At first glance, a 401(k) plan may look like a hodgepodge of pie charts and indecipherable rules. But in reality, providing employee retirement benefits is an amazing tool employers have in their arsenal to help their teams save for the future.
In this article, we give you the lowdown on how to set up a 401(k) retirement account that takes superb care of your team, along with answering your top questions.
Am I required to offer a retirement plan?
While most states don’t require you to offer a retirement plan, some do. There are also endless other reasons why you should help your team save with a small business retirement plan for whatever life has in store.
It shows that you care about your team’s future. With a company-sponsored retirement plan in place, your team will feel more comfortable thinking about the road ahead.
Most employers already provide 401(k)s to their teams. The 2023 Employee Benefits Survey by the Society for Human Resource Management (SHRM) found that 94 percent of organizations provide a 401(k) or similar retirement plan. Furthermore, 84 percent provided an employer match on some or all of their employees’ contributions to those plans (the average percentage salary match was 7 percent). Offering a retirement plan will help your small business stay competitive to attract new employees.
Offering a 401(k) leads to tax savings: You can deduct your employer contribution to your team’s 401(k). And if you have fewer than 100 employees, there is even a tax credit of $500 to $5,000 for the first three years to help offset the cost of administration fees.
It helps people stick around:Survey after survey reveals that 401k plans are among the most coveted benefits for employees (typically after health benefits and PTO).
Which plan should I set up? SIMPLE-IRA vs. SEP-IRA vs. 401(k)
If you want to set up a retirement plan for your employees, you have a few options. Some of the most common types of plans include the SIMPLE-IRA, SEP-IRA, and traditional 401(k).
IRA stands for individual retirement arrangement. If you have 100 or fewer employees, a SIMPLE-IRA or SEP-IRA might make more sense (though the latter isn’t limited to the business size without capping the number of employees. But as you grow to more than 100 employees, sponsoring a 401(k) will likely be your best bet.
Here’s how each of these types breaks down:
SIMPLE-IRA
A SIMPLE (savings incentive match plan for employees) IRA is designed for companies with 100 employees or less. It was named well, and setting one up is fairly simple. You fill out an Internal Revenue Service (IRS) form, pay the fee, and that’s kind of it.
Here are the 2024 contribution limits for SIMPLE IRAs:
Employees younger than 50: $16,000
Employees 50 and older: $19,500
SEP-IRA
A SEP-IRA, or simplified employee pension, is for small business owners and those who are self-employed. Only employers can contribute to this kind of IRA, which is why it’s more suitable for business owners. In 2024, owners can contribute $69,000 or 25% of their employee’s income, whichever number winds up lower. Employer contributions are generally tax deductible, too.
401(k) plan
With a 401(k), there are a few more steps involved, but employees are allowed to contribute more—up to $23,000 in pre-tax contributions (and after-tax designated Roth contributions up to that limit, if permitted under the plan). That maximum amount goes up to $30,500 for those age 50 and older.
Not sure if a 401(k) is right for your business? The general rule of thumb is if your total payroll is at least $500,000, you’re probably a great candidate for a 401(k) plan.
How do I set a 401(k) up?
While some of the initial decisions are up to you, you don’t have to do everything yourself. Here are the steps you’ll want to take when setting up a small business 401(k):
1. Choose the type of 401(k) you want to offer.
There are a variety of 401(k) plans, which mostly vary by who can offer them, whether you’re required to match employee contributions, and compliance requirements.
Traditional 401(k) plan: Employees contribute to their account before taxes, which means withdrawals are taxed. As an employer, you must meet all compliance requirements for plan benefits.
Roth 401(k) plan: Employees contribute money they’ve already paid taxes on, so they can usually withdraw on a tax-free basis in their retirement years. As an employer, you must meet all compliance requirements.
Safe Harbor 401(k) plan: You’re required to contribute to employees’ accounts in order to qualify for a Safe Harbor 401(k), but in exchange, you get to skip the annual nondiscrimination testing, which is a series of tests that ensure all employees are treated equally under your plan. (You do have the fiduciary duty to make sure your plan is run in the best interest of your employees and must file a Form 5500 with the IRS and US Department of Labor each year, though.)
Solo 401(k) plan: You can only offer this plan if you’re a business owner with no employees, and it can cover the owner and their spouse. Solo 401(k)s come with all the benefits of a traditional 401(k) plan but have fewer compliance requirements, such as no nondiscrimination testing.
SIMPLE 401(k) plan: Like the SIMPLE-IRA, the SIMPLE 401(k) is designed for companies with 100 or fewer employees. While this plan has a lower annual contribution limit than other 401(k)s (in 2024, $16,000 or $19,500 for those 50 and over) and requires you to contribute to employees’ accounts, it doesn’t require nondiscrimination testing.
Automatic enrollment 401(k) plan: The name for this plan nearly says it all. Available for all employers, regardless of size, you can automatically enroll employees, unless they elect they don’t want to participate in the plan. You can combine this with any retirement plan that allows elective deferrals, such as a 401(k) or SIMPLE IRA. The employee salary deferrals are put into default investments.
2. Figure out your 401(k) policy details.
401(k)s are extremely flexible and let you determine everything from the eligibility requirements and vesting schedules to matching contributions and profit-sharing details.
To begin, it may help to think about what you want you and your employees to get out of it. Any retirement plan should be rooted in the values that make your company who you are.
