25% of an employee's compensation or $66,000, whichever is lower.
5. Employee Ownership: Employees fully own the funds in their SEP IRAs as soon as they are contributed. There are no vesting schedules, meaning the funds belong to the employee immediately.

Who Is Eligible for a 408(k) Plan?

A 408(k) plan is available to businesses of any size, including sole proprietorships, partnerships, and corporations. It is particularly beneficial for small businesses that want to provide retirement benefits but may not have the resources to manage more complex plans.

Employees are eligible to participate in the 408(k) plan if they are at least 21 years old, have worked for the business in three of the last five years, and have earned at least $750 in compensation during the year.

Employer Responsibilities

Although a 408(k) plan is relatively simple to administer, there are still responsibilities that employers must fulfill, including:

• Making Contributions: Employers must make contributions to all eligible employees’ SEP IRAs based on a uniform percentage of their compensation.
• Providing Information: Employers are required to provide employees with specific information about the plan, including how it works, contribution limits, and any amendments to the plan.
• Maintaining Records: While there is no formal reporting to the IRS, employers should keep detailed records of contributions and any documents related to the SEP IRA.

Is a 408(k) Plan Right for Your Business?

The 408(k) plan is an excellent option for small businesses seeking a flexible and tax-advantaged way to provide retirement benefits to their employees. At Cole Wealth Management, we understand that each business is unique. Our team of experienced financial planners can help you determine whether a 408(k) plan or another retirement option is the best fit for your company’s needs.

Partner with Cole Wealth Management

At Cole Wealth Management, we specialize in providing personalized financial planning and investment management services to small business owners and individuals across Arizona, including Mesa, Scottsdale, Phoenix, and beyond. Our goal is to help you achieve your retirement goals while ensuring your business remains financially strong.

To learn more about setting up a 408(k) plan or to explore other retirement planning options, contact us today to schedule a consultation.

‍