Step-by-Step Guide: How to Set Up a 401(k) Plan for Your Business

Knowing how to set up a 401(k) plan can give your small business a significant advantage in attracting top talent. Retirement savings plans are among the most valued employee benefits, often influencing candidates' decisions when evaluating job offers.

A well-structured 401(k) plan not only allows employees to contribute pre-tax income toward their future but can also lower their taxable income today. By matching employee contributions, employers can further increase the plan’s appeal and boost participation in this essential benefit.

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Tax Benefits of Setting Up a 401(k) Plan for Employers

Setting up a 401(k) offers more than recruiting and retention advantages—it also provides valuable tax incentives. Eligible employers with 100 or fewer employees may qualify for deductions and credits, making a 401(k) plan a strategic choice for both business growth and financial savings.

Here’s an overview of these tax-saving benefits:

• Tax Deductions 

Employer contributions are tax-deductible. 

• Tax Credits 

  Eligible employers who start a plan may qualify for tax credits of up to $5,000 annually for three years, in addition to an auto-enrollment credit of $500 per year, totaling up to $16,500. 
   
  Other tax credits may be available to offset startup costs, including plan setup and administration and for offering an auto-enrollment feature. 

Eligible companies also can receive a credit of up to $1,000 per employee based on their contributions for the first five years of a 401(k) plan, with specific limits based on the number of employees. 

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How To Set Up a 401(k) Plan  

The IRS characterizes the different stages of starting a retirement plan as Choosing, Establishing and Operating.  

Choosing a Plan 

Like any important business decision, establishing a 401(k) should start with research and analysis. Identifying reputable firms that offer recordkeeping and administration services for 401(k) plans is the first step. Look for established providers with a strong track record and excellent customer support. 

The next decision is choosing a plan that meets your business’s needs. Options include: 

• Traditional 401(k) 

  Offers flexibility for employee contributions. Employers can match some or all of those contributions. 

• Roth 401(k)

  Allows employees to contribute money that has already been taxed. Those funds can then be withdrawn tax-free during retirement. 

• Safe Harbor 401(k)

  Requires mandatory employer contributions, and employees are vested immediately. These plans allow small business owners to avoid the IRS’s annual nondiscrimination testing, which is required of other plans to make sure they don’t favor highly compensated employees over other employees. 

• Simple 401(k)

  Provides an option for businesses with 100 or fewer employees. Employers must either match employee contributions to the plan or contribute a certain amount of each employee’s wages. 

• Automatic Enrollment 401(k)

  Automatically enrolls employees in the company’s 401(k) plan, which increases participation rates. Employees have the option to opt-out. 

Establishing a 401(k) 

Before launching a tax-qualified retirement plan, employers must: 

• Adopt a written plan

  Draft a document that details the plan’s provisions, which must comply with IRS regulations. 

• Establish a trust

  Ensure plan assets are held in trust for the sole benefit of plan participants. Appoint a trustee to oversee contributions and investments. 

• Communicate with participants 

  Provide information about the plan’s terms, including a summary plan description in simple language, fee disclosures and updates on investments as required for compliance with IRS regulations. 

• Recordkeeping

  Maintain accurate records, as is federally mandated. Employers must carefully track current plan values and how much employees contribute. 

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The Challenges of Going It Alone 

While it’s not impossible to self-administer a 401(k) plan, it’s incredibly complex and labor-intensive. Failure to meet legal requirements can result in costly penalties from both the IRS and the Department of Labor (DOL).  

Employers who operate 401(k) plans must follow multiple laws that stipulate such federally mandated tasks as: 

• Employee Notifications and Education

Employers must furnish employees with disclosures, including a summary annual report that details the plan’s financial performance over the past year, and individual benefit statements that show each employee’s account activity. 

• Timely Contributions

Employers must deposit employee contributions “as soon as they can be segregated from the employer’s assets, but no later than the 15th business day of the month following the payday.”  

• Compliance Tests

  A company must run its plan through multiple analyses to ensure the plan is fair and non-discriminatory. 
  
  

• Fiduciary Duties

Employers that administer their own 401(k) plans are responsible for investment oversight and protecting the interest of participants and their beneficiaries. Poor choices or excessive fees can result in legal consequences. 

• Required Minimum Distributions (RMDs)

Plan administrators – in this case, the small business – must initiate required RMDs to all account holders when they turn 72 or be subject to a tax penalty amounting to 50% of the undistributed amount. 

• Plan Audits

Plans with 100 or more participants must undergo an annual audit, which typically requires an independent qualified accountant. Plans that fail to meet audit requirements may be disqualified. 

Partnering with Experts to Simplify Your 401(k) Setup and Management

The DOL provides more information on how to set up a 401(k) plan and lays out the related legal requirements. As the DOL document and the list above illustrate, the process is riddled with complexities and compliance pitfalls. For all these reasons, many employers turn to a trusted professional employer organization (PEO) like Axcet HR Solutions to help. 

For decades, Axcet has helped small businesses attract top-notch employees with attractive benefits like retirement saving plans. We’re experts who can ensure you adopt the right plan for your business and that it runs smoothly with minimal effort on your part.  

When you partner with Axcet for small business 401(k) plans, you benefit from: 

• Flexible, custom-designed plans 
• Worry-free administration and management 
• No-fuss legal compliance 
• Lower plan expenses 

Schedule your free consultation today to learn how Axcet can take the burden of complying with 401(k) plan requirements off your shoulders while making a long-term positive impact on your business and the lives of your employees.