Employers do not have to offer retirement plans to their employees. However, retirement plans are an added benefit for many companies. Most employees look forward to what types of benefits their employers offer. In return, employees are more likely to stay with a company longer and increase their productivity for businesses that have a great benefits package.
The reason why many companies choose to offer their employees a 401K plan is that not only does it benefit them but also the business. A 401K plan is popular with many companies as employees contribute to their plans with pre-tax dollars. Because of this, an employee's tax liability is decreased and they are able to save for retirement. Therefore, many companies, especially small businesses, should determine what reasons they have for wanting to offer a 401K plan. For many owners, once they know why, they can begin to determine how to start a 401K for my small business.
A 401K plan is an employer-sponsored retirement plan to which employees can directly route a portion of their paychecks. This setup allows employees to automate their retirement savings, thus making 401K plans a highly demanded benefit. 401Ks are also popular because employers often match their employees’ paycheck contributions up to a predetermined limit.
401K plans benefit employers too, as they may provide tax breaks and competitive advantages for your company. These 401K plan employer benefits will be explained in more depth later.
As of 2021 , here are the contribution limits for each plan as stated on IRS.gov:
Among the reasons that small businesses like yours should set up a 401K plan include the following:
Your reasoning for why you are setting up your 401K plan will dictate how you want your 401K plan set up. Realizing your goal for having a 401K plan will give you a clear focus and provide you with direction so that you won't get off track, which would be a waste of time and resources.
Now that you know what your purpose is and have your goal set, you can determine which type of 401K plan you would like to offer.
Before choosing the company with which you’ll set up your 401K, find several potential providers and ask them the following questions:
Recordkeeper - A recordkeeper does exactly that. They will keep track of all information pertaining to your 401K plan such as who is enrolled and any money associated with it. The top recordkeepers of 2019 according to The Balance are:
Payroll system - Your payroll system should work together with your recordkeeper to make sure an employees' salary is being correctly distributed to their 401K plan.
Third-Party Administrators (TPA) - A TPA will handle the administrative tasks related to your 401K plan such as any annual forms, documents and more. Depending on the recordkeeper you might not need a TPA as they sometimes provide these services.
401K Advisors - According to Forusall.com, an advisor will help to make setting up a 401K plan for your business easier. They will be able to answer your questions and your employees' questions related to the plan. An advisor can also take on the responsibilities of a TPA. Having an advisor is also good because they can assume the legal responsibilities for your investments. They also help to build and monitor your investments such as mutual funds.
After you find partners for your 401K plan, you’re not quite done establishing your plan. You’ll also need to determine someone within your company who will oversee all plan assets and keep you updated on their growth or contraction. This person is your 401K plan’s trustee.
It’s one thing to find a payroll system capable of deducting your employees’ 401K contributions from their paychecks. It’s another to ensure that deductions will indeed be taken. Reach out to your payroll software provider to confirm that you’re properly set up your deductions. Take this time to automate your employer match contributions if you’re enabling those as well.
With all the above steps complete, you can consider your 401K plan finalized and concrete. However, you still have one last step to take: making sure your employees know about your plan.
To effectively communicate your plan’s details to your team, send an email that includes the following information:
You will need to conduct this type of testing if you elect to use a traditional 401K or a Roth 401K plan. A nondiscrimination test is conducted to make sure that any contributions aren't only benefiting the owners or highly compensated employees. The tests conducted are called Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP). It is used to compare the salary deferrals of highly compensated employees and non-compensated employees.
These tests must be completed annually but some businesses like to do them throughout the year. If your business happens to fail the test, there are several ways of correcting any mistakes so that your company will pass. One of the most popular methods is to make corrective distributions. This is when a company refunds its contributions from HCEs until they pass.
Making the decision to offer a retirement plan to your employees is a big decision. The steps needed to build a 401K plan for small business owners can take some time. However, it is very beneficial. As a result of setting up a 401K plan for your employees, they will feel appreciated which increases productivity. There are also many tax benefits, especially for small businesses. Once you determine your purpose for creating a 401K plan you can follow the steps needed to build your plan. Ensuring that you have the right partners while building your plan will save a lot of time and money.