Reviewing and Updating Your Small Business 401(k) Plan

Author: Siân Killingsworth / Reviewer: Callie Adams Farnsworth, QKA, CAFCA
14 Apr 2023 / 401(k) Plan Information, Personal Finance, Safe Harbor, Small Business 401k

As a small business owner, you may not be intimately familiar with the details of your 401(k) plan. That’s pretty normal, but it’s important to know what your options are, how they can help you save on taxes, and even potentially help you grow your business.

It’s smart to review your plan document annually, but more frequently if your business changes throughout the year. For example, if your business expands significantly, or if you hire a new employee who will be working part-time instead of full-time, you should revisit your eligibility and contribution requirements. You may also want to start or update employer contributions to employees’ accounts.

Why is Regularly Reviewing and Updating Your 401(k) Plan Important?

• Changes in business size can necessitate changes to your plan. When you start out as a one-person shop, it makes sense for your retirement savings account to be a solo 401(k) plan such as a Ubiquity Single(k)®. But as your company grows and hires more employees, you may find that you need to upgrade to a plan that covers all your employees, such as a Ubiquity Custom(k)®. To ensure that your plan passes most mandatory IRS testing, consider adding a Safe Harbor provision to your existing 401(k) plan. This enables your company to actually bypass certain compliance tests because you’re required to make minimum contributions to all employees at a pre-approved rate to ensure all employees are being treated fairly.
• Regulations change. Keeping up with these changes is crucial if you want to avoid penalties or fines from the government. And don’t forget that sometimes these changes are to your benefit! For example, annual contribution limits rise, meaning that you and your employees can all put more money in your 401(k)s each year. For 2023, anyone under age 50 can save up to $22,500, and those age 50 and older can save up to $30,000.
• Improve your own retirement readiness. By regularly reviewing and updating your 401(k) plan, you’ll be able to ensure that you and all of your employees are saving for retirement on schedule. Are you taking advantage of all the tax savings opportunities your plan provides? Are you maxing out your contributions to your own retirement?
• Increase employee satisfaction. Employees who feel valued by their employers are more likely to stay with them longer than those who don’t feel valued, which means regular reviews and updated benefits could help keep turnover low.
• Improve employee participation. The more employees participate in their own 401(k)s, the better set up they will be in the future.

How to Review Your 401(k) Plan

There are several steps you can take to help your employees get the most out of their retirement plans.

First and foremost, review the plan documents for accuracy and completeness. Make sure that all information in the document and with your provider are is current and accurate, including:

• Name and address of your company.
• Designated plan sponsor, trustee(s), and financial advisor, if applicable.
• Designated investment options available within the plan.

The plan should:

• Cover the appropriate employees.
• Provide employees required disclosures.
• Deposit employee deferrals on time.
• Make employer contributions on time.
• Follow the terms of the plan document.
• Limit employee deferrals and employer contributions to the proper maximum limits.

Reviewing your small business 401(k) plan doesn’t just mean looking at it and then forgetting about it again. It means making sure that any necessary updates are made as soon as possible so that no one gets left out or misses out on benefits they could otherwise receive from participating in the program – including you.

 

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.