Offering your employees a 401(k) plan is a great benefit. Giving the option to participate in this retirement plan is a perk that helps attract and retain talent, and it shows that you’re invested in your employees’ future financial security—especially if you make contributions to employee plans.
There are also tax benefits for your business. For example, by offering your employees a 401(k) plan, you pay less income tax, and you can deduct the costs associated with establishing and administering the plan. Additionally, your company may become eligible for a Retirement Plan Startup Costs Tax Credit.
Read on for a quick look at the basics involved in offering your employees a 401(k) plan.
Pick a 401(k) Plan
The first step is to choose one of the three types of 401(k) plans:
- Traditional 401(k) Plan: This is the most flexible option, and it’s for businesses of any size. The employer can abstain from making contributions, or can make fixed contributions, match employee contributions, or both. This plan offers the option of a vesting period, and participants can make pre-tax contributions through payroll deductions. It must pass annual nondiscrimination testing to ensure the plan is equally accessible to all employees and that benefits are proportional for personnel at all levels in the organization.
- Safe Harbor 401(k) Plan: While similar to a traditional plan, this one requires employers to make a contribution. Specific rules are in place to structure payments, which typically must vest right away, and this plan is exempted from a number of the complicated tax regulations that traditional plans are subject to. Requirements for annual nondiscrimination review are waived with this plan, which also may be offered by companies of any size.
- SIMPLE 401(k) Plan: Savings Incentive Match Plan for Employees (SIMPLE) is for companies with less than 100 employees earning $5,000 or more in the previous year. It’s similar to Safe Harbor, requiring fully vested employer contributions. This plan is also exempted from annual nondiscrimination testing. While the other types of 401(k) plans may be combined with other retirement plans, participants in this plan may not receive contributions or accrual of benefits through other plans offered by the employer.
After you choose a plan, you must adopt it by creating a written document. Your 401(k) administrator will assist with all the paperwork.
Arrange a Trust
When offering your employees a 401(k) plan, all contributions must be held in trust and monitored by at least one trustee. This ensures that all money is only used for the benefit of the participants and their beneficiaries. Your 401(k) administrator should handle this for you.
Create a Recordkeeping System
You need a reliable way to track and attribute contributions, earnings and losses, plan investments, and distribution of benefits. Your 401(k) administrator will likely keep track of all required information. Good recordkeeping is essential for filing the necessary annual report for the plan.
Inform Your Employees
Once you establish a 401(k) plan, notify all eligible employees at least 30 days prior to its taking effect; you also must provide the same advance notice for changes to the plan. Distribute a summary plan description—usually created with the originating paperwork—to explain how the plan works. Certain 401(k) plan features, like automatic enrollment or a qualified default investment alternative, generally require additional notices. It’s also a good idea to provide an outline of the benefits of joining the plan, such as pre-tax contributions or employer contributions (if applicable).