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Steps for Setting Up a 401(k) Plan to Help Your Employees Save for Retirement

Employee Benefits

As top candidates weigh the pros and cons of different employment opportunities in today’s competitive job market, offering a 401(k) plan is among the best ways to help your business attract quality talent. Additionally, other advantages such as tax benefits and owner retirement savings options make a 401(k) plan a smart benefit option.

However, small business owners may still be hesitant to offer this benefit. Often, misconceptions can keep employers from setting up a 401(k) plan, such as:

  • Not thinking they can afford it;
  • Not seeing the need or benefit; and
  • Seeing it as too complicated to set up and administer.

To overcome such misconceptions and fully understand the potential impact a plan can have on the business, it’s important to understand the benefits of a 401(k) retirement plan. Beyond its ability to attract and retain employees, employers can take advantage of an annual tax credit of up to $500 for the first three years of the plan. Plan expenses are tax-deductible, along with employer contributions such as a match or profit sharing.

Additionally, advances in payroll integration and recordkeeping make the implementation and maintenance of offering a retirement plan more affordable than ever for organizations of all sizes.

Researching your options

It’s important to do your due diligence in researching firms that provide recordkeeping and third-party administration services for 401(k) plans. Include a range of established mutual fund companies, brokerage firms, and insurance companies with excellent reputations. Focus on companies that can serve you and your employees long-term with extensive resources and excellent customer service.

Owners of businesses similar to yours can offer helpful insight from their experiences with 401(k) plan service providers. In a recent interview, founder and CFO Eric Podevels of Slate Medical shared his experience: "We did shop around to understand what different companies had to offer a small business like [ours]. We focused on traditional providers of 401(k) retirement programs and contacted the big national investment firms." Slate Medical included its payroll processor, which also offers retirement plans, into the mix.

Tracey Boehm, CPA at Epand, Boyle and Company, says in this article: "Establishing a 401(k) plan is definitely worthwhile, even for a small company like ours. The entire team and company benefit. It requires very little work to maintain, making it worry-free for everyone involved."tax credits

Choose the best retirement plan

Once you've chosen a retirement service provider, it's time to decide on a plan that fits both your business and your employees' needs.

Three options are available to employers regardless of size:

  • A traditional 401(k) plan, which is the most flexible plan. Employers can make contributions for all participants, to match employees' deferrals, to do both, or do neither.
  • The safe harbor 401(k) plan has several variations and requires the company to make a mandatory contribution to the plan participants. The contributions benefit the company, the business owner and highly compensated employees (HCEs) by giving them greater ability to maximize salary deferrals.
  • An automatic enrollment 401(k) plan allows you to automatically enroll employees and place deductions from their salaries in certain default investments, unless employees elect otherwise. This arrangement encourages workers to participate in the company 401(k) plan. Automatic enrollment plans may also contain a safe harbor provision.

fiduciary responsibility

Steps for setting up a 401(k) plan

Setting up your plan is a four-step process. Some of the steps can be outsourced, but the employer maintains a fiduciary duty to ensure that the plan is providing a benefit to participants. The Department of Labor provides in-depth details of the process:

Step 1: Create a Plan Document that complies with IRS Code and outlines the details of your retirement plan. Set up procedures to ensure the document is followed.

Step 2: Set up a trust to hold the plan assets.

Step 3: Maintain accurate records that track employee contributions and current plan values. Many small businesses choose to work with an outside recordkeeper to manage plan setup and ongoing record management.

Step 4: Provide periodic information to plan participants to keep them updated on investments and changes. The fees associated with the account must be communicated to participants as well, and a disclosure form can help ensure your communication follows IRS requirements.

Setting up a 401(k) retirement plan for your business can be complicated. But you don't have to do it alone. Consider working with a provider that can help you get started, manage your plan, and even share ideas to boost employee participation.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.