Rainstone

Financial
The Case For A Micro 401(K)
by Joseph Regenstein IV, CMFC

The Need to Attract and Retain Employees

Employers have increasing been the providers of retirement plans for employees and this has created a dilemma
for many small businesses1.  When competing for talent with larger rivals, not having a plan might make it
difficult to attract or retain quality employees.  However, the fixed costs of administrating a plan weigh heavier
on the small employer, for instance a $1,500 annual fee breaks down to $150 per employee for a 10 person firm. 
A larger organization with 100 employees may have a lower per employee cost of $15, making the expenditure
a more attractive employee benefit.  In addition, the investment provider and third party administrator might
discount the administrative costs based on the assets in the plan, another advantage for larger employers.
The Need to Reduce Costs
Businesses of all shapes and sizes are looking for ways to boost the bottom line, finding cost savings is currently
at a premium.  We have seen a wave of employers migrating away from plans purchased through a payroll
providers and transferring them to a micro 401(k) provider.  At Rainstone Financial we recently reviewed one
of our Small Business Client’s qualified retirement plan and recommended they make a change to their 401(k).
The Client has 8 employees in a 401(k) through Paychex with an administrative cost of $125 monthly.  After
reviewing the employer’s needs it was determined a micro 401(k) with an administrative cost of $250 annually
was more appropriate2.  This continues to provide the employer with all the same features as the payroll
provided plans with a reduced cost.  It is important to ensure the new plan has adequate investment options,
flexible plan design and is easy for the employer to submit contributions.
Flexible Plan Design
Micro 401(k) plans offer small business a flexible way to invest for their retirement and allow retirement
savings for their employees through:
• Discretionary salary deferral contributions including catch-up contributions for employees over 50.
• Roth Contributions without the phase-out present in Roth Individual Retirement Accounts (optional).
• Loans may be permitted if allowed by the plan sponsor subject to certain limitations (optional).
• Safe Harbor matching (optional).
• Profit Sharing (optional).
The flexible nature of micro 401(k) plans allows business owners to start, stop or later alter their salary deferral.
The Safe Harbor matching contributions plan design eliminates otherwise standard non-discrimination testing
requirements (provided all requirements are satisfied).
Flexible Distribution Options
Subject to certain distribution requirements, business owners and their employees have access to their 401(k)
account based on certain common distribution triggers.  Distributions are generally available upon:
• Reaching age 59½
• Separation from service
• Death or Total disability
• Termination of the plan
• A qualified financial hardship
The plan document will define the options for each 401(k) plan.  Distributions are subject to ordinary income
taxes and could also be subject to a 10% penalty if made before reaching 59½. 
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Consolidation
New tax laws now make it possible for plan participants to consolidate all of their retirement accounts by rolling
over or transferring their assets in their 401(k) account.
Safe Harbor Design Eases Administration
Since micro 401(k) plans are geared toward very small business, they elect to use a Safe Harbor design to avoid
complex and sometimes costly testing requirements.  Administration services are offered through micro 401(k)
providers or third party administrators.
 Who may be a likely candidate for a micro 401(k)?
1. Small Businesses with 10 participating employees or less.
2. Business owners looking for a plan that offers higher salary deferral contribution limits over Traditional
, SEP and SIMPLE IRAs3.
3. Small business owners who previously declined 401(k) setup due to administrative and cost concerns.
4. Businesses with employees who desire to defer for their retirement savings.

Who may not be a likely candidate for a micro 401(k)?

5. Small Business with more than 10 participating employees.
6. Businesses that have contributed to a SIMPLE IRA already in 2011 or have had the SIMPLE IRA for
less than two years4.
7. Small Business where the only employees are owners or owners’ spouses, a Solo-401(k) may be more
appropriate4.

Citation
1
Employee Benefit Research Institute. Retirement Plan Participation: Survey of Income and Program Participation (SIPP) Data, 2006. February 2009,
Vol. 30, No. 2: pp 16.
2
Hartford Emerging Business Platform with Dyatech EB Plan Link as the Third Party Administrator. Setup fee $0, annual administration $250.
3
U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) and the Internal Revenue Service. Choosing a Retirement Solution
for Your Small Business. Washington D.C.: 2007.
4
Department of the Treasury and the Internal Revenue Service. Publication 560: Retirement Plans for Small Business (Sep, SIMPLE and Qualified
Plans). January 15 2009, pp 21.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does
not constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee
that the foregoing material is accurate or complete
Joseph Regenstein IV, a Financial Planner, offers advisory services through Jonathan Roberts Advisory Group, Inc.  He offers
securities through J.W. Cole Financial, Inc. Member FINRA/SIPC. To contact e-mail jregenstein@rainstonefinancial.com, call
407-412-7028 or mail to 3731 Safflower Terrace, Oviedo, FL 32766. A list of Rainstone Financial sevices can be found at www.
rainstonefinancial.com

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