Category: Small Business 401k

As a small business owner, ensuring that your employees are well taken care of is essential, and offering a 401(k) plan is an excellent way to do so. But creating a 401(k) plan that meets the needs of both your small business and your employees can be a daunting task. So we’re here to help.

Creating a great 401(k) plan for your small business is a valuable benefit for your employees and can help attract and retain talent. Here are some steps you can follow to establish a strong 401(k) plan:

Understand the Basics of a 401(k) Plan

Before diving into the specifics of creating a 401(k) plan, it’s crucial to understand the basics. A 401(k) plan is a type of retirement plan that allows employees to contribute a portion of their income into a tax-deferred account.

Determine your goals and budget

Assess your company’s financial situation and establish your goals for the 401(k) plan. Consider factors such as the level of employer contributions you can afford, the vesting schedule, and any additional benefits you want to offer.

Research 401(k) plan providers

Explore different 401(k) plan providers to find the one that suits your needs. Look for providers that offer a range of investment options, user-friendly online tools, excellent customer service, and competitive fees. Evaluate their track record and reputation in the industry.

Select a plan design

Work with your chosen 401(k) plan provider to design a plan that aligns with your goals and preferences. Decide on features such as eligibility criteria, employee contribution options, and employer matching or profit-sharing contributions. Ensure compliance with legal requirements such as nondiscrimination testing.

Communicate with employees

Once your plan is established, inform your employees about the new benefit. Provide clear and comprehensive communication materials that explain the plan, its benefits, contribution options, and enrollment process. Offer educational resources to help employees make informed investment decisions.

Streamline administration

Simplify the administrative tasks associated with the 401(k) plan. Consider leveraging automated systems that handle payroll deductions, contributions, and reporting. These tools can save time and minimize errors.

Monitor and review the plan

Regularly review the plan’s performance, investment options, and fees. Ensure that the plan remains compliant with applicable laws and regulations. Seek feedback from employees and make adjustments as necessary to meet their evolving needs.

Offer employee education and support

Encourage employees to take advantage of financial education resources to help them make informed investment decisions. Consider offering access to resources or online tools that provide retirement planning assistance.

Stay informed about legal changes

Keep up to date with any regulatory or legal changes that may affect your 401(k) plan. Consult with a qualified professional to ensure ongoing compliance with laws and regulations.

Evaluate the plan periodically

Assess the effectiveness of your 401(k) plan on a regular basis – annually at a minimum. Analyze participation rates, employee satisfaction, investment performance, and overall costs. Consider making adjustments or enhancements based on feedback and changing circumstances.

So you’ve decided to start a 401(k) for your small business – now what? We know it can seem daunting to implement this new savings vehicle, and one of the biggest challenges small business owners face is deciding the right investments to offer your employees.

While traditional 401(k) plans typically offer plenty of investment options, there is a growing trend of small businesses offering customized investment options as part of their 401(k) plans.

The Traditional 401(k) Plan

Traditional 401(k) plans are designed to meet the needs of a typical employee, and while they do offer some customization, they aren’t fully customizable. This approach keeps savers within certain guardrails and their investments at less risk than a plan with fewer restrictions.

This also means all employees are offered the same investment options, regardless of their needs and goals. Some employees and employers may prefer to have all options open to them so they can customize and control their investments with greater detail and specificity.

Answer a few simple questions to find the optimal plan for you and your small business.

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

Or schedule a free consultation with a retirement specialist.

The Benefits of Offering a Customized Investment Strategy

Personalization

Offering a customized investment strategy allows your employees to personalize their investments to match their financial needs and goals.

Improved Investment Outcomes

Customized investment strategies can lead to improved investment outcomes for your employees. By tailoring investments to match their goals, you could be helping your employees be more likely to achieve their desired investment outcomes.

Increased Employee Engagement

Offering a customized investment strategy can also increase employee engagement in your small business’s 401(k) plan. Employees who have the opportunity to tailor their investments to their specific goals, interests, and needs are more likely to take an active interest in their plan and monitor their investments regularly.

