How to Start A 401(K) For A Small Business

There is no legal requirement that small businesses must offer retirement plans, but there are a lot of good reasons to provide one. Setting up a retirement plan allows you to help your team prepare for the future, retain your employees, and attract potential employees. Plus, retirement plans offer tax advantages for both employees and the employer—earnings on contributions grow tax-free, and the contributions an employer makes are tax-deductible. In short, a retirement plan is good for your business, for your employees, and for you. Now that you know the advantages, here’s how to start a 401(k) for a small business. 

Pick the Right Plan

As a small business owner, you’re responsible for every aspect of your business, and that includes setting up a retirement plan. If you’ve considered your options and decided that a 401(k) is the best fit, you’ve already made one of the most important decisions.

A 401(k) has many benefits, but it can also be one of the more complicated retirement plans for a small business. With all the decisions to make, starting one may feel overwhelming. Unless you’ve started a small business before, it’s unlikely that you’ve ever had to set up a 401(k). Thankfully, getting started is easier than you think, and it requires only a few simple steps.

Design the Plan 

If you’ve decided that a 401(k) is the best choice for you and your team, the next step is to design a plan. Designing a plan means creating the rules and features that it will offer. This is an important step that should be completed thoughtfully to help you achieve your goals, your employee’s goals, and the goals of your business.

Planning is complex, but there are some primary items you need to consider. These include whether or not your plan will have employer contributions, when employees are eligible to join the plan, and if you’ll have a vesting schedule. In addition, you’ll also want to be aware of the fees associated with at 401(k). For instance, management fees typically come out of employee’s investments, and company fees are based on certain criteria, such as the number of employees.

Choose Investment Options

The next step in creating a plan is choosing your investment options. Choosing the wrong investments for your plan can open you and your employees up to an unnecessarily high amount of risk, lead to poor results, and increase costs. We recommend that you seek the assistance of a 401(k) advisor who will help you choose the investments you want to offer. In addition, when you use a 401(k) advisor, you’re shielded from lawsuits because the advisor assumes the legal responsibility of handling the investments. Reach out to our team at Modern Family Asset Management for assistance with this task.

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Integrate Recordkeeping and Payroll 

The 401(k) recordkeeper is also known as the “401(k) provider.” This is the person tracking the key aspects of the plan, including the individuals in the plan, which investments are owned, and the money going in and out. The 401(k) recordkeeper will need to integrate with the payroll system.

Payroll may be automated, but is normally done manually. Whenever you run payroll, any and all salary deferrals must move to the recordkeeper, who then distributes them into the accounts. This may sound like a simple step, but it can easily be done incorrectly, and cause your plan to be out of compliance. Make sure your payroll system and recordkeeping are well integrated to prevent this from occurring.

Keep Growth in Mind

It’s also important to keep in mind that as your business grows, your payroll system may need to change. Typically, once you reach 50 employees, the process becomes far more complex. Once you have over 100 employees, your 401(k) must go through an annual audit. At this point, you’ll want to have a 401(k) provider that can take the lead on the tasks for an audit. You’ll also want to consider working with a provider who can help ease the burden of nondiscrimination testing.

Choose a Third-Party Administrator (TPA) 

You may or may not need a separate Third-Party Administrator (TPA), depending on if your recordkeeper is acting as the TPA for the plan. The TPA handles all the administrative work for the plan, which there is often quite a lot of. Some of the administrative duties include IRS nondiscrimination testing, putting together the Form 5500 (which must be filed every year), and calculating matching and profit-sharing numbers.

Pick the Right People

Knowing how to start a 401(k) for a small business isn’t simple, but it’s important. This type of plan can be beneficial for the employer, the employees, and the business. However, the most important part of starting a 401(k) is finding the right people to assist you. Contact the trustworthy team at Modern Family Asset Management for assistance through each step of the process. We look forward to working with you!

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