Are 401k fees deductible, and what about 401(k) tax credits for employers? These are vital questions for entrepreneurs and small business owners looking to establish a solid small business 401(k) plan. A well-structured 401(k) plan not only demonstrates a commitment to employees’ long-term success but also offers potential financial advantages. 

At Life, Inc. Retirement Services, we specialize in guiding you through the complexities of being a 401(k) plan administrator for small businesses. 

In this article, we’ll delve into the intricacies of 401(k) tax benefits, exploring the deductibility of 401(k) fees and the opportunities presented by 401(k) tax credits for employers under the SECURE ACT 2.0.

The Basics of 401(k) Fees

While they provide many benefits, 401(k) plans have various fees that can impact the plan’s performance and the participants’ savings. These fees can include:

• Administration fees – These cover the essential maintenance of the plan, such as recordkeeping, legal compliance, and customer support.
• Investment fees –  Also known as expense ratios, these fees are associated with managing the funds within the plan’s investment options.
• Individual service fees – These are charged for specific participant actions, such as taking out a loan or making a hardship withdrawal.
• Advisor or consultant fees – If you’re working with an advisor or consultant, their services may come with associated costs.

Fee transparency helps maintain plan participants’ trust as it helps them make informed investment choices and manage their retirement savings more effectively.

Are 401k Fees Deductible? 

The deductibility of 401(k) fees refers to the ability of businesses to deduct fees associated with managing and maintaining a 401(k) retirement plan from their taxable income.  These fees are related to the administration and operation of the plan, including services provided by third-party administrators, recordkeepers, and other professionals who help manage the plan’s various components.

The Internal Revenue Service (IRS) allows businesses to deduct reasonable and necessary expenses incurred in operating their 401(k) plans. Deducting these fees can reduce your taxable income, lowering your overall tax liability.

Your business must provide annual information to the IRS detailing employee and employer contributions, if applicable. This information helps ensure deductions and tax benefits related to 401(k) contributions are accurately reported. 

If you are unsure of the right plan, take our retirement plan evaluator for guidance. We understand accurate documentation and reporting can help you ensure your plan remains in good standing with the IRS.

What is the Difference Between 401(k) Deductions and Tax Credits?

A 401(k) deduction is a contribution to a retirement savings account offered by an employer-sponsored retirement plan. The purpose of a 401(k) is to encourage you to save for retirement by providing them with a tax-advantaged way to do so.

On the other hand, a tax credit is a dollar-for-dollar reduction in your tax liability, meaning if you have a $1,000 tax credit, your tax bill is reduced by $1,000. The other key differences lie in their purposes and mechanisms.

• Purpose – A 401(k) deduction encourages retirement savings by allowing you to reduce your taxable income through contributions to a retirement account. A tax credit directly reduces the income tax owed based on specific criteria, such as expenses related to dependents or education.
• Effect on tax liability – A 401(k) deduction reduces taxable income, and the tax on the contributed amount is deferred until withdrawal. A tax credit directly reduces the amount of tax you owe. Refundable credits can result in a tax refund if they exceed your tax liability.
• Application -When contributing to your retirement account, you apply a 401(k) deduction through automatic payroll deductions. A tax credit is claimed on your tax return when you meet the specific criteria outlined by the IRS.
• Long-term vs. immediate impact – A 401(k) deduction affects your retirement savings and future tax liability when you withdraw funds in retirement. A tax credit has an immediate impact, directly reducing the taxes you owe for the current tax year.

While a 401(k) deduction and a tax credit offer ways to optimize your tax situation, they serve distinct purposes. Strategize and utilize both options to achieve your financial goals and minimize your tax burden.

What Is the Eligibility Criteria for Tax Credits?

The SECURE Act 2.0 introduces new tax credits to encourage small businesses and entrepreneurs to establish and maintain retirement plans. It’s crucial to understand the eligibility criteria to take full advantage of these credits;

Small Employer Automatic Enrollment Credit Eligibility

This credit is available to eligible employers who implement automatic enrollment in their retirement plans. Eligible employers have an average of 10 or fewer employees during the previous year, each receiving at least $5,000 in compensation.

The maximum credit amounts can be as high as $500 per year for each non-highly compensated employee newly covered by the plan. The small employer automatic enrollment credit is available for three years.