Competitive Advantage

Offering a customized investment strategy can also give your small business a competitive advantage when it comes to attracting and retaining top talent. Employees are increasingly looking for comprehensive benefits packages. Offering customized investment strategies can be a powerful way to make your business stand out from competitors.

How to Implement a Customized Investment Strategy

Work with a Professional

Implementing a customized investment strategy requires the expertise of a financial advisor or knowledgable provider. Small business owners should work with someone who has experience in small business 401(k) plan implementation and administration.

Look for a professional who can help you develop an investment strategy that meets the needs of your employees. (This will also help you stay in compliance with federal regulations.)

Use Target-Date Funds

These handy funds automatically adjust their asset allocation as an employee approaches retirement, based on their expected retirement date. This allows your employees to invest in a diversified portfolio that matches their risk tolerance and time horizon.

Offer Managed Accounts

Another option is to offer managed accounts and professionally managed portfolios tailored to an employee’s individual needs and goals. This option can be more expensive than other investment options, but it can also lead to better investment outcomes for employees.

You may also want to consider offering a Roth 401(k) for your employees. This retirement option allows employees to save for retirement with after-tax dollars and all future distributions are tax-free. This allows employees to save more money for retirement and can be beneficial for those who anticipate their tax rate to be higher in the future.

Additionally, you can offer employees the option to invest in mutual funds or exchange-traded funds (ETFs). These investment vehicles allow employees to diversify their portfolio, potentially leading to better long-term investment outcomes.

 

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

CEO. Human resources manager. Marketing lead. As a small business owner, you wear many hats. One you may not have considered is the role of retirement plan administrator.

However, as your business grows, offering a 401(k) plan stops being a nice-to-have and starts becoming essential to taking your business to the next level.

Answer a few simple questions to find the optimal plan for you and your small business.

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

Or schedule a free consultation with a retirement specialist.

Benefits of Offering a 401(k) Plan

Attracting and retaining employees

In today’s job market, employees are looking for benefits beyond just salary. A 401(k) plan can help to set your business apart from the competition and show that you value your employees’ long-term financial security.

Impact: Tax benefits

1. Tax deductions

Small business owners who offer their employees a 401(k) plan may be eligible for a few different types of tax deductions:

  • Employer contributions you make to your employees are tax-deductible
  • When you open a new plan, you can qualify for up to $5,000 per year for the first three years1
  • Qualify for another $500 per year for those same three years when you add automatic enrollment

2. Tax deferral

Small business owners as well as employees can take advantage of contributions are made on a pre-tax basis. This means they are deducted from your taxable income for the year, which can lower tax liability and increase take-home pay.

Taxes on contributions are not due until the funds are withdrawn from the plan.

3. Tax-free growth

401(k) plan funds grow tax-free until they are withdrawn in retirement. This means that any investment gains or dividends earned on the funds are not subject to income tax, which can help the funds in the account to grow more quickly over time.

Impact: Increased retirement savings

Perhaps the most obvious benefit of a small business 401(k) plan is the ability for employees to save for retirement. The pre-tax and potential matching contributions can help employees save more for retirement than they might be able to on their own.

Don’t forget that as a small business owner, you are also an employee. You can make contributions to your own 401(k) account as both – meaning you can put away up to a maximum of $66,000 in 2023 (or up to $73,500 if you’re age 50 or older).

This is a significant advantage the 401(k) offers over other retirement plans such as an IRA, which offers very limited savings maximums.

What to Look For in a 401(k) Plan

Plan design

You’ll want to evaluate many components of the plan, including how you’ll be able to set up:

  • Matching contributions
  • Eligibility requirements
  • Investment options

And more. This can be a lot to think about, so It’s important to work with a qualified plan specialist to select a plan that meets your business’s and your employees’ needs.

