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How to Start a 401(k) for My Small Business

Dylan Telerski / 3 Jun 2020 / 401(k) Resources

Starting a new 401(k) for your small business

A small business 401(k) is an excellent way to show your team you care about their future.

Not only are 401(k)s ideal for boosting morale and sustaining a committed workforce, but there are also benefits for your own retirement and tax savings. The time has never been better to start a 401(k), as companies with fewer than 100 employees will receive a $500 annual tax credit to offset the cost of administrative fees for the first three years.

To start a 401(k) for your small business, you’ll need to:

  • Consider which plan you might want.
  • Find the right 401(k) provider that meets your needs and goals.
  • Determine whether you’ll match, create a plan document, and set up an asset trust.
  • Devise a recordkeeping system.
  • Let employees know about their participation options.
  • Maintain your plan.

Cut through the complexity of choosing and customizing the right 401(k) for your small business. Get an instant quote.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

Consider which plan you might want.

There are several types of 401(k) plans:

Traditional 401(k)s

Many businesses choose the Traditional 401(k) to offer multiple investment options to employees and a way of saving for retirement with tax advantages. Many employers match employee contributions and deduct a portion of employee salaries from their tax obligations for the year. With a traditional plan, no tax is paid on the income put into the account at the time – but rather, tax is paid when it is withdrawn in retirement.

The 2020 limit is $19,500, plus $6,500 additional if you are over 50, looking to maximize your savings later in the game.

Roth 401(k)s

Most plans have the option of paying taxes when you put the money into the account, rather than when you take it out. This is called making a Roth contribution.

Like pretax deferrals, Roth 401(k) contributions are made to the plan by employees through payroll deduction. However, Roth contributions are deducted from wages after payroll taxes have been calculated. The investment earnings on Roth contributions grow tax-deferred while held in the plan, just like traditional pre-tax contributions. This money then has the potential to be withdrawn entirely tax-free when the saver hits retirement.

The 2020 limit for all 401(k) contributions is $19,500, plus $6,500 additional if you are over 50. This includes both Roth and pre-tax contributions.

Safe Harbor 401(k)s

A Safe Harbor 401(k) is ideal for high earners looking to invest aggressively in a retirement account. Unlike traditional plans, a Safe Harbor does not need to pass discrimination tests to prove that it benefits employees and not just highly compensated executives. Employers can choose to make nonelective contributions, 2% match, 3% match, or 100% match.

In 2020, business owners with Safe Harbor plans can contribute $57,000 plus $6,500 in catchup contributions if you’re over 50.

SIMPLE 401(k)s

A SIMPLE 401(k) is a hybrid between an IRA and a 401(k) that allows you to bypass compliance testing and allows employees to take out loans from their accounts if necessary. Employees become immediately vested, and there is less flexibility for employers to customize.

For 2020, the maximum contribution is $13,500 plus $3,000 in catchup contributions for people 50.

Solo 401(k)s

You can open a 401(k) for yourself (and a spouse), even if you have no other employees as a sole proprietor, freelancer, or startup entrepreneur. You may make contributions as an employer and employee to maximize your tax-advantaged savings.

The contribution limit of $57,000 (plus $6,500 for 50+) in 2020 is higher than with a SEP IRA.

Find the right 401(k) provider that meets your needs and goals.

Still not sure which plan is right for you? Download our 401(k) guide to finding the right plan for you or your small business.

A 401(k) plan provider covers the administrative burden of establishing and running the plan, which can include:

  • Auto-enrollment
  • Employee support
  • Loan administration
  • Trust setup
  • Tax filing

You can expect to pay a monthly charge for this service. Some 401(k) providers work with preferred brokers, while others offer the freedom to choose any broker. Depending on the broker, this financial adviser may choose the investments for the plan or help plan participants choose their own investments.

Determine whether you’ll match, create a plan document, and set up an asset trust.

Next, you’ll need to consider: How much do your employees want to invest in their 401(k)s? How much are you willing to contribute? Keep in mind, any contributions you make can be deducted as a business expense.

The maximum on total contributions is $57,000 for employees under 50 and $63,500 for employees over 50. Depending on the type of 401(k) established, certain rules may apply. You may choose to match 50 cents on the dollar, dollar-to-dollar, a percentage of salary, or up to certain limits.

All of this should be clearly spelled out in a legally binding plan document written by the financial institution or professional tasked with handling the plan. This document will also explain employee eligibility or vesting requirements, contribution amounts, and an explanation of how contributions and distributions will be made. A trust will need to be set up to hold the guaranteed assets.

Devise a recordkeeping system.

You will need a system for tracking employer and employee contributions, earnings and losses, plan investments, expenses, and distributions. Many plan providers handle recordkeeping on your behalf. Otherwise, you may consider payroll software or SaaS payroll services.

Let employees know about their participation options.

Employees can only participate in your generous incentive if they know it exists. A plan provider can give you materials that describe the plan’s benefits, features, and employee rights, which you may then circulate. Employee seminars and presentations can be conducted to maximize participation.

Maintain your plan.

All plans will need to make employer contributions, report plan information to employees, pay plan provider fees, prepare summary reports for plan participants, and fill out Form 5500 for the IRS.

Some plans may require Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) nondiscrimination tests that compare salary deferrals of highly compensated employees vs. that of non-highly compensated employees.

Contact Ubiquity to find out how to get small business retirement plans going in as little as 15 minutes.

© 2021 Ubiquity Retirement + Savings
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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2021 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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