“An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.” Source: https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit

Small Employer Pension Plan Startup Credit Eligibility

The startup credit helps small employers establish new retirement plans. The business must have up to 100 employees, and at least one employee must be non-highly compensated to be eligible. This credit encourages small businesses to offer retirement benefits to a diverse range of employees.

The startup credit can be up to $250 per year for each non-highly compensated employee eligible to participate in the plan, with the credit available for three years. These credits can ease the financial burden of setting up and managing retirement plans, making it more feasible for small businesses and entrepreneurs to offer these valuable benefits to their employees.

4 Strategies for Maximizing Deductibility and Tax Benefits

We’ve already answered the question, are 401k fee deductible, but capitalizing on every opportunity to enhance deductibility and tax benefits can help create a retirement plan that supports your employees and elevates your business’s financial standing.

Combine Deductibility with Tax Credits

To enhance the financial impact of your 401(k) plan, strategically combine the deductibility of contributions with the tax credits offered under the SECURE Act 2.0. 

For example, while deducting contributions lowers your taxable income, utilizing tax credits directly reduces your tax liability. To implement this strategy effectively:

• Calculate optimal contributions – Determine the ideal balance between contributions yielding the maximum tax deduction and those triggering the highest tax credits.
• Review employee participation – Encourage your employees to actively participate in the plan. Greater participation enhances their retirement readiness and contributes to higher tax credits for your business.

This approach can maximize your tax savings on multiple fronts, creating a win-win scenario for your business and employees. 

Contribution Matching and Employer Match Deductibility

When you match your employees’ contributions, you’re not only investing in their financial future but also in the financial health of your business. To make the most of contribution matching, consider:

• Utilizing the deduction – You can deduct contributions made as matching contributions from your business’s taxable income. This strategy creates a mutualistic situation by fostering employee engagement and optimizing your tax benefits.
• Setting clear matching policies – Establish guidelines for your contribution matching program, specifying the percentage of employee contributions you’re willing to match. Ensure to communicate these policies to employees to encourage active participation.

By structuring your matching contributions thoughtfully, you can enhance your plan’s value while enjoying deductible benefits.

Employee Education and Participation Impact on Tax Benefits

Employee education helps maximize the benefits of your 401(k) plan and the associated tax incentives. An informed and engaged workforce can contribute more effectively to the plan’s success. Consider these steps toward employee education:

• Educational workshops: Organize workshops or seminars to educate your employees about the importance of retirement planning, the benefits of your 401(k) plan, and the potential tax advantages they can gain from participating.
• Promote enrollment: Actively promote plan enrollment among your employees. Stress the value of automatic enrollment and escalation features and highlight the long-term benefits of starting early.

When employees actively contribute to their accounts, the combined effect of pre-tax contributions and tax-deferred growth culminates in substantial tax savings over time.

Long-term Tax Planning Considerations

Integrate long-term tax planning into your strategy when establishing and managing your 401(k) plan. Proactive planning can help you adapt and maximize your tax benefits as tax laws and regulations evolve.

• Stay updated on changes in tax legislation that may impact retirement plans. Tax laws can change, and staying informed will allow you to adjust your strategy accordingly.
• Regularly review your 401(k) plan’s performance and expenses. Consider working with a 401(k) plan administrator to identify opportunities for optimization.
• As your business evolves, periodically reassess your retirement plan strategy. If you take advantage of tax credits, evaluate if your plan design aligns with the eligibility criteria.

Life, Inc. Retirement Services’ expertise extends beyond creating plans to crafting solutions tailored to your unique business circumstances. By partnering with us, you can make informed decisions and seize every available advantage.

Personalized Solutions with Life, Inc. Retirement Services

Investing in your employees’ financial security fosters loyalty, attracts top talent, and shapes a positive workplace culture. A well-structured 401(k) plan empowers your employees to envision a prosperous retirement and solidifies your reputation as a caring and forward-thinking employer. Contact us today to schedule a free consultation with a 401K expert and create an individual-based plan. 

The success of a business often hinges on the expertise and dedication of its key employees. These individuals are the backbone of your company, and their absence can lead to significant setbacks.