Plan administration

401(k) plans also require ongoing administration, including compliance testing and recordkeeping. This can be a complex and time-consuming process, so many businesses choose to work with a third-party administrator like Ubiquity to handle these tasks.

Fiduciary responsibilities

The plan sponsor also has fiduciary responsibilities to ensure that the plan is operated in the participants’ best interests. This includes selecting and monitoring plan investments, ensuring that fees are reasonable, and providing disclosures to plan participants in a timely manner.

It’s a good idea to choose a provider that offers low fees and transparent pricing to ensure you get the most from your money, too. For help in choosing the right provider, check out our article about that.

 

1 Eligible employers can receive a tax credit of up to $5,000 over three years for starting a 401(k) plan, subject to IRS requirements. Employers with 50 or fewer employees qualify for a 100% tax credit, while those with 100-50 employees can receive a 50% tax credit. Additional eligibility criteria include having at least one non-highly compensated employee, an employee who received at least $5,000 in compensation in the preceding year and having substantially the same employees receiving contributions or benefits from another plan sponsored by the employer, a member of a controlled group, or a predecessor within the three tax years prior to becoming eligible. Employers with automatic enrollment plans can receive an extra tax credit of $500 per year for a three-year taxable period.

Ubiquity is not a registered investment advisor, and the information provided herein should not be considered legal or tax advice. We recommend consulting with your financial planner, attorney, and/or tax advisor for personalized advice.

When you own a small business, little things can make a big difference. And working with a financial advisor is one of those things. Instead of you managing your small business’s 401(k) plan, they take on all the complex, time-consuming, and potentially risky work of managing that plan.

There are tons of reasons to hire a financial advisor, so we’re highlighting the top five as they relate to your small business’ retirement plan – and importantly, we’ll show how a financial advisor can help you and your employees achieve your retirement goals.

The Role of a Financial Advisor

Financial advisors are not one-size-fits-all, even within certain subcategories. If you’re looking for financial guidance for your small business and specifically want information about retirement planning, a retirement financial advisor who serves the small business market may be just who you’re looking for.

This is a professional who specializes in helping small business employers choose, implement, and manage their 401(k) plans. They provide valuable guidance on plan options, provider selection, employee education, compliance, and fiduciary responsibility. A financial advisor acts as a partner for small business owners and sometimes takes on many of the administrative burdens of managing a 401(k) plan. (They do the hard work so you don’t have to.)

Answer a few simple questions to find the optimal plan for you and your small business.

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

Or schedule a free consultation with a retirement specialist.

The Benefits of Working with a 401(k) Plan Advisor

Working with a financial advisor can provide many benefits for small business owners like you. Here are 5 major upsides:

1. Expertise and Experience

It’s a financial advisor’s job to stay up-to-date on the latest investment trends, regulations, and best practices. This means they’ll be ready to provide valuable insights and recommendations for your small business. They also have experience working with a variety of plan sponsors and can leverage that knowledge to help your business.

2. Plan Selection, Administration, and Compliance

A financial advisor can help you select a plan that meets your small business’s needs and your employees’ needs, too. They can also help you stay on top of meeting your compliance responsibilities in a timely manner.

3. Employee Education and Engagement

Looking for a way to engage your employees in the plan? A financial advisor can help with that! They can help educate your team on the benefits of participating in the plan, and provide ongoing support to ensure they are on track to meet their retirement goals. (Hint: many financial advisors refer their clients to the Ubiquity blog for easy-to-understand information about the whole gamut of 401(k) plan details.)

4. Fiduciary Responsibility and Liability

Financial advisors are required by the Advisers Act of 1940 to act in your best interest. They can help you understand and fulfill your fiduciary duties, such as selecting and monitoring plan investments and documenting plan processes and decisions. This can help you mitigate the risk of legal and financial consequences for your business.

