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Myths Surrounding 401(k) Limits

Employee Benefits

Many small business owners mistakenly believe there are 401(k) limits affecting the desirability of offering this type of retirement savings program to employees. But for the most part, myths surrounding 401(k) plans are just that—myths.

A Traditional 401(k) plan enables participants to save and invest part of their paychecks before taxes are deducted. Tax-deferred savings generally means no federal or state income taxes are paid on these contributions until money is withdrawn, usually at retirement. A post-tax Roth 401(k) is intended for account holders who think they’ll be in a higher tax bracket when they retire, as generally no federal or state income taxes are paid on Roth contributions when the money is withdrawn.

Here are five commonly held misconceptions about 401(k) limits employers should disregard:

1. 401(k) Plans Are Only for Big Companies
Businesses of many sizes benefit from taking part in a 401(k) plan. According to IRS section 401(a), any business (excluding state or local government entities) may create a 401(k) plan, from a C Corporation to a partnership, and sole proprietorship. Solo 401(k) plans are available to individuals who are self-employed, without any other employees.

2. All 401(k) Plans Are the Same
In general, 401(k) plans are similar to some degree, simply because they all function as retirement savings plans. But some employers provide matching contributions , others provide an employer contribution, and still others don't provide any form of employer contribution at all.

3. Small Business Owners Can't Afford to Match Employee 401(k) Contributions
A employer-matching contribution is not required for employees to benefit from a 401(k) plan. (Also, keep in mind that employer contributions are tax-deductible for the company.)

4. The Benefits of 401(k) Plans Are Strictly Employee-Focused
Not true! Not only can a small business owner benefit from his or her contributions, but upon implementing a 401(k) plan, a company may become eligible for small business funding from banks and other financial institutions.

5. 401(k) Plans Are Too Complex and Time-Consuming to Manage
This can be true if a small business owner chooses to take on this responsibility alone. But there are many financial firms that offer recordkeeping and third-party administration services for 401(k) plans. Some providers offer low-cost, flat-fee packages (with affordable management fees) specifically tailored to businesses with 50 or fewer employees. Some functions of  plan management can be outsourced to a brokerage firm, mutual fund company, or insurance company. A little research will guide you towards the third-party administrator with the best resources and customer service record.

Talk to other business owners in your network and see how they've fared with 401(k) plan service providers. You'll likely get warnings about which firms to avoid and recommendations for other firms that have helped make their company's 401(k) plan a rousing success for everyone involved.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.