When we talk to millennial small business owners, many want to start a 401(k) plan for their employees, but don't know where to start. This causes them to continue to kick the can down the road and never get around to starting one.
This can end up being not only a disservice to yourself, but to your employees as well.
To help you take action today, we have outlined 3 steps you need to get started when looking at a 401(K) for your small business.
Step #1: Research Plan Providers
When researching plan options, it’s beneficial to look for providers that will serve you and your employees long-term. If possible, ask other small business owners or local networks for recommendations. Hearing the experiences others have had can help you determine what to look for (or what to avoid) when choosing a provider.
It may be beneficial to look for fairly established, reputable providers who are adept at working with small businesses like yours.
Step #2: Choose a Plan
There are several types of plans that you can offer your employees.
Traditional 401(k) Plan
According to the Society for Human Resource Management, about 93 percent of businesses with a defined benefits plan offer a traditional 401(k) plan.1
This flexible option allows employers to make matching contributions, which can serve as an incentive for greater employee participation. The money employees choose to have automatically placed in their 401(k) is tax-deferred, meaning participants don’t pay taxes on that amount until earnings are withdrawn.
It’s important to note that traditional 401(k) plans are subject to annual nondiscrimination tests, called the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP).2 These tests are set in place by the IRS to determine whether or not employer matching contributions are favoring high-income earners within that business.
Roth 401(k) Plan
This option is similar to a traditional plan, however, contributions by employees are made with after-tax dollars. Therefore, withdrawals made in retirement will be tax-free. About 59 percent of businesses offering retirement plans opt for a Roth 401(k) plan (or similar defined contributions plan) for employees.1
Just like a traditional plan, you may choose to make matching contributions in a Roth 401(k) plan.
Safe Harbor 401(k) Plan
A safe harbor 401(k) plan is fairly similar to a traditional plan, but there are a few important variations. For example, employer contributions must be fully vested when made. Employers can choose to offer matching contributions only to employees who defer, or they can be made on behalf of all eligible employees.
Unlike traditional 401(k) plans, a safe harbor is not subject to the IRA’s strict nondiscrimination tests that must be completed annually.
SIMPLE 401(k) Plan
SIMPLE 401(k) plans are designed specifically for small businesses as a cost-effective retirement plan option. Employers with fewer than 100 employees may use this plan, which acts similarly to a safe harbor 401(k) plan. Employer contributions must be fully vested when made, and SIMPLE 401(k) plan providers are not subject to the annual nondiscrimination tests.
Automatic Enrollment 401(k) Plan
Unless the employees explicitly choose to opt-out or change their percentage, automatic enrollment - just as it sounds - automatically enrolls eligible employees into a 401(k) plan that defers a percentage of their pre-tax earnings.
Step #3: Find Your Partners
Once you have a better idea of what type of 401(k) you may want to offer employees, it’s important to gather the right team to implement the plan smoothly and efficiently.
Potential partners may include:
- 401(k) recordkeepers or plan providers: Recordkeepers are in charge of keeping track of the important details about your plan. This could include whose participating, what they’re invested in, when money is added/removed, etc.
- Third-party administrators: Having a third-party administrator allows business owners and small human resources departments to outsource the administrative work that goes into maintaining a 401(k) plan.
- 401(k) advisor(s): Your 401(k) advisor can essentially take the lead on assuming the legal responsibilities of your business’s plan, as well as the heavy lifting involved with establishing a 401(k) plan. They can work with your employees one-on-one to answer questions about the plan and work to keep your plan fees down as you continue to grow.
As you begin to navigate your options, you’ll want to choose providers and partners carefully, as they can make or break the effectiveness of your 401(k) plan. Your employees are crucial to the success of your business, and establishing a plan that works in both their favor and yours is important.
ABOUT THE STONEBRIDGE GROUP
The StoneBridge Group is a financial planning firm that focuses on bringing a personal side of financial planning to people through education and guidance. We are passionate about helping millennial small business owners of all income levels make great financial decisions so they can live the life they want to live. We also help pre-retirees plan for the next chapter of their life as they enter retirement. Based in Forest Lake, MN, The Stonebridge Group works with clients both locally and virtually. You can follow the links to learn more about the StoneBridge Group and the services we offer.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.