5. Cost Savings

PSA: Working with a financial advisor can actually save your small business money in the long run. They can help find providers that offer transparent, flat fees and may even know of more cost-effective plan options (or good reasons to switch providers). They can help you understand the features and benefits of your plan so you can make cost-effective choices.

How to Choose the Right Financial Advisor for your Small Business 401(k)

There are five key factors to consider when selecting a financial advisor:

1. Credentials and Qualifications

Look for a financial advisor who has the appropriate credentials and qualifications: Accredited Investment Fiduciary (AIF) or Certified Plan Fiduciary Advisor (CPFA) designations. These designations indicate that the advisor has specialized knowledge and training in retirement plan management.

2. Relevant Experience

Make sure the financial advisor has experience working with small businesses like yours, and has a track record of success. Ask colleagues and trusted business contacts for recommendations.

3. Services Offered

Consider the range of services the financial advisor offers. Is their specialty comprehensive financial guidance including small business 401(k) plan selection, implementation and management services, or is it simply investment advice? Are they willing to help you with ongoing employee education and engagement?

4. Fees and Costs

Understand the fee structure and costs associated with working with the financial advisor. Look for an advisor who is transparent and upfront about their fees and who can help you minimize plan costs overall.

5. References and Reviews

Research the financial advisor’s reputation by reading online reviews and talking to other small business owners who have worked with them. Look for an advisor who has a positive reputation and a proven track record of success.

Congratulations! You’ve picked the perfect 401(k) plan for your small business. Now what? It’s time to get your employees saving!

One of the best things you can do is make sure the enrollment process is simple, clear and streamlined.

Common Enrollment Challenges

Encouraging employees to enroll in your small business 401(k) plan can be a daunting task. Some common challenges include understanding the enrollment process, selecting investment options, and deciding on a contribution amount–not to mention the paperwork and deadlines.

Streamlining the Enrollment Process

To make the enrollment process more manageable for your employees, there five top steps you can take:

1. Automate the Process

Choose automatic enrollment as a feature of your plan, admit new participants into the plan as soon as they are eligible to participate. Instead of the traditional method of waiting for the participant to meet eligibility requirements and then enrolling manually (or not – many eligible employees procrastinate or forget), this lets employers add new eligible participants quickly and easily.

You can also choose automatic escalation, a retirement plan feature that enables employees’ contributions to automatically increase by a pre-determined amount or percentage at set intervals (such as annually) until the maximum contribution rate is reached.

Answer a few simple questions to find the optimal plan for you and your small business.

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

Or schedule a free consultation with a retirement specialist.

2. Simplify the Language

Use clear, straightforward language that employees can easily understand, avoiding technical jargon or complex financial terms. Refer to our glossary for any finance lingo that’s unfamiliar — and share it with your employees, too.

3. Provide Clear Instructions

Enrolling in your small business’s 401(k) plan should have concise directions, including step-by-step instructions on how to access the enrollment portal, select investment options, and determine the right contribution amount.

4. Offer Incentives

Consider offering incentives to employees who enroll in the 401(k) plan, such as matching contributions or other financial rewards. This can help motivate employees to enroll and contribute to the plan.

5. Communicate the Benefits

Make sure your employees know the value of a 401(k) plan. We recommend in-person meetings, educational materials, and even email newsletters. Ensure your small business’s employees understand the importance of saving (including the benefits of compound interest). And feel free to share the Ubiquity blog with them as many of the articles cover topics of interest to individual savers!

PSA: Not all 401(k) plans are created equally. So what does that mean for your small business? How do you know what to look for when evaluating different plans?

Here are the top eight features to look for when picking a small business 401(k) plan.

1. Thoughtful plan design.

Does the plan have different investment options? Does the vesting schedule work for your employees? Is it tailored to small businesses? Is it scalable for when your business expands? All of these things are green flags.

2. Potential for an employer contribution.

One of the most important aspects of a good 401(k) plan is employer contribution. This can come in many forms, including matching contributions or profit-sharing.

