Getting the most out of your 401k plan

I have recently set up my very own T-shirt printing business and currently have just 4 employees under my management. My employees have requested that I set up a 401k plan for them, but I do not really have much knowledge about how to go about doing it. While the procedure looks straightforward, is there something that I should be wary about in particular?
Samantha McIntyre

Hello Samantha,

You are certainly making a wise decision for your company’s and your employees’ future by setting up a 401k plan for them. Fortunately for you, there is plenty of information available to help you set up a plan while avoiding any potential pitfalls. Let us take a brief look at some of the more common problems that employers generally face when it comes to setting up these plans.

One of the most common errors that employees end up falling victim to is not providing adequate and up-to-date documentation. The IRS requires every employer to devise a planning document that is in compliance with all governmental regulations. As and when new tax regulations and policies are developed, 401k plans will also need to be amended accordingly. Even if you have temporarily suspended your 401k plan, as long as it includes any assets, it is still subject to inspection and cancellation by the IRS.

Another common mistake that employers make is in failing to inform all relevant parties about any amendments to an existing 401k plan. When tax regulations change, you must make the requisite changes to your 401k plan. Then, you will need to inform the changes to all relevant vendors as well as tax-related professionals who are part of servicing the plan. These changes could relate to anything such as deferral of compensation, non-discrimination policies, and alterations to employee compensation.

Different 401k plan providers offer varying definitions and rates of compensation. If you are looking for a comprehensive and transparent plan, we recommend that you visit When you make changes to employee allocations, you must check with your provider if it is in compliance with their own regulations. The new definition must comply with something known as the Employee Retirement Income Security Act (ERISA).

Finally, it is also important to understand the relationship between non-highly compensated employees and highly compensated employees. NHCEs typically choose to save a greater percentage of their income for retirement. As these percentages change, the percentage for HCEs also changes in proportion. There should be no discrepancy between the two. Inform your employees when their contribution percentages are likely to be altered.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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