Guide to Starting a 401(k) for my Small Business
Is a 401(k) Right for my Business?
Setting up a 401k for a small business has never been easier and more accessible than it is right now. Enacted into law January 1st, 2020, The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed by Congress has the rare distinction of receiving strong bi-partisan support. The new law was written with the goal of encouraging more U.S. citizens to save for retirement. Through a team of experienced professionals and cutting-edge technology, LT Trust’s small business 401(k) solutions provides employers a cost effective 401(k) plan to assist their participants in preparing for retirement.
If you’re a small business owner looking to start a 401(k), don't hesitate to contact us online or call us at (833) 458-4015 and an expert at LT Trust will be happy to help.
Requirements for Offering a 401(k)
How many employees do you need to have a 401(k) plan?
An employer of any size may have a 401(k) plan if there is at least one employee that is paid a W-2 wage. Even a sole proprietor may set up a “solo” 401(k) plan if they are reporting income that is subject to payroll taxes such as Social Security and Medicare.
Business Benefits of Offering a 401(k)
Offering a 401(k) has several tax benefits
The tax benefits for a business starting a 401(k) plan were revamped with passage of the SECURE Act. Previously, a flat $500 a year tax credit for each of the first 3 years was the business’ tax savings of starting a new 401(k) plan. The tax benefits are much more enticing now, albeit more convoluted at the same time.
Now, the limit is the greater of (1) $500 or (2) the lesser of; $250 multiplied by the number of non-Highly Compensated Employees (non-HCEs) eligible for plan participation or (b) $5,000.
Automatic enrollment - Small businesses can earn an additional $500 tax credit by adding an automatic enrollment feature to a new or existing 401(k) plan.
The credit is available for each of the first three years the feature is effective. When combined, these credits can total up to $5,500 per year ($16,500 for 3 years).
Helps with the Attraction and Retention of Talent
When it comes to employer-sponsored retirement plans, a 401(k) plan is almost a “must-have” employee benefit. In a tight employment market, benefits are often a significant factor that determines what company to choose to further one’s career.
Helps instill a people-first culture
The SECURE Act that was passed and enacted on January 1st, 2020 received strong bipartisan support, highlighting the importance of educating the U.S. populace on saving for retirement. Offering a 401(k) plan provides employees with the easiest avenue to save as contributions are simply deducted from their paycheck.
How do I set up a small business 401(k)?
With LT Trust, starting and maintaining a 401(k) plan is a straightforward process compared to other employee benefits such as health care. With 4 simple steps, an employer can set up a 401(k) plan that will provide an invaluable benefit to their employees, offering them the opportunity to build their nest egg to reach their goals of a comfortable retirement. Let us explore in greater detail these simple 4 steps.
Step 1 - Select the right plan for your business.
Step 2 - Select the right partners.
Step 3 - Setup your 401(k) Plan
Step 4 - Keep it running smoothly.
Step 1 - Selecting the Right Plan for Your Business
The term “401(k)” refers to the actual IRS Code that outlines how an employer can set up a standard retirement plan that includes special tax benefits. Because the IRS is involved, there are several different rules that a plan must follow to remain compliant. Fortunately, LT Trust does all the heavy lifting to ensure that your plan does not run afoul. For all small businesses, there are two primary types of 401(k) plans to choose from.
Traditional 401(k) Plan
One of the best attributes of a 401(k) plan, compared to other retirement vehicles, is the built-in flexibility. When a business sets up a plan for the first time, plan design choices include, but are not limited to, the following:
Eligibility requirements such as requiring employees to be employed for up to 1 full year
Distribution options such as loan and hardship withdrawals
Employer matching contributions
Vesting
One thing that is uniform with 401(k) plans is that they require “non-discrimination testing”. The main reason the IRS has implemented these rules is to ensure that the only employees benefiting from the plan are not just Highly Compensated Employees (HCEs). The non-discrimination testing compares two groups of employees; (HCEs) which include any employee that owns more than 5% of the company or received in excess of $130,000 in compensation in 2020 and Non-Highly Compensated Employees (NHCEs). If a plan fails these tests, the HCE’s will not be able to contribute as much to the 401(k) plan as they would like to. Now, there is a simple solution when it comes to by-passing these tests altogether...... a Safe Harbor provision.
Safe Harbor 401(k) Plan
An extremely popular way to avoid non-discrimination testing is to adopt a Safe Harbor 401(k) plan. In exchange for required employer contributions, Safe Harbor 401(k) plans can bypass the required non-discrimination testing. Because of this benefit, a large majority of small business 401(k) plans that are set up include a Safe Harbor provision. There are three Safe Harbor employer contribution options to choose from:
A 3% Non-Elective employer contribution is given to all eligible employees, regardless of whether they contribute themselves. This arrangement also requires the employer contributions to be immediately vested.
A Qualified Automatic Contribution Arrangement (QACA) Safe Harbor Match automatically enrolls all eligible employees and provides a dollar-for-dollar employer contribution on the first 1% and 50 cents on the dollar for the next 5%. In all, if an employee contributes 6% of their total wages, the required employer contribution maximum is 3.5%. A 2-year cliff vesting schedule can be applied to the employer contributions as well with this option.
Think of a Safe Harbor 401(k) plan as “buying” your way out of the required non-discrimination testing with the benefit being HCE’s, including business owners, will be able to contribute the maximum allowable.
401(k) Plan Selection FAQs
Traditional vs Roth 401(k). What is the difference?
The traditional option was the original 401(k) contribution type that allows employees to contribute on a pre-tax basis and defer paying taxes until withdrawing money during retirement, at which point the distributions would be considered earned income and taxed as such.
