Small Business Retirement: What is a Pooled Employer 401(k) Plan?

Are you a small business owner who has been putting off setting up a retirement plan for yourself and your employees? You're not alone. Many small business owners feel like they don't have the time or money to set aside for retirement.

But believe it or not, having a retirement plan is one of the smartest things you can do for your business. Here are just a few reasons why:

1) It shows that you're serious about your business and your future.

2) It can help you attract and retain employees.

3) It can help reduce your taxable income.

4) It gives you peace of mind knowing that you have a savings cushion in case something happens to your business.

While there are different retirement options for small businesses, in this guide, we will cover what a Pooled Employer 401(k) Plan is and how you can set one up for your small business. 

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What is a Pooled Employer 401(k) Plan? 

A Pooled Employer 401(k) Plan (PEP) is a type of retirement plan designed specifically for small businesses. PEPs offer many of the same benefits as traditional retirement plans, such as Traditional 401(k)s and IRAs, but they are typically less expensive and easier to administer.

PEPs are sponsored by professional organizations like Penelope, financial institutions, or third-party administrators. With a PEP, two or more unrelated small businesses can pool their resources together in order to provide employees with a retirement savings option that is both affordable and effective. 

How does a Pooled Employer 401(k) Plan Work? 

A PEP offers small businesses the same economies of scale and administrative efficiencies as large businesses. The businesses participating in the plan pool their resources, which helps reduce administrative costs and increase investment options. With a PEP, small businesses can offer their employees a retirement savings plan without shouldering the entire burden of plan management. This makes PEPs an attractive option for small business owners who want to provide retirement benefits for their employees but don't have the resources to set up and manage a traditional retirement plan.

Who can Contribute to a Pooled Employer 401(k) Plan?

Contributors to a PEP include the employer, employees, and/or independent contractors. Each participant has their own account into which they can make tax-deferred contributions. The PEP sponsor manages the investment of the assets in the plan and provides fiduciary responsibility for the participants' accounts. Investment options and fees vary depending on the plan.

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How Much can you Contribute to a Pooled Employer 401(k) Plan?

Business owners and employees can enjoy the same financial benefits, such as tax advantages and yearly savings opportunities, with a PEP that they would typically receive from a Traditional 401(k). In 2023, you can contribute up to $22,500 to your Pooled Employer 401(k) account.

What are the Tax Implications of Having a Pooled Employer 401(k) Plan for Your Business and Employees?

There are a few tax implications to consider when setting up a PEP. First, small businesses will be able to deduct contributions made to the plan on their taxes. This can help to offset the cost of providing benefits to employees. In addition, employees who participate in a PEP will be able to defer taxes on their contributions until they retire.

This can provide considerable tax savings over time. Finally, small businesses should be aware that there are certain reporting requirements associated with PEPs. However, overall, a PEP can be an excellent way to benefit employees while reducing the tax burden on your business.

What are the Benefits of Setting Up a Pooled Employer 401(k) Plan for my Small Business?

In addition to the tax benefits of setting up a Pooled Employer 401(k) Plan, there are also a number of other advantages that small businesses should take into account.

  • You can save on administrative costs since plans are administered by a professional third-party provider, which can help to reduce the administrative burden on your business 
  • Offering a retirement savings plan can help you attract and retain talented employees
  • PEPs can be used with other retirement savings plans, such as Individual Retirement Accounts (IRAs).
  • Setting up a PEP is typically easy and convenient, as most providers will handle the required paperwork and administration for you. 
  • It's never too early to start saving for your retirement! 

How do I set up a Pooled Employer 401(k) Plan for my Small Business?

In order to set up a PEP, you'll need to work with a financial institution, like Penelope, that offers them. Once you've found a provider that meets your needs, you'll need to complete some paperwork and make some decisions about investment options. Once the plan is up and running, you and your employees will be able to make contributions and start saving for retirement. With a PEP, small businesses can offer their employees a great benefit without having to shoulder all the costs and complexity on their own!

Start Saving for Your Future Through Penelope

A Pooled Employer 401(k) Plan can be a great way for small businesses to offer their employees a retirement option that is both affordable and beneficial. If you’re interested in setting up a Pooled Employer 401(k) Plan for your business, Penelope can help!

Penelope is the retirement platform for small businesses. They offer subscription-based plans for just $8 per active employee per month, making it insanely affordable to offer retirement benefits for your employees and yourself. They double down on affordability with completely transparent pricing with no sneaky asset management or advisor fees. So that money goes into your employees’ accounts, not the advisors’!

Frequently Asked Questions

Are Small Businesses Required to Offer Retirement Plans?

Not all small businesses have to offer a retirement plan to their employees, but there are state-mandates that have either gone into effect or will soon require businesses to offer retirement plans to their employees. Unless the state where you do business has mandated implementing a retirement plan, your business is not required to offer one.

What Other Retirement Account Options Exist for Small Businesses?

Through Penelope, your business can enroll in either a Pooled Employer 401(k) Plan, a Traditional 401(k) Plan, or a Solo 401(k) Plan. Their team will recommend the best plan for your business needs. 

Related Reading: Your Full Guide to Small Business Retirement Plans

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