two people hiking in mountains
From identifying which type of plan to offer to researching the various financial institutions that provide them, there is some research that goes into offering a 401(k). — Getty Images/AscentXmedia

No matter the size of your company, employee retirement plans are important for attracting and retaining talented workers. Types of employee retirement plans can vary from Individual Retirement Accounts (IRAs) to profit-sharing plans to 401(k) plans.

Offering a 401(k) has become a much more popular option for small businesses over the years because financial institutions have made them easier to set up and manage. Additionally, it can provide tax advantages for both you and your employees.

Here’s what you need to know about setting up a 401(k) for your small business.

The basics of a small business 401(k)

First, let’s discuss what a 401(k) plan is and why a small business might want to set one up. A 401(k) effectively is a retirement plan where employees can hold back a portion of their salary each paycheck and then that money is invested on a pre-tax basis in an investment plan. Many companies also offer to match the contributions employees make as an incentive for employees to use the 401(k).

One of the biggest reasons to add a 401(k) offering is to attract and retain talent. “Retirement security is such an important concept for all employees,” Ben Thomason, executive vice president of revenue at Vestwell, told CO— last year. “To me, that is the ‘why’ of offering 401(k)s — to attract the right talent so your business can grow the right way. The right people make all the difference.”

One other reason for companies to add one is that it can provide tax benefits for both employers and employees. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which was signed into law in the U.S. in December 2019, offers small businesses a tax credit up to $5,000 for three years for setting up a new retirement plan like a 401(k). On the employee side, 401(k) contributions are pre-tax, so their taxable income decreases and they pay less tax overall while saving for the future.

Companies have a fiduciary responsibility to make sure the selected 401(k) program is run appropriately. This means you should not offer a 401(k) without doing the proper planning and research.

Financial institutions that offer 401(k) plans

While there are many banks and financial institutions that can help businesses implement a 401(k) plan, not all offer plans that specifically target small businesses.

Here are a handful of companies that can help small businesses set up a 401(k):

Of course, while these are all fine options, the best thing any small business can do is to shop around and find the best partner for your specific needs. Each financial company offers its own fees for helping to manage your 401(k), so research is key here. You can also speak with your financial advisor or current bank to see what they recommend.

Each financial company offers its own fees for helping to manage your 401(k), so research is key here.

401(k) plan options

Once you’ve decided which company you want to work with, it’s time to actually set up a 401(k) plan. First, you’ll want to research the types of 401(k) plans each company offers. The three most common 401(k) plan types are as follows:

Traditional 401(k) plan

Under this basic plan, employees will be able to make pre-tax and/or after-tax (Roth) contributions to their 401(k) investment. Companies usually will also be able to configure factors such as:

  • What investment fund(s) you want the plan to contribute to.
  • What percentage (if any) your company will match of the employee contribution.
  • What age should employees be eligible to participate.
  • How long should employees work before qualifying?

Safe harbor 401(k) plan

This plan is similar to a traditional 401(k) plan, but it is specifically designed to help businesses avoid “nondiscrimination tests.” 401(k) plans must not favor any specific individual and using this plan helps businesses ensure they don’t favor high-earners. The safe harbor plan lets companies bypass nondiscrimination tests as long as the employer makes set contributions that are fully vested.

SIMPLE 401(k) plan

The SIMPLE 401(k) is a cost-efficient plan offered to small businesses with less than 100 employees and is not subject to nondiscrimination tests, just like the safe harbor 401(k) plans. Under this plan, the employer must make employer contributions that are fully vested.

Finalizing your 401(k) selection

Next, with the help of a financial advisor, choose the plan that makes the most sense for your company and your employees. If you have a relatively small company with only a few employees, your plan selection will likely be quite different if you have 90 employees.

The final step will be to inform your employees and to update your benefits package to reflect the change, so you can clearly tell potential employees about the 401(k) plan, as well. You will likely want to mention the benefit on all of your job listings in the future, too.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Want to read more? Be sure to follow us on LinkedIn!

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

Brought to you by
Simplify your startup’s finances with Mercury
Navigating the complex finances of a growing startup can be daunting. Mercury’s VP of Finance shares the seven areas to focus on, from day-to-day operations to measuring performance, and more.
Read the article