The best part of employer matching is that as the small business owner, you can contribute to your own 401(k) as both employee and employer, for a nice big total contribution of up to $66,000 in 2023 (or $73,500 if you’re age 50 or older).

(Wondering if you can make an employer contribution for your employees? We can help you figure it out.)

Answer a few simple questions to find the optimal plan for you and your small business.

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

Or schedule a free consultation with a retirement specialist.

3. Diverse investment options are a plus.

A good small business 401(k) plan should offer a range of investment options to help your employees diversify their portfolios. This can include stocks, bonds, ETFs, and mutual funds. Diversifying the portfolio’s holdings has been proven to diffuse risk across various types of investment instruments.

It’s the financial equivalent of not putting all your eggs in one basket. This goes a long way toward setting yourself and your employees up for a secure retirement.

4. Low fees have high upsides.

Another important factor to consider is the fees associated with the plan. High fees can eat into your budget – or your employees’ retirement savings. Look for plans with low fees to help maximize savings. (In case you missed it, we’re known for low, flat fees.)

5. Plan administration (and other paperwork).

A good 401(k) plan should be compliant with all applicable laws and regulations. This includes regular plan audits and filings with the Department of Labor. Since you’re probably busy focusing on running your small business, it’s good to find a plan that can help you maintain the day-to-day logistics.

6. Opportunities for employee education.

An often-overlooked aspect of plan administration is participant education. Many employees, especially those who are newer to the workforce, do not have a solid financial education and may be hesitant to ask questions.

So, make it easy for them to learn how to manage their futures. A good small business 401(k) plan should offer plenty of resources to help employees understand the benefits of saving for retirement. Group meetings to review plan provisions and access to online resources such as the Ubiquity blog are a good start.

7. Your plan provider has a good reputation…

Choosing the right plan provider is critical to the success of a 401(k) plan. Look for providers with a good reputation and a proven track record of providing quality plans. (We’re ranked #1 on Google Reviews for small business 401(k)s. Just FYI.)

8. … And innovative tech.

In today’s digital age, choosing a plan provider that offers robust technology solutions is important. This can include online account access, payroll integration, easy-to-use investment tools and more.

 

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

An evaluation has been conducted by Decimal, Inc. through its research of independent customer reviews on Google, Trustpilot, and the Better Business Bureau as reported by unaffiliated contributors on or before September 30, 2022, with a revaluation date on January 12, 2023, resulting in a better evaluation, for four similar small-business 401(k) providers in the marketplace. 

So you’ve gotten a 401(k) plan set up for your small business. Now what? After taking the time to set up an effective plan for your employees, you need them to start using it! However, many employees aren’t motivated to contribute more (or sometimes at all) to their 401(k)s, which can be detrimental to both you and them.

These strategies will help you – and your employees – make the most of the benefits your small business offers.

Educate Your Employees About the Benefits of 401(k) Plan

First, ensure your employees understand the benefits of contributing to a 401(k) plan. Educating our employees about the benefits of the 401(k) plan, such as tax advantages and any matching contributions, is essential. Be sure to let them know how much they’ll save on taxes by contributing more to their 401(k) plans, and make it clear that their contributions are an investment in their future.

Answer a few simple questions to find the optimal plan for you and your small business.

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

Or schedule a free consultation with a retirement specialist.

Offer an Employer Match

Want to benefit your employees (and make your small business stand out)? The easiest way to do that is by offering an employer match as part of your 401(k) plan. What this means is that you’ll make contributions to the employee’s 401(k) plan based on the amount the employee contributes. For example, if an employee contributes 3% of their salary to the 401(k) plan, you could match that contribution.

Not only will this make your employees feel more valued, it’ll also motivate them to contribute more to their 401(k)s.

Make the Enrollment Process Easy

The enrollment process for a 401(k) plan should be simple and straightforward. Make sure your employees understand how to enroll in the plan and how to make contributions. If the process is complicated, your employees may be discouraged from enrolling or contributing.

