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Offering a 401(k) Plan? Tips for Small Business Owners

Offering a 401(k) Plan Tips for Small Business Owners

Offering a 401(k) is a great way to attract high-level talent to your organization.

  • A 401 (k) plan allows your employees to save for retirement and offers tax incentives for your business.
  • Small businesses often see 401 (k) plans as a major expense, but there are opportunities to keep costs down by outsourcing work or using specialized software.
  • Before offering a 401 (k) plan, you need to decide how to manage it.
  • This article is for small business owners and HR professionals who are considering offering or expanding their 401 (k) benefits.– Offering a 401 (k) plan for employees is an important step for any small business owner. However, it can be a daunting task and a significant expense, especially for very small businesses. This guide will explain some of the benefits of offering a 401 (k) plan and will help you get started offering this benefit to your employees.

What is a 401(k) plan?

A 401 (k) plan is an employer-provided benefit that allows employees to save money for retirement. Employees typically select investment types for these funds. A 401 (k) offers financial benefits to all employees of the company, including the owner, and is a much sought after benefit for employees.

Employees retain all of their contributions even if they leave the company, but complementary employer contributions are generally accrued over several years.

How do 401 (k) plans work?

A retirement savings plan requires careful planning. For example, you need to determine who is eligible to participate and select the right investment options for the money. Many employee retirement plan providers can help you with these activities.

Here are the essentials of a 401 (k) plan:

  1. Contributions are deducted. When enrolled in a 401(k) plan, an employee designates an amount to be deducted from their paycheck each pay period. This contribution – which is excluded from taxable income, except in the case of Roth 401(k) plans – is automatically withdrawn from their paycheck and placed into a retirement account. The account comprises investments – typically stocks, bonds and mutual funds – that employees usually can select themselves.
  1. There’s a contribution cap. There is a cap on how much an employee can contribute each year. This limit varies depending on the plan type and the employee’s salary, and it can also change due to government regulations. For example, the maximum contribution for a 401(k) plan in 2022 is $20,500, according to the IRS. Employees over age 50 can “catch up” and contribute an additional $6,500 to their 401(k) in 2022.
  1. Employer matching is possible. Employers may elect to match a percentage of employees’ contributions up to a certain amount or percentage of their salary. For example, an employer might match 50% of an employee’s contribution, not to exceed 6% of the employee’s pay.
  2. Vesting takes time. Typically, an employee must stay with the company for a certain number of years in order to keep the employer’s contributions when they leave the company. An employee usually gains ownership of employer contributions over a vesting schedule. For example, an employee may be entitled to 20% of employer contributions after two years with the company, 40% after three years, 60% after four years, 80% after five years and 100% after six years.

Types of 401(k) plans

There are two main types of 401 (k) plans: traditional and Roth. Let’s examine how each type works.

Traditional 401(k)

A traditional 401 (k) plan allows employees to contribute a portion of their salaries before taxes are deducted from their salaries. Such funds are not taxed until they are withdrawn after retirement age, which is defined as age 59.5. If you withdraw money before reaching retirement age, there is a significant tax penalty.

There are several types of traditional 401 (k) plans, including a standard profit sharing plan, a Safe Harbor plan that requires employers to contribute to accounting, and a SIMPLE 401 (k) plan aimed at companies under 100 employees .

Roth 401(k)

With a Roth 401 (k), by contrast, contributions are taxed as they are paid into the account. When the account holder reaches retirement age, also defined as age 59.5, he can generally make tax-free withdrawals from Roth accounts. However, previous withdrawals are subject to a penalty and early withdrawal fee.

How much does a 401 (k) plan cost a company?

The cost of a 401 (k) plan depends on many factors, including the following.

  • Administrative costs: A plan administrator, compliance professional or benefits manager may be required to ensure your small business 401(k) plan runs smoothly, the proper amounts are withheld, and the correct tax records are kept and filed. You can expect to pay a yearly administrative fee of between $750 and $3,000.
  • Employer matches: You’ll need to consider the cost of matching employees’ contributions if that’s an additional benefit you will offer. Those costs will depend on how many employees participate in the plan and how much they contribute.
  • Software: For small businesses on a budget, 401(k) plan software platforms can help manage the program.
  • Other fees: There may be costs associated with starting the 401(k) plan or additional fees for adding certain benefits.

Why you should offer a 401(k)

Although 401(k) plans aren’t required by law in the U.S., they are beneficial for other reasons. Here are some of the benefits of offering a 401(k):

  1. It attracts top talent. Many employees look for retirement options as part of a benefits package when deciding where to work. The best candidates can choose where they work, so offering a 401(k) can help your business attract and retain top talent. Not offering such a vital benefit means top applicants may bypass your company for a competitor.
  2. It increases job satisfaction. Employees are happier when they know you’re looking out for them, and providing a retirement plan is one way to show you value your employees. Happier employees tend to be more productive and stay with your company longer, thus reducing turnover.
  3. It offers tax advantages. Your business also may benefit from tax incentives. The SECURE Act of 2019 allows businesses with up to 100 employees to claim their plan setup costs as a tax deduction. Additionally, employer contributions to a 401(k) plan may be tax-deductible.