As you’re going through the questions below, see how each one can help you bring the values you cherish to life.
Your team’s 401(k) contribution
How much do your employees want to invest in their 401(k)s?
Here are the 2024 contribution limits for most 401(k) plans:
Employees younger than 50: $23,000
Employees 50 and older: $7,500 in catch-up contributions + $23,000 = $30,500
Even if your business is tiny, the higher setup fees for a full 401(k) (rather than a SIMPLE 401(k)) may be worth it if you have a lot of high earners such as lawyers, medical staff, or engineers who want to contribute as much as possible.
Your 401(k) match
How much can your business commit to giving?
Matching your employees’ 401(k) contributions is a great way to attract and retain talent and motivate your employees to save for their future. And for Safe Harbor 401(k)s and SIMPLE 401(k)s, it’s required.
They also provide tax benefits: The great thing about 401(k) plans is that they help lower your tax burden, because you can deduct any contributions as a business expense. They are also tax-deferred accounts for employees, providing the ability to have their own contributions automatically withdrawn from paychecks before taxes are taken out, lowering their taxable income. Then, you can pad that amount by contributing a flat amount or matching whatever your worker added to the pot (usually up to a certain percent or amount).
Take your financial projections into account while choosing a plan. If your profits zigzag around and you’re a smaller company, a SEP-IRA allows you to adjust your yearly contribution from zero to 25 percent of a person’s income. On the flip side, a SIMPLE-IRA allows you to only add up to three percent.
More perks and tax advantages
Do you want to offer more than a standard account employees can contribute to?
If so, you could consider looking into 401(k) plans that offer other perks, such as the ability for employees to borrow a portion of their 401(k) tax-free (often called a 401(k) loan) or profit sharing. A profit sharing plan allows you to set aside some of your business profits, divide it among your employees, and add that money to their retirement savings as profit-sharing contributions. This can be a great way to motivate your team to work hard and help the company succeed.
401(k) vesting schedule
Do you want an extra incentive for employees to stick around?
If you contribute to your employees’ accounts, whether via matching or profit-sharing, it’s also important to think about their vesting schedule, which determines when the employee actually owns your contribution to their account. While some companies allow employees to own the entire amount as soon as it hits their account, others require employees to hit a milestone or stay at the company for a certain period of time before they earn your contribution.
401(k) maintenance and setup fees
How much are you willing to pay to actually run your plan?
The annual cost of offering a plan can range anywhere from hundreds of dollars to tens of thousands of dollars, depending on your plan design and whether or not it has all the bells and whistles, including more customization and advice from experts. Plans that are more actively managed tend to have higher administrative costs (which can eat into your employees’ returns).
There are two types of fees to know about:
Fees your company will have to pay (which are typically based on your number of employees), and
Management fees that are taken out of employees’ investments
At Gusto, we partner with our service provider Guideline to offer low-cost 401(k) plans. Learn more about 401(k)s with Gusto.
Enrollment timing
Each plan has different deadlines, so double-check that you have enough time to provide the plan you want in the year you want it to show up on your taxes.
3. Choose your 401(k) provider.
Once you decide what kind of plan(s) and features you want to offer and how much you’re willing to pay to run your plan, simply shop around and call the provider that offers the best option. If you don’t have a huge team, you may also want to make sure the provider you choose will keep you compliant, handle recordkeeping, and take care of day-to-day plan administration so you don’t have to do it all yourself or manage a bunch of different vendors.
As employees usually set up automatic contributions that come out of their paycheck, it may also help to explore options like Gusto that tie 401(k) deductions directly to payroll, which can save time, reduce errors, and save money.
4. Choose your 401(k) trustee.
Before you start collecting contributions, you need to set up a trust account, where you’ll hold your 401(k) plan’s assets. Many retirement plans, including 401(k) plans, are governed by the Employee Retirement Income Security Act (ERISA). By law, you must name at least one fiduciary in a written plan document, who serves as a type of financial advisor administering and managing the retirement plan. It’s common for one of the fiduciaries to be the trustee. The trust for a 401(k) must also have at least one trustee, who handles contributions, plan investments, and distributions, which can come in the form of a lump sum, rollover, periodic distribution, or an annuity or other lifetime income distribution.
This is to ensure these funds are only used to benefit those participating in the plan (and their beneficiaries). You may choose to keep these funds in a brokerage account that is protected under the Securities Investor Protection Corporation (SIPC). The trustee, which could be a financial institution, is responsible for collecting contributions, investing them, and making sure the money gets to the participants. Mutual funds are typical investment options through a 401(k).
5. Document your official 401(k) plan.
Once you’ve decided which plan(s) you want to offer and the features of each plan, the IRS says you need a written plan document “that serves as the foundation for day-to-day plan operations.” This document should include key details, such as:
Which employees are eligible to participate
How your employer contributions work
Any applicable fees employees may need to pay
When employees can withdraw their money
Who employees can contact for more details
This will help minimize questions on your employees’ end and demonstrate compliance if you’re ever audited. Fortunately, many 401(k) administrators will take care of this for you.
6. Onboard employees.
Finally, let eligible employees know about your 401(k) before it goes into effect, and share a summary plan description so they can understand the details as possible plan participants. It may help to host an initial info session to give your team a high-level overview and answer most of their questions in one fell swoop.
