How to Set Up a 401(k) for My Company

Offering a 401(k) retirement plan has a number of benefits for both business owners and employees. With a little research, or with the assistance of a financial professional, establishing a 401(k) plan is a fairly straightforward process. If you’re considering establishing a 401(k) plan for your business, read below to learn more about the benefits of providing a retirement plan for both you and your employees and the steps to take to get the 401(k) plan started.

Benefits to Employer

One of the greatest benefits of offering a 401(k) plan is that it helps to attract and retain employees. Including a well-structured 401(k) as part of your compensation package can make your company stand out among your competitors in the recruiting process and it sends a signal to your employees you are investing in their future. In addition, providing a 401(k) may also provide a tax benefit for you. If your business is eligible, you may be able to deduct contributions you make to employees and you may qualify for tax credits to help with startup costs.

Benefits to Employees

Participating in an employer-sponsored 401(k) retirement savings plan offers a number of benefits to employees. Pre-tax contributions deducted automatically from each paycheck makes maintaining the account simple. Tax-advantaged retirement saving plans like 401(k)s allow for long-term growth on tax-differed income. Furthermore, higher annual contribution limits and employer matching options maximize potential growth and differentiate 401(k)s from other plans like individual retirement accounts (IRAs). Other benefits include the potential to borrow against funds in a 401(k) account and asset protection from creditors.

Steps to Set Up a 401(k) Plan

Establishing a 401(k) plan for your company takes time and research. Consulting with a financial professional will streamline the process, but working through the process on your own is manageable. The Internal Revenue Service (IRS) outlines four key steps when setting up your 401(k) plan.

Step 1: Create a Written Plan Document

Once you’ve determined the type of plan to offer—a traditional 401(k), a safe harbor 401(k), an automatic enrollment 401(k) or a SIMPLE 401(k) plan—you must create a written document detailing all the terms and conditions of your 401(k) plan. All of your plan features such as employee eligibility, contribution policies and vesting should be clearly explained. Your written plan also must comply with the Internal Revenue Code (IRC) for sponsoring an employee retirement plan.

Step 2: Set Up a Trust for Plan Assets

Your 401(k) plan’s assets must be held in a trust to assure that all of the assets are managed properly. The trust must have one trustee dedicated to managing contributions, plan investments and distributions. However, if your plan is set up through insurance contracts you may not need to arrange for a trust to hold the contracts. This step is vital for preserving the financial integrity of your 401(k) plan and seeking consultation from a financial professional is strongly advised.

Maintaining accurate and up-to-date accounting records for your 401(k) plan is essential. Every year, you will be required to submit your plan’s annual return/report with the federal government. Developing a recordkeeping system to track all of the activity—including plan investments, contributions and distributions, earnings and losses, and expenses—ensures you provide accurate and timely reports.

Step 4: Communicate Plan Information to Participants

Once your plan is established, you must communicate plan benefits, features and requirements with employees eligible to participate. The IRC stipulates that you must provide a Summary Plan Description (SPD) to inform participants and beneficiaries of their rights, benefits and responsibilities under the plan. In addition, the SPD must be written in clear, easy to understand language. Generally, the SPD is created at the same time as the written plan document.

Establishing a 401(k) plan for your company may require working through a learning curve, but offering a retirement savings plan as a part of your compensation package is well worth the effort for both you and your employees. At Wickham Financial & Insurance Services, our team of experienced financial advisors stands ready to consult with you and guide you through the process. Meet with us today to learn more about how we can help.

Any information provided has been prepared from sources believed to be reliable but is not guaranteed, does not represent all available data necessary for making investment decisions and is for informational purposes only.