Offer Automatic Enrollment

Automatic enrollment is a great way to motivate employees to contribute more to their 401(k) plan. With automatic enrollment, you enroll your employees in the plan and set a default contribution amount. The employee can opt out of the plan, but most employees will remain enrolled. This can be a great way to increase participation in the plan.

Offer Financial Education

Offering financial education to your employees can help them understand the benefits of a 401(k) plan and how to manage their finances. Consider offering financial education seminars or one-on-one counseling sessions. The Ubiquity blog is a great online resource for timely, relevant retirement plan information and more.

Communicate Regularly

Communication is key, and this is no exception. Regularly update your employees on the benefits of your small business’s 401(k) plan, its performance, and how to enroll. Keep them informed about any changes to the plan or employer contributions.

Celebrate Success

When your employees contribute more to their 401(k) plan, celebrate their success (and we don’t just mean with a pizza party). Offering incentives for reaching certain savings milestones can also motivate your employees to continue to contribute more to their 401(k) plan.

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

If you’re looking to set your small business apart, you’ve come to the right place. As a small business owner, you’ve probably faced some tough challenges – and attracting and retaining top talent is likely one of them.

So how do you become a business everyone wants to work for? Two words: Competitive benefits. More specifically, a high-quality 401(k) plan.

401(k) 101: An Intro to Retirement Plans

So, what’s a small business 401(k) plan? It’s a retirement plan that allows employers to:

  • Attract and retain talented employees
  • Integrate payroll
  • Automate your plan administration
  • Receive up to $16,500 in tax credits over three years when you open a 401(k).*

(*Up to $5,000 per year, plus an additional $500 per year for automatic enrollment for the first 3 years if qualified under IRS guidelines)

Employees contribute a percentage of their salary to the plan, and often, the employer will match a portion of the contribution (you don’t have to, but it’s encouraged). The money in the plan is invested, and over time, it grows tax-free.

Answer a few simple questions to find the optimal plan for you and your small business.

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

Or schedule a free consultation with a retirement specialist.

Benefits of Offering a Small Business 401(k)

Offering a high-quality 401(k) plan to your employees can provide several benefits to them, including:

Retirement Savings

One of the most obvious benefits of a 401(k) plan is that it provides employees with a way to save for retirement. By contributing to the plan, employees are able to grow their retirement savings tax-free, which can be a huge advantage over other types of investments.

Employer Matching

Many employers offer a matching contribution to their employees’ 401(k) plans (and here’s some help in figuring this out, if you don’t already). This can be a great incentive for employees to participate in the plan, as it essentially gives them free money. Bonus: Contributions you make are tax-deductible!

Tax Benefits for Employees

Contributions to a 401(k) plan are pre-tax, which means that your employees can potentially reduce their taxable income by contributing to the plan. Additionally, the money in the plan grows tax-free until it’s withdrawn, which can provide a significant tax benefit in retirement.

Tax Benefits for Employers

PSA: Your small business also benefits from tax advantages by offering a 401(k) plan. For example, you can deduct your contributions to your employees’ savings. Additionally, offering a 401(k) plan can help to reduce the company’s taxable income. As a small business, you could qualify to earn up to $16,500 in tax credits over a 3-year period by starting a qualified retirement plan with auto-enrollment.

Investment Options

401(k) plans typically offer a range of investment options, including stocks, bonds, and mutual funds. This allows your employees to choose investments that align with their financial goals and risk tolerance.

Attracting and Retaining Employees

An easy way to make your small business competitive with much larger companies? Offering a high-quality 401(k) plan. This can be valuable in attracting and retaining employees, especially if you offer matching contributions.

Increased Productivity

Studies have shown that employees who are financially secure are more productive. By offering a 401(k) plan, you are helping your employees achieve financial security, leading to increased productivity and better job performance.

