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

Siân Killingsworth / 27 Oct 2022 / 401(k) Plan Information, 401(k) Resources, Small Business 401k

Along with competitive compensation and robust healthcare benefits, offering a retirement savings package such as a 401(k) is a crucial way for large and small businesses alike to attract and retain top talent.

Implementing a plan is more affordable than ever, and you’ll receive a tax credit for plan startup costs and a tax deduction for expenses paid.

But how do you start a 401(k) for your small business? Here’s a step-by-step overview of where to begin, along with answers to some common employer FAQs.

 

5 Steps to Starting a 401(k) for Your Small Business

The IRS heavily regulates the process of establishing and maintaining a 401(k). As a result, many small businesses outsource the job to a knowledgeable small business financial advisor to set up and administer the retirement plan throughout its life.

Still, every owner should understand the steps involved in starting their small business 401(k):

• Decide Which Plan You Should Establish

Will you offer a traditional, simple, or safe harbor 401(k) plan? Or maybe a simple IRA plan is best for you. There are plenty of 401(k) plan types to choose from, so it’s essential to do your homework and determine the plan that fits your immediate needs and long-term goals.

• Understand Your Fiduciary Responsibilities

While you’re not responsible for how your employee’s 401(k) selections perform, you are responsible for acting as a fiduciary. That means you’re legally bound to make choices about your 401(k) plan as a person who owes a duty of care and trust to your employees.

Part of acting on your fiduciary responsibilities is setting up a trust for your plan’s assets and appointing at least one trustee to manage the plan investments, distribution, and other activities. This helps ensure the funds’ use solely benefits your employees and their beneficiaries.

• Draw Up a 401(k) Plan Document

This document outlines your plan’s details in compliance with the IRS. It should contain information including (but not limited to) details about your trust, fiduciaries, your contribution plans, and more.

• Establish an Organized Recordkeeping Process

You’ve drawn up the plan document and cleared it with the IRS. Now, keeping meticulous records documenting the progress of that plan is essential, including information about plan values and employee contributions. In addition, you must regularly update your participants’ census and employment data to ensure they’re still eligible for their 401(k) benefits.

• Create a Thorough Information Package for Your Plan Participants

The law requires that employers provide information to their participants about how the plan works, its features, and its benefits. It’s also essential to disclose information to both your employees and the IRS about any fees and investment changes (if applicable).

 

FAQs for Starting Your Small Business 401(k)

Q.) How much will it cost to set up a 401(k) for my small business?

Initial fees typically run anywhere from $500 to $3K. How much you’ll pay depends upon the type of benefits you choose, the size of your business, consultation fees associated with your retirement service provider (if applicable), and more. For more information, click here for the Department of Labor’s retirement plan fees and expenses guide.

Q.) How long does it take for a small business to set up a 401(k)?

That all depends upon how thorough you are. If you submit your plan with missing or incomplete information, it could mean several time-consuming rounds with an Implementations Specialist to get the correct information uploaded. You could also end up paying fees because of mistakes you accidentally made from rushing through the details of your plan.

Q.) How much should I contribute to the plan?

You can contribute as much as you’d like within IRS limitations. Remember that employer contributions are tax deductible on your small business’s federal tax returns. Just as importantly, think about the positive impact matching or profit-sharing will have on morale, your relationship with your employees, and your employee’s financial health.

Q.) How much should participants contribute?

Participants may contribute as much as they wish within IRS limitations. Encourage your employees to research the investment options available and educate them on the benefits of a 401(k) to help make comfortable retirement a reality.

Q.) What are the maintenance costs for maintaining a 401(k)?

Once you select a 401k for your small business and get it up and running, you’ll need to pay fees associated with ongoing operations, services, investments, and expenditures for matching contributions.

Starting a 401(k) promotes employee morale, which leads to improved retention and a better ability to attract new talent. It also helps contribute to your and your employees’ financial well-being. The knowledgeable professionals at Ubiquity are here to assist with customizing a low-cost, easy-to-manage retirement plan for your small business.