Setting up a 401 (k) Plan for Your Business’s Employees


As a business, you are not required by law to set up a 401 (k) -retirement program for your employees. In recent years, however, traditional retirement plans are on a decline and potential employees are keen on employers that have established 401 (k) retirement plans for their workers.

Having a 401 (k) program for your employees, therefore, helps you attract and retain the best talents in the market. Furthermore, your business stands to benefit from the tax savings.

The process of establishing the program is also not as complex or costly as many small business owners perceive it to be. The following steps demonstrate how easy it is to set up the 401 (k) program.

Research extensively

Establishing a 401 (k) program for your employees is a business decision. As such, it is important that you fully understand what the plan entails, the benefits to the workers, and your business’s obligations, options, and benefits.

You must therefore carry out extensive research through the internet or experts before you even start the process.

It is also advisable that you inquire from businesses similar to yours that have set up 401 (k) programs for their employees. Note the options that they found beneficial and why.

Contracting a third-party administrator

The day to day running of the 401 (k) -retirement program is quite technical. Operations such as preparing benefit statements, amending the plan documents, adherence with IRS and other regulatory agencies require accuracy and timeliness.

Running these operations in-house exposes your business to liability in case of errors or non-compliance. It is therefore prudent to hire a third-party administrator (TPA) to run these operations for you.

Learn the terms that each of the available TPAs has to offer your business before settling on one.

Also check reputable online sites for customers’ reviews.

Retirement plan options

The 401 (k) is not a rigidly designed program. You have options to choose from based on what your business can offer the employees and the desired benefits.

  • Traditional 401 (k) versus Roth

Under traditional 401 (k), the contributions are deducted from your income before tax while in Roth, the contributions that go to 401 (k) are already taxed.

The traditional plan contributions are therefore taxed when you will be withdrawing while Roth plan contributions are not taxed at withdrawal time.

Small and medium-size business often prefer the traditional 401 (k) because it is more tax-friendly and flexible.

It is, however, important that you explore all the pros and cons before making the final decision.

  • Safe harbor 401 (k)

Under this 401 (k) -retirement plan, the business is required to make a standard contribution for each employee. You can therefore commit to pay make a contribution that is equal to a certain percentage of the employee’s salary or contribution.

The main advantage of this plan is that it demonstrates that all the employees are treated the same, thus helps the business pass the regular discrimination tests.

Consult the TPA or other experts on other available options and flexibilities.

Allow the employees to also submit their recommendations.

Matching the contributions

Many small and medium-sized enterprises choose not to establish 401 (k) because they feel the business cannot afford to match the contributions by employees. This is a misconception.

You can opt not to match your employees’ contributions.

If you choose to, it is up to you to decide the matching rate e.g. A percentage.

You can also set the limit for the match e.g. Up to $20,000 or 3% of the salary whichever is lower.

401 (K) retirement plan loans

The 401 (k) contributions are ideally meant to be untouched till retirement. However, an employee might face financial emergencies and wish to get a loan against their savings.

Traditional 401 (k) and other types the retirement plans allow employees to access loans in such instances.

As the employer, you have some legroom in setting some of the terms of the nation 21 loans. You should therefore take time to design these terms so that it does not cause problems after you have already rolled out the program.

Some of the aspects of the loan you need to decide beforehand are:

  • Circumstances under which the investor may take a loan
  • The loan limit: may be a fixed amount, a percentage of savings or a combination of both
  • Interest rates: must be reasonable as per market rates
  • Installment rates and amounts

Usually, the loan limit is 50% of the employee’s account balance or $50,000.

Also, the loan must be paid within five years unless the amount was used to buy a principal residence.

Employees’ options when they leave

One of the main reasons that employees hesitate to join the plan is that they are unsure what will happen to their contributions when they leave your business. Communicate with the TPA to ensure that the employees have the following options when they leave:

  • Retaining their savings in your business’s 401 (k) account
  • Moving the assets to the new employer’s account: only applicable if the employer is known before departure
  • Rollover IRA
  • Cashing out to get the money

In conclusion…

Small and medium-size businesses refuse to create 401 (k) retirement plans for their employees because they think the process is costly, difficult, or non-beneficial. This is based on misconceptions that have been peddled for too long.

Hopefully, we have alleviated your concerns and demonstrated that the process is easy, cheap and beneficial for the employees as well as business. Modern technology has only made the process easier and more efficient.

You no longer have a reason to deny your employees the chance to plan for their retirement.


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