Setting up a 401(k) plan for your small business not only helps you stand out in the competitive job market but also offers tax credits, deductions, and retirement savings for business owners. With the passing of SECURE Act 2.0, small businesses can take advantage of even more tax incentives, making a 401(k) plan more lucrative.
The following steps will help get you started on establishing a 401(k) for your employees.
Why Offer A 401(k) Plan?
Many business owners assume a 401(k) plan is too costly or complex, but the benefits can far outweigh the negatives. By offering a 401(k) plan you can:
- Attract and retain top talent: A recent study found that after health insurance, retirement plans are tied with company leave as the second most sought-after benefit. This study also found that 401(k) plans can help reduce turnover rates and boost retention by 81%.
- Access tax credits: Small businesses with 50 employees or less may qualify for up to $5,000 per year in startup tax credits for the first three years, and an additional $500 annually for automatic enrollment, adding up to a potential $16,500 in total savings.
- Secure retirement savings: A 401(k) plan lets business owners contribute to their own retirement savings while offering tax-deductible contributions for their company.
Step 1: Research Retirement Options
If you don’t have a 401(k) set up for your business, begin by exploring providers. Look into reputable financial institutions that offer robust support, payroll integration, and easy administration. Seek feedback from other small business owners about their experiences and consider a provider that can serve you for the long term.
Consider factors such as:
- Cost: How much is the plan? Is there a monthly fee associated with managing the plan?
- Investment options: What funds are available in the plan?
- Advice and guidance: Is there advice or counsel offered for participants?
- Customer support: Is there easy access to reliable support if technical questions arise?
Step 2: Choose Your 401(k) Plan Type
Once you have a provider, select one or more plan types that best fits your business and employees’ needs:
A traditional 401(k) allows employees to make pre-tax contributions via payroll deductions. Employers can contribute on behalf of employees, offer matching contributions, or both, with these contributions potentially subject to a vesting schedule. This plan must meet nondiscrimination requirements through annual actual deferral percentage (ADP), actual contribution percentage (ACP), and top-heavy tests to ensure fairness to ensure fairness. to ensure fairness.
A Roth 401(k) is similar to traditional plans but contributions are made with after-tax dollars. This means withdrawals from the account are tax free upon retirement.
The safe harbor 401(k) also resembles traditional plans except this plan requires employers to make contributions that employees own right away. These contributions can either match what employees put in or be a set amount for everyone who qualifies. A safe harbor plan doesn’t have to pass the ADP or ACP tests if employers provide their employees with clear and timely information about how the plan works and what their rights are.
Lastly, the SIMPLE 401(k) is designed for small businesses with 100 or fewer employees. It is not subject to annual nondiscrimination tests and requires fully vested employer contributions. However, employees cannot receive contributions under other plans of the employer. If an employer offers alternative retirement plans, an employee utilizing the SIMPLE 401(k) plan can’t maintain those options.
Once you have your plan type(s) selected, you should then consider other factors such as automatic enrollment and matching contributions. Automatic enrollment self-enrolls employees in your company’s plan, increasing participation rates and potentially qualifying your business for extra tax credits. Matching contributions is when an employer matches an employee’s 401k contribution up to a certain percentage of the employee’s salary.
Step 3: Create A 401(k) Plan Document
Draft a plan document that meets IRS requirements and outlines the specifics of your retirement plan. This document will include the plan’s terms, contribution structure, and eligibility criteria. Work with your provider to ensure compliance with federal regulations.
Step 4: Set Up A Trust To Hold Plan Assets
All 401(k) plan assets must be held in a trust to protect participants’ interests. Appoint at least one trustee to manage contributions, investments, and distributions, ensuring the plan’s financial integrity.
Step 5: Maintain Accurate Records
Accurate record-keeping is essential for tracking contributions and plan values. Many small businesses work with a contract administrator or financial institution to simplify this process and ensure ongoing compliance.
Step 6: Inform Your Employees
Provide employees with a summary plan description (SPD) that explains the plan’s benefits, rights, and features. Keep employees updated on investments and any plan changes. Transparent communication helps employees make informed decisions about their retirement savings.
Step 7: Monitor And Maintain The Plan
Regularly review your 401(k) plan to ensure it continues to meet your business and employees’ needs. A reliable provider can assist with compliance checks, manage reporting requirements, and help maximize the plan’s value.
Tax Benefits Of Setting Up A 401(k) Plan
Establishing a 401(k) plan offers several tax advantages for your business including:
- Startup tax credits: As mentioned above, small businesses with up to 50 employees may qualify for a tax credit covering 100% of startup costs, up to $5,000 per year for the first three years. Medium-sized businesses (51-100 employees) are eligible for a 50% credit on administrative costs, capped at $5,000 annually for three years.
- Employer contribution credit: The SECURE Act 2.0 introduced a credit that allows small businesses to receive up to $1,000 per employee in employer contribution credits. This amount phases out gradually over five years, providing 100% credit in the first two years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year.
- Employer contribution deduction: Employers can deduct contributions up to 25% of eligible employees’ compensation, directly reducing federal tax liability.
- Pre-tax deferrals for employees: Contributions reduce taxable income for the employer and employees, as pre-tax contributions defer taxes until funds are withdrawn, potentially lowering employees’ tax bills in retirement.
Setting Up Your 401(k) With Ease
Establishing a 401(k) plan may seem complex, but the right partner can make the process straightforward and manageable. A professional employer organization (PEO) like Group Management Services (GMS) simplifies 401(k) administration, offering expertise in plan selection, compliance, and ongoing management. Let GMS help you build a retirement plan that benefits your employees and strengthens your business.
Ready to get started? Contact GMS today to explore how we can help you set up a 401(k) plan best suited for your business.