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

– December 14, 2023

Benefits

A 401(k) can make a business more competitive in attracting and retaining top talent.
A business might be eligible for retirement plan tax credits when it starts a new plan.
Under the SECURE 2.0 Act, an employer contribution credit is available for eligible businesses.
Some plan expenses and contributions are also tax-deductible.
Payroll integration and administration make setting up and maintaining a retirement plan more affordable.

How To Set Up a Plan

First, research retirement options for the business. Look for firms that provide recordkeeping and third-party administration services. Focus on providers that can serve owners/managers and employees long-term with extensive resources and excellent customer service.

Next, choose a plan for employees. Options include the following:

A traditional 401(k) plan is the most flexible. Employers can make contributions for all participants, match employees’ deferrals, do both or neither.
The safe harbor 401(k) plan requires the company to make a mandatory contribution to the plan. The contributions benefit the company, the business owner and employees by giving them greater ability to maximize salary deferrals.
With an automatic enrollment 401(k) plan, you enroll employees and place deductions from their salaries in certain default investments unless employees elect otherwise. Automatic enrollment plans may contain a safe harbor provision.

Setting up a 401(k) includes some crucial steps, some of which may be handled by your provider. The U.S. Department of Labor provides in-depth details of the process, a summary of which includes the following:

Create a 401(k) plan document that complies with IRS Code and outlines the details of your retirement plan. Then ensure the document is followed.
Set up a trust to hold the plan assets to assure they are used solely to benefit the participants and their beneficiaries.
Maintain accurate records of 401(k) employee contributions and values. Many small businesses work with a 401(k) recordkeeper to help them manage plan setup and ongoing record management.
Provide information to plan participants. It’s important to provide information about plan benefits, rights, features, etc. A disclosure form can help ensure your communications follow IRS requirements.

Employers should decide what they wish to contribute and consider the tax savings involved. With an employer match, a business can invest in its workforce and positively impact employee morale and retention.

Employees can contribute as much as they like, within IRS limitations. Encouraging employees to increase their 401(k) participation could result in happier, less-stressed employees who are more engaged and productive.

Administration and Maintenance

Establishing a 401(k) can be straightforward. Businesses should do preliminary research and allow ample time to create a plan document, establish a trust, notify employees and launch the new benefit.

Costs to set up a 401(k) plan will depend on the size of the business and the benefits selected. Other costs include fees for rolling assets over from another plan and initial costs for investment advice.

Once established, there will be ongoing 401(k) administrative fees and costs for day-to-day operations, investment fees and individual service fees. Employers should seek to avoid potential fees or penalties associated with being non-compliant with 401(k) reporting. Using a knowledgeable retirement services provider can help ensure compliance with retirement plan forms, deadlines and notifications.

Find a provider with an excellent track record to get the 401(k) started, manage the plan and share ideas on how to maximize the value to the company and its employees. It can provide an ongoing, positive benefit for years to come.

Paychex is an NJCPA member benefit provider. Learn more at paychex.com/accounting-professionals.

This article appeared in the winter 2023/24 issue of New Jersey CPA magazine. Read the full issue.