In this blog post, we’ll discuss how business owners can protect their key employees using life and disability insurance, ensuring the continued growth and success of their businesses. By understanding how to protect your key employees, you can safeguard your company’s future.

The Importance of Key Employees

Key employees are the pillars of a company, responsible for driving growth and maintaining stability. These individuals possess specialized skills, have extensive experience, and are critical to the overall success of the business. Their unexpected loss, either through death or disability, can cause significant disruption to the company’s operations, and may even threaten its existence. In this section, we’ll discuss the roles and responsibilities of key employees and the impact their absence can have on a business.

Life Insurance for Key Employees

Life insurance policies for key employees provide businesses with a financial safety net in the event of a key employee’s untimely death.

Proceeds from the policy can be used to cover the costs of recruiting, training, and hiring a suitable replacement, as well as to offset any losses in revenue resulting from the employee’s absence.

There are two main types of life insurance policies used to protect key employees:

Key Person Life Insurance: This policy is taken out by the business owner, with the company as the beneficiary. The company pays the premiums, and in the event of the key employee’s death, the company receives the death benefit. This policy ensures that the business has the necessary funds to deal with the loss of a key employee.

Buy-Sell Agreement Funding: This policy is usually taken out by business partners in a partnership or shareholders in a corporation. The policy is structured so that the death benefit proceeds are used to buy out the deceased partner’s or shareholder’s interest in the company. This arrangement ensures a smooth transition of ownership and prevents disruption to the business.

Disability Insurance for Key Employees

Disability insurance policies protect key employees and their companies in the event that an employee becomes disabled and is unable to work. These policies provide a source of income replacement for the disabled employee, as well as financial assistance for the company to cover the costs of hiring and training a replacement.

There are two main types of disability insurance policies used to protect key employees:

Key Person Disability Insurance: Similar to key person life insurance, this policy is taken out by the business owner, with the company as the beneficiary. The company pays the premiums, and if the key employee becomes disabled, the company receives the disability benefits. This helps the company cover the costs associated with the employee’s absence and ensures business continuity.

Business Overhead Expense (BOE) Disability Insurance: This policy is designed to cover the fixed expenses of a business, such as rent, utilities, and payroll, in the event that a key employee becomes disabled. The policy provides a monthly benefit to the business, allowing it to continue operations and maintain stability while the key employee recovers or is replaced.

Tax Implications and Policy Considerations

When choosing life and disability insurance policies to protect your key employees, it’s essential to understand the tax implications and other policy considerations. The premiums paid for key person life and disability insurance policies are generally not tax-deductible for the business, as they are considered a capital expense. However, the death benefits received by the company from a key person life insurance policy are typically tax-free.

In the case of buy-sell agreement funding, the tax implications depend on the structure of the agreement and the type of business entity. It’s crucial to consult with a tax professional to ensure compliance with all applicable tax laws and regulations.

Additionally, when selecting insurance policies, business owners should consider factors such as the coverage amount, term length, and any riders or additional benefits that may be necessary to meet the specific needs of their business and key employees.

Choosing the Right Policies

When determining how to protect your key employees, it’s essential to consider the specific needs of your business and your employees. Factors such as the size of your company, the nature of your industry, and the roles of your key employees will play a crucial role in determining which policies and coverage amounts are most suitable.

Consult with an experienced insurance professional to help you assess your needs and design a comprehensive plan.

Conclusion

Understanding how to protect your key employees is a vital aspect of business planning. By implementing life and disability insurance policies tailored to your company’s needs, you can safeguard the future of your business and ensure its continued growth and success.

Don’t leave your company’s future to chance; invest in the protection of your key employees today. Consult with an experienced insurance professional to help you design a comprehensive insurance plan that meets the unique requirements of your business and its key personnel.

If you need help determining how to protect your key employees, schedule a call discussion with us or take 30 seconds to find which retirement plan is best for your company with The Retirement Plan Evaluator.

