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Setting Up a 401(k) as a Small Business: Key Requirements and Restrictions

As a small business owner, you may be considering the benefits of offering a 401(k) plan to your employees. You may live in a state that is mandating businesses to offer retirement plans and are investigating private plan options. Whatever your situation, saveday is here to help navigate the dos and don’ts of sponsoring a retirement plan.

 A 401(k) plan is a popular retirement savings method that provides tax advantages for both employers and employees. However, before diving into the world of retirement plans, it’s important to understand the key requirements and restrictions associated with setting up and managing such a plan.

Who can set up a 401(k) plan?

A 401(k) plan can be established by various types of small businesses, including sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and certain non-profit organizations. The eligibility to set up a 401(k) plan depends on the structure and nature of the business. To learn more you can read the IRS 401(k) page here, but we’ve listed the key considerations below…

Key Considerations:

  1. Eligibility: A 401(k) plan must be offered to all eligible employees, which includes part-time workers, as long as they meet specific criteria such as age and length of service. Ensuring compliance with eligibility requirements is essential to avoid discrimination issues. Saveday can help you navigate the eligibility criteria and ensure that your plan is inclusive and compliant.
  1. Contribution limits: The IRS sets annual limits on the amount employees can contribute to their 401(k) accounts. For 2023, the elective deferral limit is $20,500, with an additional catch-up contribution of $6,500 for individuals aged 50 or older. These limits are subject to adjustment by the IRS in subsequent years. Saveday’s platform enables easy tracking of employee contributions and ensures that they stay within the IRS limits.
  1. Employer Contributions: While not mandatory, employers have the option to make contributions to their employees’ 401(k) accounts. These contributions can take the form of matching contributions or profit-sharing contributions. However, there are rules and limits governing employer contributions, including non-discrimination requirements. Saveday can assist you in designing and implementing an employer contribution strategy that aligns with your business goals and maximizes employee benefits.
  1. Vesting: Vesting refers to the ownership of contributions made by the employer. The IRS has specific rules on vesting schedules, which determine when employees have full ownership of employer contributions. Understanding vesting schedules is crucial for both employers and employees. Saveday can help you establish vesting schedules that are fair and compliant with IRS regulations.
  1. Testing and Reporting: The IRS requires certain tests to ensure that the 401(k) plan does not disproportionately favor highly compensated employees. These tests include the Actual Deferral Percentage (ADP) test, Actual Contribution Percentage (ACP) test, and top-heavy testing. Additionally, annual reporting of the plan’s activity is required through Form 5500, which provides transparency and accountability. Saveday offers complimentary custodial services – which means we do all the reporting and filing for you, at no additional cost.
  1. Fiduciary Responsibilities: As a plan sponsor, you have fiduciary responsibilities to act in the best interests of the plan participants. This includes prudently selecting and monitoring investment options, providing plan information to participants, and ensuring compliance with Employee Retirement Income Security Act (ERISA) regulations. Saveday can act as your ERISA 3(16) and 3(38) fiduciary, relieving you of some of these responsibilities.

Starting a 401(k) at $0 Cost to Your Business

By partnering with saveday, you’ll not only set your small business on the path to a successful 401(k) plan, but you’ll also empower your employees to achieve a secure retirement. With our expertise and personalized guidance, saveday becomes your trusted ally in navigating the complexities of 401(k) plans. We’ll ensure that you meet all key requirements, comply with regulations, and provide your employees with valuable benefits.

Don’t wait any longer to take the first step towards offering a competitive retirement savings option for your employees. Contact saveday today and discover how our services can make a significant difference in your small business. Together, we’ll create a plan that meets your unique needs and helps your employees build a solid financial future. Your commitment to their well-being will set your business apart and contribute to their long-term success. Let saveday be your partner in making it happen.