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

There are many types of small business 401(k)s, all with different advantages:

• A traditional 401(k) allows you to make contributions with pre-tax dollars, thereby reducing your taxable income for the year, though you’ll have to pay taxes as you take the money out during retirement. Though not required by law, companies often choose to match a portion of the employee’s contribution amount, which is not only a generous form of added compensation but also allows business owners to save more in their own plans.
• A Roth 401(k) plan allows you to make contributions with money that’s already been taxed, so the money can be taken out of the account tax-free in retirement. As an employer, you can make this choice for your employees or leave it up to them by offering the options of both traditional and Roth accounts. Unlike a Roth IRA, there are no income limitations on a Roth 401(k).
• Safe Harbor 401(k) plans are very popular with small businesses because they exempt companies from annual plan auditing and nondiscrimination testing requirements. With a Safe Harbor plan, fairness requirements are automatically satisfied when employers make mandatory contributions to all employee accounts. The formula generally ranges from 3-6% of employee compensation.
• SIMPLE 401(k) plans are geared toward companies with fewer than 100 employees, requiring a match worth 3% of employee pay or a non-elective contribution worth 2%. All employees must be 100% vested. SIMPLE plans are easy to set up and affordable to run. The contribution limits are also lower.
• Solo 401(k) plans are designed for small business owners and their spouses, with no other employees. You can set aside up to 100% of net adjusted business income, up to the maximum of $61,500 (or $67,500 if you’re over 50.)

Next, you’ll need to consider what special features you want in your company plan. Simply put:

• Are you interested in talent retention strategies?
  You may wish to have eligibility requirements and a vesting schedule in place that allow enrollment at six months or even one year into service, as an incentive for talent retention. Or, you may prefer to get everyone on board right away and take advantage of the auto-enrollment tax credit.
• Are you interested in attracting talent while increasing your own savings?
  Employer contributions are seen as a generous incentive. Offering matching contributions is a great strategy for encouraging employees to save, which will then allow you to max out your own contributions without worrying that the plan will fail nondiscrimination testing. There are ways to correct plan imbalances, but it can be more predictable with a Safe Harbor 401(k).
• Do you want highly compensated employees to be able to max their contributions?
  For added insurance, adding a Safe Harbor provision will allow all your top executives to hit their maximums if desired, without worrying that low participation rates or low savings among rank-and-file employees will make your plan look unfair.
• Are you looking to increase productivity?
  Adding profit-sharing contributions based on company performance is one way to do it. In slower years, you can opt out of paying a bonus without worry. On breakout years, you can share the overflowing cup with your hardworking staff to encourage more of the same.

Small business employers often work with brokers to limit legal liability. Having an overly risky, poor-performing, or expensive fund can limit the amount of money employees earn come retirement and open the company up to lawsuits. Most advisors will assume fiduciary duty, so you can be sure the investments selected are in everyone’s best interest. A diversified, low-cost portfolio of mutual funds is the most common choice, but it helps to have an experienced hand at the wheel, keeping tabs on performance over time.

As a 401(k) administrator, we’ll draw up the formal plan documents, notify employees of the benefit, handle the enrollment, and keep track of money going in or out of the account. We’ll help you communicate with the IRS as needed to remain fully compliant with the law. Contact Ubiquity to learn more about how easy it is to set up an affordable, flat-fee 401(k) plan for your small business that will help meet your retirement savings goals.