Sources

1. The American College of Financial Services. (n.d.). Key person insurance. Retrieved from https://www.theamericancollege.edu/designations-degrees/CLU/key-person-insurance
2. Investopedia. (2021, June 25). Key person insurance. Retrieved from https://www.investopedia.com/terms/k/key_person_insurance.asp
3. Littell, D. (2019, May 1). How to insure your most valuable employees. Forbes. Retrieved from https://www.forbes.com/advisor/life-insurance/how-to-insure-your-most-valuable-employees/
4. Principal Financial Group. (n.d.). Key person insurance: Protecting your business from the loss of a key employee. Retrieved from https://www.principal.com/business-owners/key-person-insurance
5. The Guardian Life Insurance Company of America. (n.d.). Business overhead expense insurance. Retrieved from https://www.guardianlife.com/business-insurance/business-overhead-expense-insurance

Not only does it provide them with financial security in their golden years, but it also incentivizes them to stay with the company longer. In this blog post, we will discuss four retirement plans that your employees will want to stay for.

But first…

Create a Balance “Rich Plan”, That Incentivizes Longevity in the Employees 

When designing a retirement plan, it is important to find the balance between creating a “rich plan” and incentivizing longevity in the employees. A rich plan offers generous benefits that encourage employees to save for their retirement.

On the other hand, if the benefits are too generous, employees may become complacent and not work as hard. It is important to find the right balance so that employees feel appreciated and are also motivated to stay with the company for a long time.

Understand What and How a Vesting Schedule Works and the Benefits for the Employer 

A vesting schedule is a timeline by which an employee becomes fully vested in their retirement plan benefits. This means that they have ownership of all the benefits they have accrued and can withdraw them without penalty. There are two types of vesting schedules: cliff and gradual.  

With a cliff vesting schedule, employees become fully vested after completing a certain number of years with the company.  This can be good for employers who are looking to save benefits for loyal employees.

A gradual vesting schedule, on the other hand, allows employees to vest gradually over a period of time. This is a more gradual process and gives the employees a target to reach down the road and incentivizes them to stay longer.   The hope is that the longer the vesting schedule, the longer the tenure of your employees.

Retirement Plans That Allow You to Use a Vesting Schedule

Here are 4 plan types that will make your employees want to stay with your company: 

1) Traditional 401k  

A Traditional 401k is a type of retirement plan that allows the employer to design a plan from scratch. This means that they can create a matching and vesting schedule based on their goals.  Whether it’s for employee retention, or to fit the plan within the company’s budget.  The benefits of a Traditional 401k include:  

• Roth or Pre-tax contributions.
• Employees can contribute up to $20,500 per year (2022)  
• Employers can design a plan on budget and to incentivize their employees.

A Traditional 401k is a great option for employers who want to create a vesting schedule. They can match employee contributions on a gradual or cliff vesting schedule. This allows employees to become fully vested in their benefits over time and incentivizes them to stay with the company for a long period.

2) QACA (Qualified Automatic Contribution Arrangement) Safe Harbor 401k  

A QACA is a type of Safe Harbor 401k that has a 2-year, cliff vesting schedule.  As opposed to the Standard Safe Harbor, that has an immediate vesting schedule. 

This plan is great for businesses with high turnover to incentivize the employees to stay longer, but also to keep any matching contributions within the company if an employee were to leave within the two years.

Its benefits include:

• Roth & Pre-tax contributions. 
• Employees can contribute up to $20,500 per year (2022). 
• Employees are vested after 2 years. 
• Allows the owners and HCEs to maximize contributions regardless of employee contribution rates.

3) Profit Sharing (stacked on top of any 401k plan or stand-alone)  

A profit-sharing plan lets employers offer profit-sharing plans as a way to attract and retain employees. Profit sharing is a great option as employees like the idea of being apart of the growth and success of the company.

Other benefits to profit sharing include:  

• Employees feel appreciated by their employer.  
• Gives employees a share in their company’s profits based on its quarterly or annual earnings. 
• Employers have the ability to create a separate vesting schedule versus the 401k plan.

4) Cash Balance Plan (also can stack on any 401k plan or stand-alone)

Cash balance plans are a type of defined benefit plan that can be used as either a pension or as a supplemental retirement plan.  It is a great solution to highly successful business owners with a smaller employee pool.

Cash balance plans have many benefits, including: 

• Substantial tax reduction on the employer. 
• Creates a highly sought after employee benefit to recruit high-quality employees.  
• Employees can roll the funds into an IRA once the plan has shut down, or they leave the company.