How to start offering a 401(k) plan

Once you’ve decided to offer an employee 401(k) plan, you’ll need to follow certain steps for compliance. Here’s what you’ll need to do:

  1. Create and document a 401(k) plan.
  2. Open a trust.
  3. Establish a system to record employee contributions.
  4. Update plan participants regularly.

1. Document the 401 (k) plan.

The first step you will need to take once you decide to offer your employees a 401 (k) plan is to document the details of the plan. This process can be tedious, and small business owners often outsource this task.

Your plan should include details on contribution amounts, when benefits are paid, and information on eligibility. Once the plan is created, you will need to submit it to the IRS for approval. Also, remember to review this plan annually to stay in compliance.

2. Open a trust.

Once your 401 (k) plan has been approved, you will need to create a trust account in which all of your plan assets will be stored. At this point, you will also need to select a trustee who can oversee all plan activities, including contributions and distributions.

3. Implement a record keeping system.

The next step is to implement a system to track plan values ​​and employee contributions. If you need help with this step, consider hiring a record keeper. 4. Update attendees about plan changes.

The IRS requires all business owners to constantly update 401 (k) participants on changes, investments, and associated fees. Business owners should also provide employees with a concise description of the plan, including detailed information on how the plan works.

Tips for Implementing a 401 (k) Plan.

If you decide to offer a 401 (k) plan, consider the following tips.

1. Consider outsourcing the administration.

Hiring an in-house expert can be very expensive, and doing it without experienced staff could lead to mistakes or inefficiencies. With outsourcing, you improve efficiency and reduce liability.

Professional Employer Organizations (PEOs) are third-party companies that manage human resources, payroll, benefits, and 401 (k) plans for small businesses. Thousands of small businesses across the country partner with PEOs to access competitive advantages and 401 (k) plans.

Choosing a PEO can be tricky, but different types make sense for small businesses. The best PEOs have industry accreditation, minimum coverage requirements, and great functionality, including short-term contracts.

2. Provide competent and qualified financial advisors.

It is very helpful for your employees to have someone to consult when they have questions about how to invest in their account and how much they should contribute. A consultant takes away the burden of providing financial advice to your employees. Make sure you select your candidates correctly as a financial adviser, as poor financial advice can have serious financial and legal consequences.

3. Provide good investment options.

Make sure your business offers a good range of investment options. Your mutual fund options should represent different markets, such as US equities, stocks, and international bonds. A good rule of thumb is that 75% of your mutual funds should have an expense ratio of less than 1%.

Also, track how funds are performing in your plans to see if they are underperforming, matching or outperforming their benchmarks. You want to make sure your employees are happy with their options. It should be simple and free to trade fund options.

What are the best 401 (k) options for small businesses?

Not all 401 (k) plans are designed for large companies. As a small business owner, you have plan options to suit your budget and business goals.

Here are some of the best employee retirement plan providers to consider for your small business. Guide

Guideline is a leading provider of employee retirement plans that handles all plan needs, including plan administration, investment management, and record keeping. The company charges a basic monthly fee and a per participant fee.

ShareBuilder 401 (k)

ShareBuilder 401 (k) is a great option for employers offering a Safe Harbor 401 (k) plan. The company provides small businesses with a plan administrator, custodian, investment advisor, and record keeper. No contract required, so you can withdraw at any time. Paychex employee retirement

Paychex offers 401 (k) plans that integrate with its human resources, payroll and employee benefits services. Entrepreneurs can choose their own 401 (k), IRA, 403 (b) and investment options to offer to employees when partnering with Paychex. Additionally, business owners can add their favorite financial advisor or design a plan. Paychex makes it easy to set up your plan and integrate with automated payroll to manage employee enrollment and contributions.

human interest

Human Interest offers easy-to-use 401 (k) plans and offers profitable employee retirement options for small businesses. By partnering with Human Interest, employers and their employees gain access to benefit plans starting at just $ 120 per month, plus $ 4 per employee per month, which include full registration, management and integration tools. perfect payroll.

American 401k

American 401k is a small pension provider based outside of Philadelphia that offers highly personalized service combined with the support of a large national insurance company. Small business owners who want a simple, hassle-free employee retirement package can work with American 401k to design the perfect plan for their needs.

ADP employee retirement

ADP’s employee retirement benefits complement the company’s payroll services through an all-in-one platform. Additionally, ADP provides employee retirement accounts that are affordable and easy-to-use solutions for small businesses with at least twenty employees. Avant-garde

Vanguard is best for employers who want an individual 401 (k) plan. There are no setup costs and you can choose from over 100 investment options. The company’s website includes various tools to help you decide where to invest your money.

PEO providers offering health and retirement benefits

If you’re looking to outsource your benefits administration, here are our reviews of many of the best PEOs that can help your business deliver health and retirement benefits:

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