Small business owners are accustomed to handling a great deal of responsibility. They manage everything on a daily basis, from determining the business’s plan to budget creation, talent recruitment, and overseeing day-to-day operations. Setting up a 401(k) retirement plan for employees also falls squarely upon an owner’s shoulders. The task can be somewhat overwhelming, with many uncertainties surrounding such a decision. It doesn’t have to be stressful or complicated. Here are some things that every small business owner should understand concerning the process of choosing, implementing and administering a 401(k) plan.
Choosing The Right Plan
There are three types of 401(k) retirement plans to choose from, each with distinct conditions.
- Traditional 401(k) — With this type of plan, employers can choose not to contribute, make outright contributions, or match an employees’ contributions. Employers can also set a vesting period for contributions. Regardless of the selected option, traditional 401(k) plans must successfully pass nondiscrimination testing every year.
- Safe Harbor 401(k) — This type of plan, although similar to a traditional program, requires employers to make contributions; they cannot elect not to. It has specific rules about the structure of contributions, which must be vested immediately. Since contributions are required, companies can bypass nondiscrimination testing.
- SIMPLE 401(k) — Beneficial to businesses with fewer than 100 employees, SIMPLE 401(k) plans are similar to the Safe Harbor plan. Employers are obligated to make contributions to their participants’ 401(k) accounts, which also are vested immediately. They are also exempt from nondiscrimination testing.
Which plan is right for your business? That depends upon the amount of flexibility you wish to have regarding contributions to employee’s plans. The ability to pass nondiscrimination testing is also a consideration as failing even one of the tests could result in costly plan changes and possibly refunding all of the contributions previously made.
Implementing and Administering Plans
One of the most significant decisions business owners must make is whether to set up the plan themselves or to consult a professional to help establish and maintain it. In either case, businesses are required by the Internal Revenue Service (IRS) to take specific other steps.
- Adopt a Written Plan — The IRS defines this document as a foundation for the policy’s day-to-day operations. For most business owners, this is a task best left to a retirement plan professional or financial institution. Regardless of whether outsource the job or draw up the document on your own, its content is binding, and you must follow it to the letter.
- Establish a Trust Fund for the Plan’s Assets — The assets of any 401(k) plan must remain in a trust that ensures they are used solely for the benefit of the participants and their beneficiaries. There must be at least one trustee to manage the contributions, plan investments and distributions. Bear in mind that the financial integrity of the plan is dependent upon the trustee, so it is vital to choose wisely. In fact, it may well be the most critical decision you make.
- Develop a System for Recordkeeping–– It is imperative that you keep accurate records of contributions, plan earnings or losses, investments, expenses, and distributions to participants. Not only does this ensure the plan’s integrity, but it is also useful in preparing annual returns and reports required by the government. If you’re working with a plan administrator or other financial institution, they will typically help you with the process of recordkeeping.
- Provide Participants With Plan Information–– Employers are required to provide a summary plan description (SPD) to inform eligible employees, plan participants, and beneficiaries about the plan and how it works. The company also should provide information regarding the advantages of joining the program, such as pre-tax contributions, employer contributions, and compounded tax-deferred earnings. Doing so will help to eliminate confusion and encourage employee participation.
Regardless of the number of employees on your payroll, providing plans that encourage savings for the future makes good business sense. As a small business owner, establishing a 401(k) retirement plan will help you attract and retain the best talent. In fact, employees often prefer the option of participating in a retirement plan over receiving a raise in their salary. In other words, they’re concerned with their future, and as an employer, you should be as well.
While it is possible to set up and administer your company’s 401(k) retirement plan, most business owners prefer to outsource this task. The truth is, the average small business owner doesn’t have the knowledge and experience necessary to execute such a plan correctly, so it’s best not to go it alone. A retirement fund expert will set up the program, provide all of the necessary documents, manage contributions, make investment decisions, and oversee payouts from the fund. That means you can focus on running your business, and you can rest assured that your employees will be well-cared-for in their retirement years.