Conclusion

As an employer, you should consider implementing one (or more) of these plans as part of your overall compensation package.

If you are self-employed without employees, keep in mind that starting a solo 401k plan allows you to save tax-free for retirement and offer employer contributions to yourself. 

Building a custom plan based on the goals of your company is a good practice of any employer.  Whether it’s tax savings or the recruitment & retention of high-quality employees, our 401k experts can help you design the best plan for your goals.

If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

American workers are set to be the key beneficiaries of the ongoing transformation of retirement savings plans, with small businesses playing a bigger role to make this a reality. On Tuesday, March 29, 2022, the House of Representatives turned up in a big way to pass the Securing A Strong Retirement Act of 2022 (SECURE 2.0) by a vote of 414 – 5.

The new legislation rides on a previous retirement legislation, The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), boosting all workers, including those working in small businesses, to live a secure retirement future. Among the key changes the bill will actualize are expanding retirement saving plans offered by small and large businesses and broadening the automatic enrollment.

The Senate, which is making the next move toward passing the bill, has unveiled the Retirement Security and Savings Act, which has the same features as those in SECURE 2.0. Workers can rest assured that both the House and Senate will work together with the future of the American worker at the forefront.

Some of the over 50 highlighted provisions under SECURE 2.0 that small business owners and plan administrators should watch out for include:

1. Expansion of Automatic Enrollment

Small businesses offering 401(k), 403(b), and SIMPLE plans are required to automatically enroll their employees. The enrollment starts with a contribution rate of 3% of employees’ pay, which will gradually increase by 1% every year until it reaches no more than 10%. Employees are also free to no longer participate in the plan. Those exempted from the rule include businesses hiring 10 or fewer employees, new businesses that have been running for less than three years, churches, and government plans.

2. Extension of Saver’s Credit

Small businesses would receive tax credits of up to $1,000 per employee to minimize startup costs for contributions made on behalf of the employee. Further, the tax credit will be increased from 50% to 100% to cover up to 100 employees from the previous 50 employee limit for small business startups. The allocations would be as follows: 100% in years 1 and 2, 75% in year 3, 50% in year 4, and finally 25% in year 5.

3. Incentivizing for More Plan Participation

The plan would allow employers to offer employees financial incentives such as small gift cards to encourage participation in 401(k) and 403(b) plans.

4. Allow Student Loan Payments to Qualify as Elective Deferrals

The SECURE ACT 2.0 will allow the employer to make contributions to match the qualified student loan payments for their employees.

5. Ease the Process to Enroll Military Spouses Into Employer Retirement Plans

Small businesses would claim tax credit per employee in exchange for; i) making it possible for military spouses to be eligible for plan participation within two months of employment, ii) ensuring they are eligible for matching or nonelective contributions, and iii) making sure 100% of military spouses are vested in all employer contributions. The tax credit would be $250 for every military spouse and 100% of employer contributions for the military spouse up to $250 each year.

6. Raising the Required Minimum Distributions Age

Under the SECURE Act, the retirement withdrawals by workers were delayed by two years from age 70 to 72. With the new provisions, this will further push them back up to age 73 starting in 2022, 74 by January 1, 2030, and 75 by January 1, 2033, which gives workers a long time to save more.

9. Reduced Eligibility Requirement for Part-Time Workers

The new proposal modifies the SECURE Act, where long-term, part-time workers are allowed by employers to defer to their 401k plans provided they’ve worked for three consecutive years with at least 500 hours of service annually. Now the three-year limit will decrease to two.

10. Securing Retirement Savings

Through the Act, a national online lost and found database will be set up for retirement savings. This will assist individuals to trace and receive their benefits lost due to a business changing names or merging with other organizations.

11. Lowered Penalty for Not Taking Minimum Distributions

The plan will reduce the excise tax from 50% to 25% for those who don’t take their minimum distributions. The tax will be reduced to 10% if there is a timely correction of the failure.

12. Amendment of the Employee Plans Compliance Resolution System (EPCRS) 

The Act will permit plans to be put in place to enable the EPCRS to make self-corrections to errors made in the system, including IRA errors.

The above key provisions are aimed to expand the coverage, encourage and preserve retirement savings for all workers and help small business owners offset the cost of administering retirement plans.

.

