401(k) Setup for Small Businesses: A Simple Guide

Whether you plan to go at it alone or you’re curious about using third parties that can help you reward your employees for their hard work and dedication, this guide to setting up a 401(k) for a small business can help you start off on the right foot. This is where a seamless payroll integration, like the offerings from Clover Payroll by ADP, can help your small business manage contributions while staying compliant.

Benefits of offering a 401(k) plan at your small business

Why offer a 401(k)?

Setting up a 401(k) plan for your employees can benefit both your team and your small business’s bottom line.

Here are some of the benefits that make investing in 401(k) planning worth every penny.

• Makes employment more attractive: The job market can be a competitive place, with multiple companies all vying for the same appealing candidates. Offering retirement benefits, like a 401(k) plan, can help position your company as a top choice. In addition to playing a role in the recruitment process, a 401(k) can help retain talent, too.
• Increased productivity and loyalty: Studies have repeatedly shown that employees who feel appreciated are more engaged, meaning they’re more interested in their jobs. Investing in your team via a 401(k) could be a good way to demonstrate your loyalty, garnering you plenty of the same in return.
• Decreased tax liability: What’s good for the team is good for the leadership, and that includes contributing to a company-wide 401(k) plan. As the owner or manager, you can reallocate some of your salary to your personal 401(k) account, lowering your taxable income. Implementing a 401(k) can also help increase tax savings for your small business, including possible deductions for startup costs and matching contributions.
• Perks beyond those offered by other retirement plans: Employers often choose 401(k) plans over alternative offerings because a 401(k) benefits employees at all levels of the company. There’s also a lot of diversification, with contributions allowed to grow through a portfolio that can include mutual funds, stocks, bonds, savings accounts, money market funds, and more. Employees are also allowed to take their investment with them if they leave their position, which can be a pretty empowering feeling.

How to set up a 401(k) plan for a small business

Learning how to set up 401(k) for employees is not unlike the process you went through when you were first figuring out how to launch your business. You’ll need to do lots of research, lay out a strategy, communicate clearly with everyone involved, and keep a close eye on operations even after things are in motion. It can be a lot of work, but using a platform with built-in employee management features and plenty of third-party software integrations can help when it comes to tracking contributions and doing payroll. An option like Clover Payroll by ADP allows you to easily manage employee contributions, automate deductions, and stay compliant with federal regulations—all within your payroll system. Visit ADP’s website to learn more about which ADP 401k plan might be right for your small business.

In the meantime, here’s how to get started.

Conduct basic research

Before you launch your 401(k), you need to understand your options—and which of those options you may want to avoid. You don’t need to be a large business to launch a 401(k) plan, but there are some providers that charge small businesses unreasonable fees just for administering a plan. You can choose to set up the plan yourself instead, or search for a trustworthy bank, insurance company, or mutual fund provider that offers reasonable rates and has a proven track record of open and honest communication. When evaluating providers, look for partners, like ADP, that offer comprehensive plan options and can handle the compliance complexity for you.

Also, look into some basic terminology and actions associated with a 401(k). Here are two of the biggest concepts you’ll need full grasp of before continuing:

• What are employer contributions? Employer contributions are the amounts put into an employee’s 401(k) plan by the company. The amount contributed varies depending on several factors, including the type of plan selected, and these contributions are often capped based on a percentage of the employee’s total compensation.
• What are employee contributions? Employee contributions are the amounts an employee defers from their paycheck into a 401(k) account. These contributions can be made before or after taxation takes place — those options depend on the plan chosen, not just employee preference.

Choose a plan

There are three 401(k) plans to choose from:

• Traditional 401(k) plan: The most flexible of these three plans, the traditional 401(k) allows employer-directed contributions, employer matching, or both—it’s up to the employer. Other options include vesting schedules (wherein employees gain ownership over employer contributions after a predetermined amount of time), and pre-tax contributions taken automatically through payroll deductions.
• Safe harbor 401(k) plan: Safe harbor plans are like traditional plans with two main differences. The first is that employer contributions are fully vested at the time of the contribution. The second is that the tax rules governing the plan are far simpler.
• SIMPLE 401(k) plan: This plan is specially geared toward small businesses with 100 or fewer employees, assuming those employees received at least $5,000 in salary or other compensation in the previous calendar year. Employers who maintain a SIMPLE plan cannot offer any other retirement plans and they must make fully vested contributions.

