Having a 401 (K) plan, is a way of investing in your employees and their benefits, with research indicating that employees who are happy with their benefits have high levels of job satisfaction.
So, where you need to get going is over at the IRS web site (https://www.irs.gov/retirement-plans/irc-401k-plans-establishing-a-401k-plan) which will get everything set up for you. You will go over the aspects of the 401 K here to break it down into manageable chunks.
What plan type is right for you?
First of all, your plans need to be equal to all employees. The IRS have placed anti-discrimination guidelines in place, which you can find here. https://www.guideline.com/blog/safe-harbor-401k-plan/#nondiscrimination-test
If your plan fails one of these tests, make sure to adjust it as it could end up being an administrative nightmare and in the worst case, conclude with refunds of 401K contributions.
The biggest difference in plans is whether an employer is going to make contributions on behalf of its employees. Which fall under three groups
Traditional 401 (k): In this model the employer can select between no contribution at all or matching a portion of the wages employees defer, this can also include a vesting period (which is just a way of saying, a time after they have started)
Safe Harbor 401 (K): Very similar to the traditional plan, except this requires employers to make contributions. They normally have to vest immediately. The main benefit of this structure is that the company bypass non-discrimination testing and it applies to companies of any size.
SIMPLE 401 (k): The SIMPLE plan, is apparently a clever acronym for “Savings Incentive Match Plan for Employees”. First of all, this plan is only for businesses with less that 100 employees. Employers must match contributions of up to 3% of employee compensations, or contribute 2% of total eligible employees’ compensation.
Create a written plan
At this point the IRS actually recommends the following: “consider obtaining assistance from a financial institution or a retirement plan professional” (https://www.irs.gov/retirement-plans/irc-401k-plans-establishing-a-401k-plan) the written plan will detail features such as which employees can contribute and how much.
Organising a trust fund for the plan
This is something which you need to select carefully as in general this will be handled by a third party. They will be responsible for collecting the contributions, investing them and how to issue distributions. Selecting the right trustee is critical in ensuring that you get the most out of your employees’ contributions.
Like every other aspect of your business, you will need to ensure that you keep reliable accounting to keep track of all the contributions made, the earnings, losses and other plan investments. Keeping good records will make your annual returns much simpler.
Providing information to participants
If you decide to make any changes or updates to the 401 (K) plan, you will need to provide notice 30days before they go into effect. Generally, a summary plan will do the trick. You may have to issue additional notices to employees if they are on specific plans.
So, what are the benefits of doing this?
So, the set up process seems a bit overly complicated, but with the right advisor it should be straightforward. But lets also talk about the other benefits of doing this. There are three primary tax advantages that you get.
- Your business pays less income tax, because employer contributions are deductible business expenses
- Your business can deduct the cost of setup and administration of the 401 (K)
- Your business may also qualify for a Retirement Plan Start-up Cost Tax Credit
So the next stage is to talk to a professional about what you would like to offer, and what benefits both you and your employees will receive.