How to Offer a High-Quality 401(k) Plan

If you’re interested in offering a high-quality 401(k) plan to your employees, there are a few things to keep in mind:

Choose a Quality Plan Provider

The quality of your 401(k) plan will depend largely on the plan provider you choose. Look for a provider with a strong reputation, good customer service, and a range of investment options. You may also want to consider a provider that offers additional features, such as educational resources or financial planning tools. We suggest looking for low fees and transparent pricing, too!

Communicate the Benefits to Your Employees

Once you’ve chosen a plan provider and set up your 401(k) plan, it’s important to communicate the benefits to your employees. Make sure they understand the value of the plan and how it can help them save for retirement. Consider offering educational resources or workshops to help them make informed investment decisions.

Monitor and Evaluate the Plan

Finally, it’s important to monitor and evaluate your 401(k) plan on an ongoing basis. Keep track of participation rates, investment performance, and feedback from employees. Use this information to make adjustments as needed and to ensure that your plan continues to meet your employee’s needs (and your own!).

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

If you are a small business owner, you may have considered offering your employees a 401(k) plan to help them save for their future (and reduce their taxable income in the process).

However, setting up and maintaining a 401(k) plan can be complex, and failure to comply with the regulations could result in corrections and even have large penalties. One way to make the process easier (and safer) is by offering a Safe Harbor 401(k) plan.

What is Safe Harbor?

Although most people refer to this as a Safe Harbor plan, Safe Harbor is actually just an optional provision to a 401(k) plan. This provision is designed to automatically pass certain nondiscrimination testing requirements set by the IRS. These requirements ensure that the plan does not favor highly compensated employees over non-highly compensated employees when it comes to contributions and benefits.

With a Safe Harbor provision in your 401(k) plan, you agree to make certain contributions on your employees’ behalf; in return, the plan is exempt from certain non-discrimination testing requirements.

Answer a few simple questions to find the optimal plan for you and your small business.

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

Or schedule a free consultation with a retirement specialist.

The Benefits of a Safe Harbor 401(k) Plan

Reduced Administrative Burden

One of the main benefits of offering a Safe Harbor 401(k) plan at your small business is that it can greatly reduce the administrative burden on you as the employer. Non-Safe Harbor plans require annual deferral and match testing, which can be complex and time-consuming.

With a Safe Harbor plan, those testing requirements are waived, allowing the employer to spend less time and resources on plan administration.

Increased Employee Participation

Another advantage of a Safe Harbor 401(k) plan is that it can increase employee participation. By offering a safe, simple, and automatic plan, employees are more likely to enroll and contribute to the plan. This can help employees save for their future while also helping you attract and retain top talent.

Avoiding Corrections

Non-compliance with non-discrimination testing can result in corrections, which could mean you have to return contributions to highly compensated employees and pay taxes and penalties. Safe harbor plans are exempt.

Higher Contribution Limits Annually

All 401(k) plans, including those with a Safe Harbor provision, have higher contribution limits each year per the IRS. In 2023, employees can contribute up to $22,500 to their 401(k) plan, with an additional $7,500 catch-up contribution for those over age 50. This can help employees save more for their retirement. While the increased limit isn’t unique to Safe Harbor plans, it’s certainly a nice expansion of the benefit. A Safe Harbor provision does allow highly compensated employees to contribute up to the limits without worry of any corrective refunds.

How to Set Up a Safe Harbor 401(k) Plan

If you are interested in setting up a Safe Harbor 401(k) plan for your small business, there are a few things you need to know.

Contribution Types

To be eligible for a Safe Harbor 401(k) plan, you as the employer must make certain contributions to your employees’ retirement accounts. There are two types of Safe Harbor contributions: a non-elective contribution or a matching contribution.

  • The non-elective contribution requires employers to contribute a percentage of each eligible employee’s compensation, regardless of whether the employee contributes to the plan.
  • The matching contribution requires the employer to match 100% of each eligible employee’s contributions up to a certain percentage (usually 4%) of their compensation.