What Next for Small Business Owners?

It now remains to be seen if the Senate adopts the House bill or enacts their own; either way, the expectation is that it will get many Americans to save more.

In addition, it will make it easy for employers to navigate the retirement rules, such as more time for employers to amend beneficial discretionary retirement plans and modernizing family attribution rules, which hugely affect small businesses and women business owners.

The upside is that the Act is designed to recognize the impact employers have over their employees’ retirement savings, more so small business owners, who may be limited compared to larger organizations.

This can be seen in how the plan capitalizes on aspects such as integrating 403(b) plans under PEP, including increased tax credits to make it cost-effective to manage 401k plans.

If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

As an employer, it may feel difficult to support your employee’s side businesses.  But first, let’s dive into why it might be beneficial to your business by supporting them.

The U.S is recognized for its great economy and hardworking population. Unfortunately, the country’s economy suffered a big blow, especially in the second quarter of the global pandemic. 

The GDP declined at a 32.9 percent rate. This is the highest decline since 1947. As a result, the working class is compelled to work harder to revive the declining economy. For instance, a growing number of employees have a side hustle in order to survive the tough times.

However, the idea of employees having a side hustle has attracted a lot of controversies among employers. In this article, we’ve explained why employers should encourage their employees to have a side hustle.

Benefits of Supporting Your Employees Side Business

Many employers strive to extract every second from their employees’ schedules, causing some employees to work overtime day in and day out. 

These are employers who view an employee’s side business as a threat to their business. But this isn’t the case. 

Instead, you can gain a lot by supporting your employees side businesses and allowing them to have thriving side hustles. Here’s how you can benefit.

Cut Training Cost  

With the ever-changing technology, employers are forced to invest in employee training programs. The goal is to help them keep up with the new trends. 

Training is a lifeline to businesses, and it comes at a higher cost. However, by supporting your employers to start side hustles, they’ll strive to grow their business so as to remain relevant in the highly competitive environment. 

This helps them acquire new skills. They’ll then use the skills mastered to run your business. This means you’ll have a team of experts at no additional training cost.

For example, IronMonk (digital marketing agency) CEO Jack Choros claimed that most of their staff have freelancing side hustles. They support them because it helps them sharpen their skills, making them better writers without the company shouldering inflated training costs.

Improves Employees Retention Rate

Employees don’t stick with employers who don’t support their goals. Therefore, you may be forced to keep looking for new employees, which could sink your investment. That’s because losing skilled employees means you have to spend more time and money on recruitment and training. And the new employees may take time to adapt to your business style.

With the current tough economic times, supporting your employees to find other ways of boosting their income motivates them and increases their loyalty to you. So, they’ll strive to achieve your business goal along with growing their side hustles. 

That means you’ll retain the right talents in your company by supporting your employee’s side businesses, and this is good for business.

Not sure which plan is for you, check out our Retirement Plan Evaluator to learn in 30-seconds. 

A Financially Secure Workforce is More Productive

Financial insecurity can take a toll on your employees’ productivity, directly affecting your business. Regardless of how much you pay your employees, most are always worried about potential changes that could render them jobless. 

Anxiety triggered by money affects relationships, psychological health, and physical health. Employees who have side business regardless of its size are more confident because they have an alternative plan. 

The confidence and peace of mind boost their productivity, creativity, and commitment to you. Besides, they may use income from their side hustles to pay their debts, which helps them remain calmer.

Help them Find Satisfaction

According to 2019 Gartner’s, employees study in the United States, only 13% seem to find satisfaction in their jobs. And over 46% of workers are dissatisfied. 

If your employees feel unsatisfied, they may not offer an exceptional service. Supporting their side business helps them fulfill their purpose and lead happier lives. 

The fact that your employees find their side business more fulfilling should not worry you because most still keep their day job. Their side business gives them renewed energy needed to run your business activities. 

In this condition, they’ll address customers better, be more organized and become better time managers.

A Side Business Helps Employees Better their Skills

Even if you’ve constantly been offering training courses to your workforce, it may not bear results like running a side hustle. 

A side business offers both skills and experience. This way, your employee will improve their existing skills and master new skills in the process. 

They’ll improve their communication skills, problem-solving skills, financial management skills, and so on. 

