Establishing a Small Business 401(k) Plan

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Small businesses are the backbone of the American economy. Employees are attracted to work at such companies because of the many benefits offered, including flexible hours, the opportunity to learn new skills, and a more closely knit work environment. One area where small businesses struggle when it comes to employee benefits is with retirement plans. It’s often difficult and expensive for a small business to offer the same level of retirement benefits as larger companies. Although it is a concern for many, the good news is that there are retirement plan options designed especially for small businesses. To help clients, prospects and others who may be contemplating implementing a plan, Wilson Lewis has provided a summary of key steps (and challenges) below.

1. Plan Selection – Many small businesses choose a traditional 401(k) plan because they offer substantial flexibility with regard to employer contributions, vesting schedules, and the ability to forego matching contributions. Those who are self-employed can set up an individual 401(k), which works similar to a traditional 401(k). Another possibility is a safe harbor 401(k), which enables the business to contribute the maximum allowed without restrictions when they provide a matching contribution to their employees’ accounts. Certain profit sharing plans may work well for partnerships, such as legal firms, that reward employee contributions differently based on their role (e.g. partner, lawyer, and staff).
2. Plan Features – Once the plan type is identified, the business owner can choose some of the plan’s features, such as which employees can contribute to the plan, how much can be contributed, and whether the company will provide a matching contribution.
3. Selecting a Trustee/Plan Provider – Unless established through insurance contracts, a plan’s assets must be held in trust to assure that they are used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee to accept funds, manage investments prudently, and distribute them to beneficiaries. In addition, a plan provider should offer reasonable plan management fees, experience designing small business plans, and the ability to grow as the company’s needs change.
4. Create a Written Plan Document – A plan document is a required element for all 401(k)s and provides the foundation and day-to-day details of the plan’s operation. For instance, the plan document must describe how certain key functions are carried out, including how contributions are to be deposited. Every plan document must also clearly identify one or more persons to be the named fiduciary and any delineation of responsibilities among multiple fiduciaries. This is needed to identify to participants and regulators who is responsible for various plan functions.
5. Distribute Plan Information – If the company elects to include employees in the plan, it’s necessary to notify eligible participants about certain benefits, rights, and features. In addition, a summary plan description must be provided to all participants.
6. Plan Monitoring – Knowing the plan details and monitoring them closely is vital to avoid the costs of correcting errors and additional reporting. Some common pitfalls include not following the plan’s definitions of eligibility and compensation and making late contributions to participant accounts. Be sure that everything is working as outlined in the plan document, which includes ensuring eligible employees are invited to participate in the plan.
7. Maintain Compliance – There are many compliance requirements for 401(k) plans. A key challenge is passing nondiscrimination testing. This test compares plan participation and contributions of executives (highly compensated employees) to staff (non-highly compensated employees) to ensure that they are proportional. If the plan fails the test, corrective action must be taken to preserve tax benefits. It’s also important to note that all 401(k) plans – no matter how small – must adhere to the fiduciary compliance rules for ERISA retirement plans.

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Implementing a retirement plan for a small business can be a big step. For this reason, it’s essential to work with a provider who can guide you through the process and share expertise. If you are considering implementing a retirement plan for your business, Wilson Lewis can help! Call us at 770.476.1004 or click here to contact us. We look forward to speaking with you soon!