Funding Requirements

To maintain Safe Harbor status, employers must make the required contributions on time each year. Both contribution types must be funded by the end of the next plan year and generally, to take as a deduction, they must fund prior to their tax return including extensions. However, some documents require that the match be funded each pay period, which means they are required to fund no less than a quarterly basis to avoid late penalties.

Notice Requirements

To offer a small business 401(k) plan with a Safe Harbor provision, you must also provide certain information to employees. This includes notification explaining the plan’s provisions and informing employees of their right to make contributions to the plan. This notice must be provided at least 30 days before the beginning of each plan year.

As a small business owner, offering a 401(k) plan to your employees is a great way to attract and retain talent. However, simply having a 401(k) plan isn’t enough to win the loyalty of employees and the attention of prospective new hires.

In order to truly benefit your employees, you need to make sure that the plan is user-friendly. We’re breaking down our top tips for making your small business 401(k) plan easy to understand.

Provide clear and concise information about the plan.

It makes sense that one of the biggest barriers to participation in a 401(k) plan is a lack of understanding. Make sure that your employees have clear and concise information about the plan, including:

  • What a 401(k) plan is.
  • How your small business 401(k) plan works.
  • What the investment options are.
  • What the fees and expenses are.
  • How to enroll in the plan.
  • How to start contributing and make changes to contributions.
  • How to access their account.

This information should be provided in a way that is easily accessible. You may want to consider adding resources such as a dedicated 401(k) information section on your company website or intranet.

Answer a few simple questions to find the optimal plan for you and your small business.

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

Or schedule a free consultation with a retirement specialist.

Offer investment education.

Investing can be overwhelming, especially for those who are new to it. Offer investment education to your employees to help them make informed decisions about their 401(k) contributions. This could include:

  • Holding informational sessions or webinars on investing.
  • Providing educational materials such as books or online resources. (Hint: the Ubiquity blog is a great resource!)
  • Offering consultations with a financial advisor or plan representative.
  • Creating a list of recommended investment options based on different risk tolerances and goals.

Remember: Employees who feel confident in their own knowledge about investing are more likely to participate in the plan.

Simplify the investment options.

Help your employees avoid decision paralysis by paring down the investment options your small business 401(k) offers. This will make it easier for your employees to make informed investment decisions, and help them feel more confident doing so.

Consider offering a limited number of investment options, specifically including pre-packaged portfolios that allow your employees to quickly and easily click into saving for retirement.

Automate enrollment and contributions.

You heard it here first: Automatic enrollment is awesome. By automating these employee contributions, you’re making it easier for your employees to participate in your 401(k) plan. Automatic enrollment will be mandatory for most plans in 2025 anyway, so get ahead of the curve now.

You can also offer automatic contribution increases, also known as auto-escalation. This is when the employees’ contribution rate increases annually. This can help employees save more for retirement without having to think about it.

Regularly review and update the plan.

A 401(k) plan is not a set-it-and-forget-it benefit for you or your employees. Regularly review and update the plan to ensure that it remains user-friendly and relevant to your employees’ needs. This could include:

  • Reviewing the investment options and updating them as needed.
  • Evaluating the fees and expenses (or switching to a provider with low, flat fees – like Ubiquity).
  • Gathering feedback from employees and making changes based on their suggestions.
  • Keeping up-to-date with regulatory changes and ensuring compliance with all applicable laws and regulations.

By regularly reviewing and updating the plan, you can ensure that it remains a valuable benefit to your employees–and to your small business.

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.

Read Ubiquity's Guide to Small Business 401(k) Plans
Download Your 401(k) Guide Now

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Talk to Sales
Schedule a Free Consultation

Contact Support
Visit our Help Center
support@myubiquity.com
Monday–Friday
6am–5pm PT / 9am–8pm ET

© 2024 Ubiquity Retirement + Savings
44 Montgomery Street, Suite 300
San Francisco, CA 94104