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How to Set Up a 401(k) for a Small Business

How to Set Up a 401(k) for a Small Business

No matter the size of your company, a 401(k) can play a pivotal part in a competitive benefits package. Only 48% of businesses offer some form of retirement savings plan for their employees, which makes starting a 401(k) plan all the more enticing for an enterprising business owner.

Of course, it’s not always clear how to set up a 401(k) or profit sharing plan for your small business. Offering a retirement saving and investing plan takes a few steps, but the results can have a major impact on both your employees and your company. It’s time to break down what it takes to set up the right 401(k) for your company.

Why Should My Small Business Offer a 401(k) Plan?

Before you set up a 401(k) for your small business, it’s important to know why it makes sense for your company. There are several key reasons to offer this sought-after benefit.

Attract and retain talent

Arguably the most obvious benefit of offering a 401(k) plan is that it makes your business more competitive in the hiring market. Charles Schwab reports that 88% of job seekers named a 401(k) plan as a “must have” benefit when considering a position. That desire for a retirement plan not only makes your business more attractive as a landing spot, but also adds another way to keep your current employees satisfied.

Improve your employees’ morale

A 401(k) can stand as more than just a financial benefit. The act of giving your employees a retirement savings plan serves as a symbol that you value their future with your company—and beyond. 73% of Americans named their finances as the top cause of stress in their lives. By offering a 401(k), you can show employees that you care for their quality of life, which can help make them more productive and appreciative.

Tax-deductible perks

Another potential advantage of offering a 401(k) plan is that they can help out during tax season. First off, the IRS states that any “elective deferrals and investment gains are not currently taxed,” which means that you and your employees can enjoy tax deferral until those funds are distributed. Employers can also deduct any matching contributions up to the annual limit on their federal income tax return.

The Four Steps for Setting up a 401(k) for a Small Business

Once you’re ready to establish a 401(k) plan, there are some initial actions you’ll need to take for your business. This four-part process will help you go from identifying the right type of plan all the way through executing your new 401(k).

Step One: Choose A Plan That’s Right For You

Once you decide to offer a 401(k), it’s time to determine which type of plan is right for your business. There are many types of plan designs that offer different contribution features or advantages. This amount of flexibility allows you to determine how contributions work, create eligibility requirements and vesting schedules, and decide on whether or not to contribute to these plans. These plans include:

  • Traditional 401(k)
  • Safe harbor profit sharing 401(k)
  • Simple 401(k)
  • Roth 401(k)

Traditional 401(k)

The traditional 401(k) plans are arguably the most flexible option available. The plans give employers a lot of freedom in terms of profit sharing options, vesting schedules, and more. Through a traditional 401(k), employers can:

  • Contribute directly to all participants’ plans.
  • Match employees’ deferral amounts (or a portion of the deferrals).
  • Provide both contributions and matches.
  • Offer none of the above.

Any contributions employers make can be subject to a vesting schedule, giving employers added flexibility. These schedules determine how long an employee must work for your company in order to keep part or all of your company’s contribution.

Another key part of traditional 401(k) plans is that they are subject to non-discrimination tests with the IRS. These tests are designed to prevent businesses from favoring certain employees over others. Every year, the IRS will test traditional plans to see if the deferral percentage and actual contribution percentage don’t favor highly compensated employees key employees such as an owner. As such, you’ll need to meet these testing requirements to prevent your 401(k) from failing IRS guidelines.

Safe harbor 401(k)

Safe harbor plans are similar in nature to traditional plans, with the biggest difference being that safe harbor plans are not subject to the IRS annual contribution testing. In exchange for eliminating these non-discrimination tests, employers are required to make contributions to employees’ plans. In addition, many safe harbor 401(k) plans require these mandatory contributions to fully vest when they’re made.

SIMPLE 401(k)

If your business has fewer than 100 employees, you can also opt to offer what’s called a SIMPLE 401(k). This type of plan is also exempt from nondiscrimination testing, but does limit some of the flexibility of other plan types. For example, your business cannot offer any other types of plans and all contributions must be fully vested. SIMPLE plans also require employees to make one of the following types of contributions.

  • A matching contribution up to 3% of each employee’s pay.
  • A non-elective contribution of 2% of each eligible employee’s pay.