The knowledge gained from side hustles is a great asset to your business. Keep in mind that a well-equipped and skilled workforce is a lifeline to your business. 

Tips on How to Manage Employees with Side Business

While supporting employees’ side hustle comes with tons of benefits, it may cost your business if you don’t set reasonable limits. If some employees are not controlled, they may skip their day jobs or spend hours answering private business calls during working hours.

This is inappropriate and unacceptable. You can prevent this from happening by letting your employees know that you have no problem with them having a side hustle, but they must comply with your business policy. 

This will help protect your hard-earned investment. Here are practical business practices to add to your policy:

• Must portray good working performance–  It’s important that you specify each employee’s daily obligations. 

Their performance and conduct must be good. That doesn’t mean you implement stringent regulations, keep it professional and sensible. 

For example, implement flexible working schedules and involve your employees. Make sure they understand that non-compliance or misconduct may lead to disciplinary or dismissal.

• Comply with working time legislations-  According to the U.S. Department of Labor, employees are required to work for specific hours per day. The law dictates that they receive time off and breaks between shifts. 

An employee can choose to have a side hustle and run it during their off-days and breaks. To enhance their general well-being, advise your employees to work reasonably to avoid overworking their brains and bodies. 

And avoid denying them their rest time as that could lead to monetary penalties and fines since it’s against the law.   

• Develop an open communication culture–  Start discussions about side hustles to encourage your employees to open up about their outside jobs. 

This helps build rapport because they’ll be convinced you have their interest at heart. 

Being honest and open boosts productivity and loyalty, and you can borrow their ideas and implement them in your business, especially from employees with thriving side businesses.

• Protect your business assets–  Employees should not expose your business assets, such as confidential clients materials and information. 

These should remain within the business. A breach of data can harm your brand reputation, and therefore your employees should run their side hustles without exposing your business data. 

Key Takeaway

Your employees’ side hustle should not be a threat to your business.   In face, you have a lot to gain by supporting your employee’s side businesses.

It has tons of benefits like boosting their productivity, skills and giving them satisfaction. Besides, they gain new skills without you spending on educational courses. 

Whether you need advice on practical business solutions or looking for a reliable 401(k) provider, Life, Inc Retirement Services is the best option. We value your business and employees. 

Partnering with us gives you time to concentrate on your business growth as we handle the hard stuff.

If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

There are several ways to invest in real estate.  However, it depends on a few factors if real estate investors can have a 401k plan.

While the joys of being a real estate investor are many, so are the stressors. One of the main stressors is that you have to plan for retirement by yourself, unlike when you are employed.

Luckily, there are various retirement savings plans that were created to house all kinds of professions. One such plan is the 401k plan. This is a retirement savings plan that allows individuals to save a certain percentage of each paycheck directly to a long-term investment account. So, to answer the question “can real estate investors have a 401k plan,” the answer is yes. 

Here is everything you need to know about real estate investors’ 401k plans.

What Retirement Plans Can Be Used by Real Estate Investors?

Here are a few retirement plans for real estate investors. Like other plans, these three plans have various tax benefits depending on which you choose. These plans are:

1. SEP IRA

Simplified Employee Pension IRA is a type of traditional IRA that was created to extend the IRA concept to small businesses. It is set up and funded by the owner. Any business entity can set up a SEP IRA whether it has employees or not.

It is a great choice because it is easy to set up, has no administrative overhead, the savings are tax-deferred, and has much higher contribution limits compared to Roth or traditional IRA.

With that, the tax deductions for a SEP IRA are much higher than that of an IRA.

2. Solo 401k

The solo 401k plan was designed for solo entrepreneurs without full-time employees. As such, if you run a business that has another employee other than yourself and a spouse, you are not eligible for a solo 401k.

A Solo 401k offers similar contribution limits to the SEP IRA.  However, the way your contributions are calculated require less income to reach those limits.  It also offers a Roth option to the employee portion.

3. Cash Balance Plan

A cash balance plan is different from a 401k plan as it is a defined benefit plan. This is as opposed to the 401k, which is considered a defined contribution plan. That means it guarantees a certain amount of benefit in retirement in terms of a stated account balance.

