How to set up a 401(k) for small business in five steps
One of the most reliable ways to attract and keep quality talent in your business is to offer an attractive retirement plan to your employees. This is beneficial not only for helping you keep top talent in your business, but also for taking advantage of tax benefits and owner savings options.
Setting up a retirement plan can seem complicated at first, but if you take a moment to understand your options, you can put a plan in place that keeps you and your employees satisfied.
1. Choose a plan design
The IRS is serious about employer-sponsored plans being accessible and fair for all of a business’s employees. This means that your plan cannot favor higher paid employees or owners over the rest of your staff. Failure to pass the annual IRS nondiscrimination test can result in hefty financial corrections and the potential for having to refund 401(k) contributions to your employees.
To avoid this mess, make sure you choose the type of 401(k) plan that will work best for you and your employees:
- Standard profit sharing — In the standard 401(k) model, employers can decide whether to contribute at all or to make contributions matched to a percentage of what employees contribute. With this plan, an employer can set up contributions with a vesting schedule as long as it meets nondiscrimination standards.
- Sea Harbor profit sharing — The Sea Harbor 401(k) model is similar to the standard profit sharing model, but it requires employers to make contributions rather than leaving it up to them. The benefit for employers is that these contributions are usually vested immediately, which can exempt you from nondiscrimination tests.
- SIMPLE — Short for Savings Incentive Match Plan for Employees, SIMPLE is similar to Sea Harbor in that it requires employers to make contributions, which allows employees to become vested immediately. However, SIMPLE plans have outlined start and stop dates. Once you commit to contributing into a SIMPLE plan for a financial year, you cannot stop until the end of the year. This plan is beneficial for employers and employees in smaller companies who prefer to have plans laid out clearly.
2. Create a written plan
Once you have selected a plan model, it is time to actually create your plan. Write out a plan document that complies with the IRS guidelines. Be sure to clearly outline the details of your plan, including:
- Matching information
- Vesting schedule
- Distribution information
- Contact information
3. Create a trust account for the plan
The law requires plan sponsors to hold the plan’s assets in a trust account. This is to ensure that they are safe for the plan’s participants and their beneficiaries. You will need to appoint a custodian who will hold the plans assets and a trustee who will be responsible for collecting and investing contributions.
4. Educate your employees
Your employers need to know about your plans and its benefits if they are going to participate in it. For many plans, you are required to notify eligible employees at least 30 days before they can participate in the plan. Make sure your employees have access to clear information about their plans so they can make more informed decisions on investments and boosting their plans.
5. Keep record of employee contributions
The law requires employers to keep record of employee contributions and the values of their plans. These are subject to review by the IRS at any moment, so it is important to have accurate record keeping in place to stay on top of this. Many employers use an automated record keeper or work with their financial advisor to set up their record management.
Talk to a ProVise CFP® professional about setting up a retirement plan for your small business
If you are hiking with a group of friends led by a guide, you expect that guide to know where they are going, right? It is the same for your employees when it comes to the retirement plan you offer. Your employers expect that you know what you are doing and that the plan you have for them is good.
Creating and managing a plan on your own when you already have many other responsibilities is a challenging task. This is where the ProVise Management Group comes in.
Our CERTIFIED FINANCIAL PLANNER™ professionals can work closely with you to get to know your business and its goals to help create a plan that works for you and your employees.
We can analyze your current circumstances and goals to draft a plan at a fiduciary standard of care. All of our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about developing a retirement plan for your small business so you can focus more on running your business and less on worrying about finances? Contact ProVise today to schedule a complimentary consultation.