Small Business Guide to 401(k) Retirement Plans

Senior agent and her clients planning business investment

When you offer your employees a 401(k) plan, it shows them that you are invested in their future with your company. 401(k) plans help employees save for retirement while providing your business with tax savings and a valuable tool that helps with employee retention. According to the Economic Policy Institute, close to half of all American families do not have ANY retirement savings. Knowing this terrible reality, it should not be surprising that when you choose to offer your employees a 401(k) plan it can have a big impact on the way that your employees think about your company.

How many employees do you need to have a 401(k) plan?

Many small businesses assume that there is no way they can offer 401(k) due to the exorbitant fees 401(k) providers have historically charged businesses. At Trust Company of Oklahoma, we are making waves in our industry by providing small businesses with an easy and affordable 401(k) plan.

How do I set up a 401(k) for my small business?

The IRS website covers the actions you need to take to set up a 401(k) for your small business. We tasked our experts with writing out the steps the IRS website covers but using terms that are easier to understand.

Without further ado, these are the steps you will need to take to set up a 401(k) plan for your small business.

  1. Choose a plan that helps you to meet your business goals.

Plan Designs

There are different 401(k) plan designs, and the difference in these revolves around how the employer makes contributions on behalf of their employees. Here are the three types of 401(k) plan designs, and their requirements.

  • Standard Profit Sharing

This plan allows its employers to make 401(k) contributions, offer employee matching, or choose not to contribute to the employee’s account at all. Employer contributions can be made with a vesting schedule and are subject to IRS nondiscrimination tests.

  • Safe Harbor Profit Sharing

This plan is similar to the standard profit-sharing plan in design, but it requires employers to contribute to their employees’ accounts. A Safe Harbor Profit Sharing 401(k) plan has specific rules about contributions and requires immediate vesting from contributions. The “safe harbor status” means they are exempt from IRS nondiscrimination tests and the consequences of failure, whereas standard tests are required to pass these tests every year.

  • SIMPLE 401(k)

If you have less than 100 employees, you can opt for a SIMPLE 401(k). It is similar to a Safe Harbor plan, in that employers are required to make contributions to their participants’ 401(k) accounts and they also ensure contributions are immediately vested. SIMPLE plans are exempt from nondiscrimination testing. The most critical thing to remember when it comes to SIMPLE 401(k) plans is that start and closing dates should be set in stone and once you commit to contributions for the year you cannot change your mind.

What other features should I consider for a 401(k) plan?

Sure, offering retirement benefits is a wonderful way to attract and retain talent, but specific plan features can help boost participation and make your small business’s 401(k) plan even more appealing.

Traditional vs. Roth 401(k). What is the difference?

When we speak about the difference between a traditional vs. Roth 401(k) we are mainly discussing how employee contributions are taxed. With traditional accounts, contributions are made before taxes are taken out of one’s pay. Whereas, with a Roth 401(k), contributions are taxed before being deposited. When an employee retires and chooses to withdrawal accounts are taxed at ordinary income rates as opposed to with a Roth account where withdrawals can generally be made tax-free.

Should I offer contribution matching to my employees?

Did you know that matching contributions can be beneficial for both you and your employees? It is true! For employees, it offers them additional compensation, and for employers matching contributions allows for extra tax-deductible exemptions.

What is 401(k) profit sharing?

Profit sharing can easily be thought of as a bonus to an employee’s retirement account without being taxed immediately. With that said, these contributions are taxed once they retire.

  1. Pick Your Team

Small business 401(k) plans involve a lot of different service providers and advisors. When you set up your plan you have the ability to pick and choose to create your plan, as though you are ordering off a menu.

When you choose to offer a retirement plan through Trust Company of Oklahoma, we handle all of your record keeping, compliance testing, and day-to-day plan administration.

401(k) Recordkeepers

This should come at no surprise to you, but small business 401(k) plans require a lot of recordkeeping on the employer end of things as you need to track contributions, earnings, losses, investments, expenses, and benefit distributions, it can be a lot to keep track of. Having a 401(k) recordkeeper at your disposal can save your business time and money in the long-run.

Third Party Administrators

In order to keep your small business 401(k) plan in good standing, there is a lot of behind the scenes work that needs to be done. 401(k) plan administrators handle tasks such as:

  • Preparation of documents and notices for participants and beneficiaries
  • Approval of transactions (loans, distributions, etc.).
  • Monitoring compliance with plan rules and IRS regulations.
  • Discrimination testing
  • Audit support
  • Filing compliance Form 5500
  • Generation of annual participant census’

Many companies choose to outsource this task to a third-party administrator such as Trust Company of Oklahoma because they take on the liability of these tasks when they sign on to administer your plan.

What is the difference between a custodian and a trustee?

The U.S. law says that your 401(k) plan assets must be held in a trust account to make sure they are used solely for the plan participants and their beneficiaries. Trustees may be responsible for collecting contributions, investing them, and issuing distributions, while a custodian’s responsibility is to make sure your employees’ money is kept in a safe place. It’s important for you to know that these tasks may be delegated to a plan administrator, such as the corporate retirement team at the Trust Company of Oklahoma.

Payroll Providers

Employees contribute to their retirement accounts on payday. So it is important that your plan administrator works closely with your payroll provider to ensure employees’ contributions and personal information is kept up to date across all systems. It is important to choose a 401(k) provider that is able to fully integrate with your HR and payroll providers in order to save time and reduce errors.

  1. Make it Official

After you have chosen your plan type and the features you are wanting your 401(k) plan to offer, it is important to create a written plan of that document for IRS purposes. Your 401(k) plan administrator is able to handle compiling the benefits, rights, and features under your plan for you.

In general, your plan documents should include the following features:

  • When employees are eligible to participate
  • Vesting schedule information
  • Employer matching or profit sharing information
  • How distributions are handled
  • Contact information for employer and third parties.

Onboarding Employees

For most 401(k) plans it is important to notify employees if they are eligible for a plan or about any changes 30 days before they go into effect. When a summary plan is created it is the primary way to share information about your plan and the benefits it has.

  1. Keep on running your 401(k) plan smoothly.

401(k)s are not a set it and forget it type of program for your company. They require upkeep and someone paying close attention to ensure all IRS rules are followed. In addition to keeping up with compliance testing, a 401(k) plan administrator files a IRS Form 5500 each year. This federally mandated form requires information about your business, retirement plans, and participants.

Are there fees for your employees?

Many providers put a lot of fees on employees or force employees to invest with overly high monthly or management fees. For small businesses, the average fees range from 0.07% to 1%, which could mean thousands of dollars for employees’ retirement accounts.

At Trust Company of Oklahoma, we understand that this is a lot of information to take in, and we are standing by ready to help answer any questions you might have. Click here to connect with us.