Note also that traditional 401(k) plans are the only plans subject to nondiscrimination testing, which checks whether employer contributions are taking place fairly versus being weighted in favor of those team members with bigger titles and/or compensation packages.

Secure a trust fund for asset safekeeping

If you’re setting up your small business 401(k) plan on your own, now’s the time to set up a trust — with at least one trustee in charge — to hold and manage contributions and associated distributions. The trustee you choose will have quite a bit of responsibility and power, so consider this step very carefully.

If you’re entrusting plan setup to a third party, they’ll likely take point here. If you work with a third-party partner like ADP, they can set up and manage the legal details (like the trust fund), lifting the entire administrative burden. For example, the ADP Save4Retirement Pooled Employer Plan (PEP) combines plan administration and payroll integration under one managed solution,

Establish a paper trail

You cannot underestimate the importance of paperwork when it comes to recording 401(k) setup and activity. Everything from contributions and benefit distributions to earnings and losses must be recorded regularly and accurately. These records will be used to prepare the must-have annual report for the plan, which is in turn filed with the IRS. They’re also integral to proving the veracity of your plan-related actions if you’re ever challenged by employees or the federal government.

Other key documents, such as filing the right tax forms for small business, will help with transparency, too.

Discuss the plan and all relevant details with your employees

Finally, you must disseminate all essential plan information to employees eligible for enrollment and contribution. Outline all the details of plan benefits, requirements for participation, and other tidbits like various employee perks.

Cost to set up a 401(k) for a small business

The cost of setting up a small business 401(k) includes a one-time fee that may be as little as $500 or well into the thousands, depending on the scope and complexity of the plan. Remember, though, that some of these costs are tax deductible (as discussed above).

Eventually, you’ll also have to cover the costs of employee contributions and administrative expenses, too. Employers are usually tasked with paying for plan administration fees (this includes things like accounting, recordkeeping, compliance testing, and tax prep/filing). The employees participating in the plan usually bear the cost of investment fees and individual service fees.

Additional retirement plan options

If you’ve read through this small business 401(k) setup guide and are still unsure if this is the path that’s best for your business, you may want to consider other retirement plan options.

• Roth 401(k): A Roth 401(k) is a type of retirement savings account sponsored by employers. The account is funded using after-tax income, but subsequent withdrawals (assuming you wait until retirement) and any earnings made from the funds in the interim are tax-free. If you withdraw money before the age of 59 ½, penalties may apply.The same goes for withdrawals made on accounts that have been active for less than five years.
• Simple IRA: SIMPLE IRAs carry the benefit of low to no startup and operating costs. These plans are only available to small businesses, meaning those with 100 employees or less, and employers must not maintain any other type of retirement plan. Employers are still required to contribute funds to their employees’ accounts, all of which is 100% vested at the time of contribution, but employee participation and contributions are completely voluntary.

Setting up a 401(k) plan for your small business requires a significant investment in time and you’ll have to make room in your budget for startup and admin costs, but the benefits may very well outweigh the use of resources. From improved recruitment to boosting employee satisfaction, the perks of a 401(k) make it well worth exploring how these plans could fit into your overall vision.

Before you get started, we encourage you to explore the seamless payroll and 401(k) integration options available through Clover Payroll by ADP to see how a trusted partner can streamline your process.

Other articles you may like

• How to onboard a new employee (including new hire checklist)
• How to create employee incentive programs for your small business
• Tips and strategies to recruit and retain millennial employees

This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.

Editorial Team

401K, ADP, Guides, payroll, Run your business, Staffing

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