Each participant in the cash balance plan has an account. The account grows in two ways: the annual contribution, and an interest credit with a rate of return that is typically set by an actuary.

When the participants retire or terminate their employment, they receive the vested portion of their account balances.

Not sure which plan is for you, check out our Retirement Plan Evaluator to learn in 30-seconds. 

A Financially Secure Workforce is More Productive

Financial insecurity can take a toll on your employees’ productivity, directly affecting your business. Regardless of how much you pay your employees, most are always worried about potential changes that could render them jobless. 

Anxiety triggered by money affects relationships, psychological health, and physical health. Employees who have side business regardless of its size are more confident because they have an alternative plan. 

The confidence and peace of mind boost their productivity, creativity, and commitment to you. Besides, they may use income from their side hustles to pay their debts, which helps them remain calmer.

Help them Find Satisfaction

According to 2019 Gartner’s, employees study in the United States, only 13% seem to find satisfaction in their jobs. And over 46% of workers are dissatisfied. 

If your employees feel unsatisfied, they may not offer an exceptional service. Supporting their side business helps them fulfill their purpose and lead happier lives. 

The fact that your employees find their side business more fulfilling should not worry you because most still keep their day job. Their side business gives them renewed energy needed to run your business activities. 

In this condition, they’ll address customers better, be more organized and become better time managers.

A Side Business Helps Employees Better their Skills

Even if you’ve constantly been offering training courses to your workforce, it may not bear results like running a side hustle. 

A side business offers both skills and experience. This way, your employee will improve their existing skills and master new skills in the process. 

They’ll improve their communication skills, problem-solving skills, financial management skills, and so on. 

The knowledge gained from side hustles is a great asset to your business. Keep in mind that a well-equipped and skilled workforce is a lifeline to your business. 

5. LLCs

A limited liability company has the pass-through taxation of a partnership and the limited liability of a corporation. It is a great choice for long-term real estate investors and rental properties. On the downside, it is usually dissolved in the event of death or bankruptcy.

6. Single-Member LLCs

Just as the name suggests, a single-member LLC is an LLC that has a single owner instead of more than one. It has all the advantages and disadvantages of a multi-member limited liability company.

Taxes are collected through the owner’s personal tax returns.

7. Sole Proprietorship

A sole proprietorship is an entity structure for real estate investors if they want to do everything by themselves without forming anything. It is the easiest to form and doesn’t have extra tax returns. On the downside, a sole proprietorship has unlimited liability.

Where Should a Real Estate Investor Report Income?

There are two types of income for a real estate investor: active and passive. If you qualify to be a real estate professional, your rental income is considered active. Otherwise, it is considered passive.

You are considered a professional if you meet the two requirements below.

• “More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.”
• “You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.”

Schedule E is used to report passive income, while schedule C, K-1, W-2, etc are for reporting active income.

Income for owners of S-Corporations and individual partners in a partnership is reported on Schedule E, while that for corporations, sole proprietors, and single-owner LLCs isn’t.

How Short-Term Rentals vs. Long-Term Rentals Can Be Taxed Differently

The difference between long and short-term rentals depends on the time and not the property type. Any property rented for one month or less is considered a short-term rental. A long-term rental is a property rented for longer than one month.

Long and short-term rentals have their own unique tax treatments as broken down below.

• Unlike long-term rentals, furniture, property decorations, and painting among others are tax-deductible for short-term rentals.
• You don’t need to pay property taxes if you run a short-term rental through rental arbitrage. You also won’t need to insure property appliances.
• Homeowner associations and property taxes are included in long-term rental costs.
• In some states and countries, long-term rentals have a much higher tax rate compared to short-term rentals.
• Long-term rentals enjoy deductions such as depreciation, property taxes, repairs, and mortgage interest.

Hire a Retirement Plan Advisor 

There comes a time in the life of a successful real estate investor when it’s imperative to consider ways to allocate duties. For many, top of the list of delegating is the administration of the 401k plan. 

Where there are several methods for delegating the management of a 401k plan, there is now a trend towards hiring a 401(k) specialty firm or advisor that takes on nearly all the fiduciary liability associated with the investment process. 

At Life, Inc. Retirement Services, we assist you in designing a plan fit for your business, and offer administrator and fiduciary support to keep your plan compliant.

If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.