Some of the most popular types of retirement plans offered to employees are small business 401k plans. These plans often have high contribution limits and both employers and employees can contribute to the plans. There are also tax incentives for employers by establishing and maintaining 401k plans for their employees. Compared to Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLE) plans, 401ks require a bit more paperwork to establish and maintain.

 Establishing a 401k Plan

As a small business, one of your first decisions in establishing a small business 401k is deciding whether to set up the plan yourself or consult with a professional financial institution. Large firms such as Charles Schwab and Fidelity offer 401k plans to set up and maintain on behalf of a business. Whether you decide to set one up yourself or have an outside financial firm assist you, there are 4 major steps in establishing a 401k:

  1. Adopt a Written Plan Document – This establishes the foundation for day to day operations of the plan and what type of 401k plan your business will use: a traditional 401k, a safe harbor 401k, or an automatic 401k plan. Put simply, traditional small business 401ks offer the most flexibility in contributions and vesting schedules (as in, the amount of money an employee is entitled to in a 401k plan after a certain duration of time), safe harbor requires mandatory employer contributions and more inflexible vesting schedules, and automatic 401k plans allow employers to automatically enroll employees into 401k plans to increase participation.
  2. Arrange a Trust for the Plan’s Assets – A trust must be set up to handle the assets of the 401k plan so that it can solely be used by its participants and beneficiaries. A trustee must be designated in handling the contributions, plan investments, and distributions.
  3. Develop a Recordkeeping System – A recordkeeping system is required to track contributions and distributions of the plan.
  4. Provide Plan Information to Employees Eligible to Participate – As the employer, you are required to inform all employees eligible to participate in the 401k plan about the benefits, features, and other details in a summary plan description (SPD).

Maintaining a 401k Plan

Once established, you as a business owner have certain responsibilities in operating it. If you hired an outside third party to help you establish the 401k, you may also be able to utilize them in managing the plan. The general responsibilities of operating a small business 401k plan can be summed up as:

  • Participation – Typically a 401k plan includes a mix of rank & file employees and management/owners. Some plans may exclude those that are under 21 years old or resident aliens though.
  • Contributions – Participants can contribute to a 401k through salary deductions. The type of 401k your business has can affect the nature of the contributions and amounts.
  • Vesting – Employee salary deferrals are 100% vested. Depending on the type of plan, employer contributions may be immediately vested or may be part of a vesting schedule.
  • Nondiscrimination – The 401k plan must offer substantial benefits to both regular employees and management. It must not just favor ownership and management. To ensure benefits are proportional for regular employees and management, 401ks may be subject to annual tests.
  • Investing 401k Money – You have the option of considering a variety of investment options on behalf of employees, or let your employees determine where to direct the accounts.
  • Fiduciary Responsibilities – These include duties such as following plan documents, acting on behalf of the participants and beneficiaries of the 401k plan, properly reporting plan details to government authorities, and carrying out these duties with care, trust, skill, and diligence.

This is a simplified rundown on the setup and duties in operating a small business 401k for your company. If you are interested in learning more details about setting one up, feel free to ask us via email. MiklosCPA is a Los Angeles-area CPA firm focused on helping businesses succeed through tax strategy consultation and assisting by providing outsourced accounting functions. If you are interested in learning more about our services, please send us an inquiry. We post articles on our website periodically, so follow us on our social media pages for future updates!

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