Roth 401(k)

Another option available to business owners when setting up a 401(k) is a Roth account. Roth accounts function much in the same way as a regular 401(k), except that all contributions are taxed before they’re deposited. The main advantage of this type of plan is that account owners don’t need to pay any taxes on withdrawals, including all of the investment earnings.

Step Two: Find the right team for your 401(k) plan

When learning how to set up 401(k) for a small business, an essential requirement is partnering with the right providers for your business. There are many different aspects of a 401(k) plan that makes it nearly impossible for business owners to do everything by themselves. That’s why these plans can involve a variety of partners, including:

  • Recordkeepers in charge of processing withdrawals and tracking contributions, earnings, losses, plan investments, expenses, and benefit distributions.
  • Advisors who help you select and maintain plan investments and potentially oversee the money management of the plan.
  • Plan administrators who handle document preparation, transaction approval, compliance filing, and other behind-the-scenes tasks.
  • Payroll providers who tie your payroll process to plan contributions and paycheck deductions.

With the right team, business owners can successfully implement a 401(k) plan. However, that doesn’t necessarily mean that multiple providers for each role. Small businesses can choose to work with multiple vendors or find a partner like a Professional Employer Organization that can oversee and manage most, if not all, of the setup and administration for your plan.

Step Three: Start Your New 401(k) Plan

Now that you have the plan type and partnerships in place, it’s time to make your 401(k) official. The IRS requires businesses to take some basic actions to officially establish and run a 401(k) plan.

Create a plan document

Every 401(k) plan needs to start with a written document. According to the IRS, this document should serve as “the foundation for day-to-day plan operations.” In short, the document should lay out the various rights, benefits, and features of your plan. These details include:

  • When your employees are eligible for the plan.
  • A breakdown of profit sharing and employer matching (if applicable).
  • Guidelines on vesting schedules.
  • The process for handling distribution.
  • Relevant contact information for providers and internal company resources.

Set up a trust

The next basic action involves having any plan assets held in a trust. This step ensures that these assets only benefit the participants of the plan. Your business must assign at least one trustee to the plan. This individual or group is tasked with handling plan activities such as contributions, distributions, and plan investments.

While this step may seem simple, it’s critical to have the right trustee in place. Trustees’ decisions will have a direct impact on your plan’s financial health, so you’ll want a person or people in place who you can trust with the financial integrity of the plan.

Record maintenance

Businesses are also required to set up an accurate recordkeeping system for their plans. This system should track and properly attribute several key details, including:

  • Contributions
  • Earnings and losses
  • Plan investments
  • Expenses
  • Benefit distributions

Another reason recordkeeping systems are important is that they can help your business stay compliant with the Federal government. Every year, businesses must prepare and file an annual return/report for their 401(k) plans. The recordkeeping system makes it easier for you and your team to prepare these reports.

Inform participants

The final action for setting up your small business’ 401(k) plan is to notify eligible employees about your plan. This information should include key details about your plan’s benefits and requirements. These efforts should include providing employees with a summary plan description (SPD) that shares key information and discloses fees. You can also opt to provide additional information, such as education about the advantages of a 401(k) plan and employees can get the most value out of them.

Step Four: Ongoing Maintenance

Setting up a 401(k) for a small business is a big accomplishment, but it’s not the end of the process. An ongoing 401(k) plan requires additional work to keep it successful and compliant. These responsibilities include:

  • Regular plan maintenance
  • Ongoing nondiscrimination testing
  • Government filings
  • Employee assistance

Find the Right Partner to Help You Set Up and Maintain Your Small Business’ 401(k)

Let’s face it – setting up and maintaining a 401(k) plan can be an overwhelming, time-consuming process. That’s why GMS partners with small businesses to offer an attractive 401(k) or profit sharing retirement plan without the added time and hassle. GMS not only saves you time by managing your setup and ongoing maintenance, but also reduces plan costs by leveraging the group buying power as a PEO.

Ready to set up a fully customizable retirement savings plan for your business? Contact GMS today to talk to our experts about how we can support the financial health of your employees through our large-scale 401(k) plan.

Already a GMS client? Sign up for a 401(k) through GMS now through Aug. 31 and we’ll waive the admin fee for the rest of 2021-22! Reach out to your account manager or Tom Smith ( to set up an appointment.

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