Establishing a Small Business 401(k)

Small businesses are no less focused on providing a quality work environment for their employees than larger ones – and, in fact, some may be more so.

From benefits like flexible work hours or remote work options to competitive salaries and paid time off, small businesses offer many advantages. Part of the benefit package that employees have come to expect is a retirement plan, like a 401(k). While small businesses often have fewer resources to invest in plans like these, there are many options that are made just for them. To help our clients, prospects, and others understand the basic considerations - and a few potential pitfalls - of small business retirement plans, Hanson & Co. has provided the key steps for establishing a 401(k) below:

  1. Select the most appropriate plan. There are three main types of plans to consider. Many small businesses choose a traditional 401(k) plan because they offer substantial flexibility with regard to employer contributions, vesting schedules, and even the choice to not match at all. Those who are self-employed can set up an individual 401(k), which works similarly to a traditional 401(k). Another possibility is a safe harbor 401(k), which enables the business to contribute the maximum allowed without restrictions when they provide a matching contribution to their employees’ accounts. Certain profit sharing plans can work well for partnerships, such as legal firms, that reward employee contributions differently based on their role (e.g. partner, lawyer, and staff).
  2. Identify key plan features. Once the type of plan has been decided, some of the plan’s features can be chosen, such as which employees can contribute to the plan, how much can be contributed, and whether the company will provide a matching contribution.
  3. Choose the trustee and plan provider wisely. Unless it is set up through insurance contracts, the plan’s assets must be held in trust to assure that they are used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee to accept funds, manage investments prudently, and distribute them to beneficiaries (usually the owners or officers of the business or an institutional trustee, such as an insurance company or financial institution). In addition, when selecting a provider, ensure that employee fees are kept under one percent, that they have the investment and plan design expertise that minimizes administrative hassles, and that they have the services and options that can grow with the company.
  4. Develop a written plan document. A plan document is a required element for all 401(k)s and provides the foundation and day-to-day details of the plan’s operation. For instance, the plan document must describe how certain key functions are carried out, including how contributions are to be deposited in the plan. Every plan document must also clearly identify one or more persons to be the named fiduciary for the plan and any delineation of responsibilities among multiple fiduciaries. This clearly identifies for participants and government agencies who is primarily responsible for the plan.
  5. Provide plan information to eligible employees. If employees will be included in the plan, those who are eligible to participate must be notified about certain benefits, rights, and features. In addition, a summary plan description must be provided to all participants.
  6. Continually monitor the operation of the plan. Knowing the plan details and monitoring them closely is vital to avoid the costs of correcting errors and additional reporting. Some common pitfalls include not following the plan’s definitions of eligibility and compensation or making late contributions to participant accounts. Be sure that everything is working as outlined in the plan document, including offering anyone who meets the necessary requirements the opportunity to participate.
  7. Remain in compliance. There are a number of compliance obligations that 401(k) administrators must meet. One of the biggest challenges is passing non-discrimination testing, which compares plan participation and contributions of business owners and managers (highly compensated employees) to those of other (non-highly compensated) employees to ensure that they are proportional. If the plan fails the non-discrimination test, corrective action must be taken to preserve tax benefits. It’s also important to note that all 401(k) plans – no matter how small – must adhere to the fiduciary compliance rules for ERISA retirement plans. Hiring a service provider to assume some of the fiduciary responsibilities will help reduce some of the company’s liability.

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Small businesses that want to attract and retain their best talent may determine at some point that a retirement plan, like a 401(k), is the right move for the company. When that time comes, it’s important to utilize the right resources to set it up and properly manage the plan. If you would like more information about setting up a retirement plan for your business or want assistance administering your plan and compliance obligations, Hanson & Co. can help! Call us at (303) 388-1010 or click here to contact us. We look forward to speaking with you soon!

TaxNate Galuzzi