The Roth option is an after-tax contribution, so taxes are paid up front. The tax benefit is that all principle and investment earnings can be withdrawn tax free upon reaching the age of 59 ½ if the account has been held for five years. This is a great option for younger employees first starting to save as they are likely to be in a lower tax bracket now than at retirement.
Step 2 - Selecting the Right Partners
The 401(k) industry is filled with specialized terms and acronyms that make heads spin. That is why finding the right 401(k) partner backed by a team of professionals is crucial to making sure your plan runs smoothly and efficiently. Through the combination of automation and our experienced Client Service Team, LT Trust prides itself on being a one-stop fully bundled 401(k) solution that clients can trust to ease their administrative burden.
401(k) Recordkeepers
A 401(k) recordkeeper is responsible for handling all day-to-day functions of the plan such as processing payroll contributions, investment transactions and providing tools such as the websites for participants and plan sponsors alike to view and manage the 401(k) plan.
Payroll System
One of the biggest benefits of 401(k) plans is the ease of continuous payroll deductions that are deposited into participant accounts every pay period. While LT Trust is not a payroll company, we have now offer payroll integrations with several nationally known payroll companies that systematically upload contributions every pay period without any involvement of the Plan Sponsor. For those companies utilizing payroll providers in which we do not have integrations, our innovative Payroll Assist program is available to all our clients to ease the administrative burden of processing payroll each pay period.
401(k) Third Party Administrators
A Third-Party Administrator (TPA) has the all-important role of ensuring a 401(k) plan is abiding by the plan rules outlined in the plan document, conducting the annual compliance testing, preparing the appropriate federal government filings, and distributing all required participant notices. A TPA can be a separate entity from the recordkeeper. The arrangement of a separate TPA is still quite common for insurance-based 401(k) recordkeepers. LT Trust can act as both the recordkeeper and TPA.
Financial Advisors and Fiduciary Responsibilities
A financial advisor’s role in a 401(k) plan is to educate and provide guidance to both participants and plan sponsors when it comes to the investment options. Furthermore, a Registered Investment Advisor (RIA) is required to act in a fiduciary capacity for all their clients. For 401(k) plans, there are two specific types of fiduciary arrangements in accordance with the IRS Code.
Section 3(21) Advisor
A 3(21) Investment Advisor works with plan sponsors to recommend the investment lineup but does not have discretion over plan investments. It is up to the plan sponsor to approve the fund lineup as well as any recommended changes over time.
Section 3(38) Investment Manager
The 3(38) Investment Manager will have full discretion and control to select and monitor the fund lineup. By delegating the job of managing the investment lineup to the 3(38) Investment Manager, a plan sponsor’s liability is limited to selecting and monitoring the 3(38) Investment Manager and benchmarking the reasonableness of their fees.
Step 3: Setup Your 401(k) Plan
When starting a 401(k) plan with LT Trust, you can expect a streamlined process that is managed by our team of experienced professionals. During the setup process, an Implementation Specialist will be the dedicated point of contact until the plan is ready for the first payroll contribution. There are 3 primary steps is the implementation process that LT Trust will shepherd along the way.
Create a 401(k) Plan Document
Earlier, it was mentioned that one of the main benefits of a 401(k) plan versus other retirement plan options is the flexibility to choose different plan provisions. All those different plan design options are outlined within a plan document that is approved by the IRS. When starting your plan, an LT Trust team member will schedule a call with the business owner to discuss all the options in detail and assist with creating a plan design that aligns with your objectives. After that call, we will generate the official plan documents to be signed. At that point, congratulations are in order as you now officially have a 401(k) plan for your employees' benefits!
Distribute Plan Information
Now that the rules for the new 401(k) plan are established, it is time to notify all the employees of this important benefit. The IRS has specific guidelines for disclosures that need to be distributed to all eligible employees. LT Trust prepares this required information and will provide it to the plan sponsor to distribute appropriately. Initial information includes plan highlights, fee disclosures, and investment information.
Onboard Employees
After all employees have been notified of the new plan, it is time to enroll. LT Trust has a dynamic online enrollment tool that allows participants to easily sign up in less than 5 minutes. During the enrollment process, participants will select the amount they would like to contribute each pay period, choose investment options, and select a beneficiary.
401(k) Plan Setup FAQs
How long does it take for a small business to set up a 401(k)?
After selecting LT Trust as your 401(k) recordkeeper, you can expect to start contributing to your new plan in 45 days. During the 45 days, we will be gathering employee data, create the IRS-approved plan documents to govern the plan, and allow time for participants to enroll.
Should I match employee contributions?
Although employer contributions are not required in a 401(k) plan, it has been proven repeatedly that a matching contribution will boost participation to a 401(k) plan.
How much does it cost to set up a 401(k) for a small business?
LT Trust does not charge a setup fee to start a plan with us.
What are the ongoing costs for a 401(k)?
At LT Trust, the ongoing fees are both cost-effective and easy to understand:
$1,600 Annual Base Fee
$36 Annual per Participant Fee
0.10% Annual Asset-Based Fee
Contact Us to learn about our impending release of a much lower cost option geared towards employers beginning a plan for the 1st time.
Step 4: Keep it Running
On the surface, 401(k)’s may seem like a labyrinthine of laws and administrative tasks that need to be managed by employers. At LT Trust, every plan is assigned a dedicated Relationship Manager averaging 18+ years of industry experience to ensure that your plan runs smooth and remains compliant with IRS regulations. LT Trust clients have the peace of mind that they have a single point of contact for any questions or concerns about their 401(k) plan. There is nothing that our team has not experienced in a 401(k)!
As 401(k) plans continue to play a significant role in the U.S. retirement system, LT Trust’s commitment is to ensure that every employer can provide their employees a path to a dignified retirement.