Everything Business Owners Need to Know Before Offering a 401(k)

What kind of 401(k) plan should your business offer?

When considering a 401(k) for employers, most small to mid-sized businesses will choose one of these three options: traditional 401(k), Safe Harbor 401(k), and SIMPLE 401(k). Each offers distinct benefits depending on your business’s size and contribution goals.

1. Traditional 401(k) Plan: Many businesses opt for this plan because it allows employees to make pre-tax contributions while offering the potential for employer matching. Traditional 401(k) plans provide significant flexibility in terms of contribution limits and investment options, making them a popular choice.
2. Safe Harbor 401(k) Plan: If you want to avoid the complexities of non-discrimination testing, a Safe Harbor 401(k) plan offers a great solution. By committing to either a matching or non-elective contribution for all eligible employees, your business bypasses some of the regulatory challenges associated with traditional 401(k) plans.
3. SIMPLE 401(k) Plan: This plan works well for smaller businesses looking for an easy setup and low maintenance. The SIMPLE 401(k) plan requires less administrative effort compared to other 401(k) plans and allows both employer and employee contributions. However, it does have lower contribution limits than a traditional 401(k), which may affect businesses aiming to maximize employee retirement savings.

It’s important to note that there are other types of retirement plans available. In addition to these options, partnering with a professional employer organization (PEO) like G&A Partners opens the door to specialized retirement solutions such as Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs).

• Multiple Employer Plans (MEPs): MEPs enable multiple, unrelated businesses to join forces and offer a retirement plan, sharing administrative responsibilities and costs. This option is particularly attractive for small businesses that want to provide competitive retirement benefits without bearing the entire burden alone.
• Pooled Employer Plans (PEPs): PEPs, a relatively new option, allow unrelated employers to pool resources to offer a 401(k) plan. The primary advantage of a PEP lies in its ability to significantly reduce the administrative and fiduciary responsibilities for each participating employer, as the PEP provider takes on most of these duties.

By carefully assessing your company’s size, goals, and resources, you can choose the right 401(k) plan to meet your and your employees’ needs. Whether you opt for a traditional plan or explore the benefits of MEPs and PEPs through a PEO, offering a competitive 401(k) plan can significantly strengthen your recruiting and retention efforts.

How to set up a 401(k) for your employees

When it comes to setting up a 401(k) for a small business, you have two primary options. Each approach offers distinct advantages, depending on the level of involvement and responsibility you’re prepared to take on.

Option 1: Setting Up and Administering the 401(k) Yourself

The first option involves finding a financial institution that offers retirement plans and taking on the role of sponsor and administrator for your 401(k) plan. This route allows you to maintain complete control over the plan’s setup and ongoing management, but it also requires a more hands-on approach.

To begin, you’ll need to choose a financial institution—such as a bank, mutual fund provider, or insurance company—that offers 401(k) plans. Once you’ve selected a provider, the process involves several steps:

1. Design the Plan: Work with your chosen provider to create a plan tailored to your company’s needs. This includes determining eligibility requirements, deciding on employee contribution limits, and deciding whether your business will offer employer matching.
2. Create Plan Documents: You’ll need to prepare and distribute plan documents that outline the details of the 401(k) plan, including contribution rules, vesting schedules, and investment options. These documents must comply with IRS regulations.
3. Establish a Trust for Plan Assets: The assets of your 401(k) plan must be held in a trust to ensure that they are used solely for the benefit of plan participants and their beneficiaries.
4. Develop a Recordkeeping System: Accurate record keeping is essential for administering the plan. You’ll need a system to track contributions, investments, and distributions, and to generate required reports for plan participants.
5. Distribute Plan Information: Finally, you’ll need to provide employees with information about the plan, including how to enroll, make contributions, and choose investment options.

While this approach offers control and customization, it also comes with administrative responsibilities and the need for you or your team to stay compliant with regulations.

Option 2: Utilizing a PEO to Sponsor and Administer the Plan

If you prefer a more streamlined approach, partnering with a professional employer organization (PEO) like G&A Partners can simplify the process. In this scenario, the PEO sponsors the 401(k) plan and handles all administrative duties, significantly reducing the burden on your business.

With a PEO, you also gain access to a well-structured 401(k) plan without the need to design or manage it yourself, and your PEO partner takes care of all regulatory compliance, recordkeeping, and participant communication. This option allows you to offer a competitive retirement plan to your employees without having to invest in additional administrative resources or expertise.

By choosing a PEO, you also benefit from economies of scale, which can lead to lower costs and better plan features compared to setting up a plan independently. The PEO’s larger pool of participants can result in more favorable investment options and reduced fees, making this an attractive choice for small to mid-sized businesses.

How much does it cost to offer a 401(k) plan to employees?

The cost of offering a 401(k) plan to your employees varies based on several factors, including the number of employees, the amount of assets under management, and whether you choose to administer the plan yourself or through a PEO.

For businesses setting up a 401(k) plan independently, costs will include annual administrative fees. These costs may increase if you opt for additional services such as investment management or if your plan includes a match contribution.

If you choose to work with a PEO, the costs may be different. Typically, using a PEO can offer cost savings, especially if you’re moving from an open-market 401(k) plan. The PEO’s collective bargaining power often results in lower fees for investment options and administration.

It’s important to remember that employer contributions are an additional cost to consider. These contributions can vary widely based on the type of plan and the matching formula you choose.

While the costs associated with offering a 401(k) plan are an investment, the benefits—such as attracting top talent, boosting employee retention, and providing a valuable retirement savings tool—often outweigh the expenses.

