Over 50% of Americans work in or own a small business. This is important to highlight because small businesses play a crucial part in our economy.
When it comes to attracting top candidates and improving retention, offering certain advantages such as a 401(k) plan can be an effective move. It also can be beneficial for other reasons – 401(k) plans give companies significant tax breaks and deductions, and both the business and employees benefit from contributions. But as a small business owner, you may have shied away from such benefits due to logistical and financial concerns.
So, should you set up a 401(k) for your business? If you’re thinking about offering a plan for your employees, get started with these three steps.
Step #1: Research Plan Providers
When researching plan options, it’s beneficial to look for providers that will serve you and your employees long-term. If possible, ask other small business owners or local networks for recommendations. Hearing the experiences others have had can help you determine what to look for (or what to avoid) when choosing a provider.
It may be beneficial to look for fairly established, reputable providers who are adept at working with small businesses like yours.
Step #2: Choose a Plan
There are several types of plans that you can offer your employees.
Traditional 401(k) Plan
According to the Society for Human Resource Management, about 93 percent of businesses with a defined benefits plan offer a traditional 401(k) plan.1
This flexible option allows employers to make matching contributions, which can serve as an incentive for greater employee participation. The money employees choose to have automatically placed in their 401(k) is tax-deferred, meaning participants don’t pay taxes on that amount until earnings are withdrawn.
It’s important to note that traditional 401(k) plans are subject to annual nondiscrimination tests, called the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP).2 These tests are set in place by the IRS to determine whether or not employer matching contributions are favoring high-income earners within that business.
Roth 401(k) Plan
This option is similar to a traditional plan, however, contributions by employees are made with after-tax dollars. Therefore, withdrawals made in retirement will be tax-free. About 59 percent of businesses offering retirement plans opt for a Roth 401(k) plan (or similar defined contributions plan) for employees.1
Just like a traditional plan, you may choose to make matching contributions in a Roth 401(k) plan.
Safe Harbor 401(k) Plan
A safe harbor 401(k) plan is fairly similar to a traditional plan, but there are a few important variations. For example, employer contributions must be fully vested when made. Employers can choose to offer matching contributions only to employees who defer, or they can be made on behalf of all eligible employees.
Unlike traditional 401(k) plans, a safe harbor is not subject to the IRA’s strict nondiscrimination tests that must be completed annually.
SIMPLE 401(k) Plan
SIMPLE 401(k) plans are designed specifically for small businesses as a cost-effective retirement plan option. Employers with fewer than 100 employees may use this plan, which acts similarly to a safe harbor 401(k) plan. Employer contributions must be fully vested when made, and SIMPLE 401(k) plan providers are not subject to the annual nondiscrimination tests.
Automatic Enrollment 401(k) Plan
Unless the employees explicitly choose to opt-out or change their percentage, automatic enrollment - just as it sounds - automatically enrolls eligible employees into a 401(k) plan that defers a percentage of their pre-tax earnings.
Step #3: Find Your Partners
Once you have a better idea of what type of 401(k) you may want to offer employees, it’s important to gather the right team to implement the plan smoothly and efficiently.
Potential partners may include:
- 401(k) recordkeepers or plan providers: Recordkeepers are in charge of keeping track of the important details about your plan. This could include whose participating, what they’re invested in, when money is added/removed, etc.
- Third-party administrators: Having a third-party administrator allows business owners and small human resources departments to outsource the administrative work that goes into maintaining a 401(k) plan.
- 401(k) advisor(s): Your 401(k) advisor can essentially take the lead on assuming the legal responsibilities of your business’s plan, as well as the heavy lifting involved with establishing a 401(k) plan. They can work with your employees one-on-one to answer questions about the plan and work to keep your plan fees down as you continue to grow.
As you begin to navigate your options, you’ll want to choose providers and partners carefully, as they can make or break the effectiveness of your 401(k) plan. Your employees are crucial to the success of your business and establishing a plan that works in both their favor and yours is important.