How is a 401(k) plan administered to employees?

For employers, administering a 401(k) plan involves more than just setting it up—it also includes navigating a complex landscape of regulations. As the plan sponsor, your business bears the responsibility for complying with IRS and Department of Labor requirements—a task that can quickly become overwhelming, especially for small and mid-sized companies.

Managing a 401(k) plan involves several critical tasks: staying compliant with ever-changing regulations, keeping meticulous records, and effectively communicating with your employees. Common challenges include staying on top of key regulatory updates or deadlines to avoid costly penalties or misclassifying employees, both of which can cause issues with contributions and legal compliance.

Many businesses find that they need to either bring in someone with specialized knowledge in retirement plans or assign these responsibilities to an existing team member. But without the right expertise, this can lead to mistakes and increased risk. And even if you choose to outsource some of these responsibilities, but you remain the plan sponsor, you’re still on the hook for making sure everything is done correctly. That means overseeing the work of any third-party providers, keeping records up to date, and conducting regular audits—all while juggling the demands of your day-to-day operations.

Partnering with a PEO like G&A Partners, however, can change the game. When you work with a PEO, the PEO sponsors the 401(k) plan, taking on the administrative and regulatory responsibilities that would otherwise fall on your shoulders. From managing audits to updating plan documents, G&A, for example, handles the heavy lifting, so our clients don’t have to.

A PEO can also make it easier for you to offer a competitive retirement plan without the administrative burden. And while your PEO partner manages all the complexities, you can focus on what you do best—running your business—while still providing your employees with the benefits they deserve.

Are employers required to offer a 401(k)?

Employers across the United States are increasingly facing new requirements related to offering retirement plans like 401(k)s. While federal law does not mandate that businesses provide a 401(k) plan, state-level regulations are evolving rapidly. In a number of states, private employers must either participate in a state-run retirement program or offer a similar, approved plan. Other states are in the process of finalizing or implementing these mandates, and some have introduced voluntary requirements that encourage employers to offer retirement benefits.

These state requirements aim to address the growing concern over retirement savings gaps, particularly for workers who lack access to employer-sponsored retirement plans. As a result, it’s important that business owners stay informed about their state’s specific regulations to maintain 401(k) compliance and avoid potential penalties.

What is required for a business to offer a 401(k)?

Offering a 401(k) plan involves meeting several key requirements to comply with federal laws and regulations. For example, when operating a 401(k) plan, you will be responsible for:

• Participation
• Contributions
• Vesting
• Nondiscrimination
• Investing the contributions
• Fiduciary responsibilities
• Disclosing plan information to participants
• Reporting to government agencies
• Distributing plan benefits

As states continue to introduce their own retirement plan requirements, businesses must stay up-to-date with both federal and state regulations to avoid compliance issues. In states with mandatory retirement plan laws, failing to offer an approved plan can result in fines or other penalties.

For businesses that find navigating these requirements challenging, partnering with a professional employer organization like G&A can provide relief. A PEO can manage the complexities of 401(k) compliance and stay on top of 401k rules for employers, from setting up the plan to ensuring ongoing adherence to federal and state regulations.

How much should your business and your employees contribute to 401(k) plans?

Determining if you will contribute, and if so, the right contribution levels for both your business and your employees is an important component to creating a successful and compliant 401(k) plan. While employer contributions are optional, they play a significant role in attracting talent and ensuring compliance with IRS regulations. By carefully planning your contribution strategy and understanding the rules, you can offer a retirement plan that benefits both your employees and your business.

Understanding the 401(k) contribution rules is essential to ensure your plan complies with IRS regulations. Here are a few things to keep in mind:

Employer Contributions: What to Consider

As an employer, you have several options for contributing to your employees' 401(k) plans. While you aren't obligated to contribute, many businesses choose to do so as a way to enhance their benefits package. Employer contributions can come in various forms, such as matching contributions, where you match a percentage of the employee's contribution, or non-elective contributions, where you contribute a set amount regardless of whether the employee contributes.

However, if you decide to contribute, certain rules and requirements come into play. For example, Safe Harbor 401(k) plans are a popular choice for small and mid-sized businesses because they automatically satisfy IRS nondiscrimination requirements. This means your contributions, whether matching or non-elective, help avoid the need for complex annual nondiscrimination testing. Safe Harbor plans require a specific level of contribution, either by matching employee contributions or by providing a set contribution to all eligible employees.

Employee Contributions: Encouraging Participation

Employee contributions are a critical part of any 401(k) plan. Most plans allow employees to contribute up to a certain percentage of their salary, with the IRS setting annual limits on how much can be contributed. Encouraging your employees to contribute as much as possible not only benefits their retirement savings but can also boost the overall effectiveness of the plan.

One strategy to increase participation is to offer a matching contribution, which provides employees with an added incentive to contribute. For example, you might match 50% of employee contributions up to 6% of their salary. This approach not only motivates employees to take full advantage of the plan but also enhances their retirement savings over time.

Balancing Contributions for Compliance

For businesses with highly compensated employees, ensuring that 401(k) contributions remain balanced is crucial. The IRS imposes strict rules to prevent these employees from benefiting disproportionately from the plan. To comply with these rules and avoid nondiscrimination testing issues, your contribution strategy should consider the overall compensation structure of your workforce.

Offering a Safe Harbor 401(k) plan is one way to streamline compliance. By providing the required employer contributions, you can make sure that all employees benefit fairly, which helps you avoid potential pitfalls with IRS nondiscrimination tests.