How do you set up a 401(k) for small businesses?

Q. I run a small local business in my town and we have been doing pretty well for the last three years. I want to provide a 401(k) plan for my employees, but have no idea how to go about it. Is it a complicated process where I will need to hire others, or can I do it on my own? What are the steps involved? Meredith, Georgia.

Hi Meredith, setting up a 401(k) for small businesses is not complicated but requires your attention. For any small business, employee benefits is an effective way to attract more employees, and keep your current employees happy. You can find the steps involved described below.

  • Decide whether you are outsourcing or not

The first step of setting up a 401(k) plan for small businesses is to decide whether you will be hiring other people like a bank, insurance company or a professional to set up and maintain the plan, or if you will be doing all this yourself. While you will save money by taking up the responsibility yourself, it is not the most time-efficient option. If you have little to no experience in setting up a 401(k), it may be better to hire a company that has a number of years of experience like 401k Easy.

  • Create a legally binding written plan document

A written plan document is a legally binding document which contains all the information about the plan including terms and conditions, the type of plan you choose, and features such as contribution amounts and which employees are eligible, how the funds will be contributed and distributed, and so on.

  • Set up a trust for holding the assets

The next step is to set up a trust for holding the assets of the 401(k) plan in order to ensure that the contributions are not misused in any way. While setting up this trust, you must also appoint a trustee. The trustee will be the one handling the contributions and distributions.

  • Find a way to handle record-keeping

It’s not enough to simply have a 401(k) plan. Your small business should have a way to keep track of the details such as contributions, distributions, investments, expenses, earnings, losses and more. If you are the one maintaining the plan, a payroll software can help you out.

  • Inform eligible employees

Now that your 401(k) plan is ready, you can inform all eligible employees about it by using a summary plan description. Make sure it contains crucial information such as the features, benefits, and rights of the employees.

The backbone of any organization is its employees. Keep them happy, and they will reward you with increased productivity and commitment. A 401(k) plan is a sure-shot way to keep your employees happy. Try out 401k Easy’s online services to help you open accounts for your employees in a smooth and easy manner.

What are the things you need to know before taking out a 401(k) loan?

Q. I am currently in a tight financial situation. The company I have worked in for over ten years offers a 401(k) plan to its employees. I was thinking of taking out some amount from my 401(k) account as a loan. However, I have heard that this may not always be the best option. I wanted to know more about how a 401(k) loan works, and any other thing that will be of help. Scott, Wisconsin

Hi Scott, while you may be tempted to take out a 401(k) loan, it is true that it may not always be the best option since failure to repay will have serious consequences. Consider it your last resort if you have no other options. Many people think that since you are borrowing your own money, it is a simple process. But the truth is that taking out a 401(k) loan is not as simple as it sounds.

If you still think that borrowing from your 401(k) plan is the way to go, then there are some things to keep in mind. The first thing you have to check is how much you can borrow. Usually, the limit is set to 50 percent of your retirement plan or $50,000 – whichever is the lesser amount.

When borrowing from your 401(k) plan, you don’t have to go through a credit check since you are taking out your own money; no financial institution is loaning you the money.

However, even though you do not have to run a credit check, you still have to pay the interest. The interest rate depends upon your loan plan, which is usually based on the current industry rates. Apart from this, taking out a 401(k) loan will also require you to follow a strict repayment schedule. This means that you have to pay back your loan, along with interest, within five years. However, if you use the loan to buy a home, the period for repayment is usually more than ten years.

Lastly, make sure that you do not miss any of your payments. Failure to repay your 401(k) loan on time will have some serious repercussions. If you miss a payment, your employer will regard it as you withdrawing from your 401(k) plan. This means that not only will you have to pay taxes on the loan you take out but also pay the penalty for withdrawing from your retirement plan early.

Has the government increased the contribution limit for 401(k) in 2018?

Q. Hi, I recently heard about an increase in the 401(k) contribution limit and would like to know about the possibilities regarding the same. I am about to max out my 401(k) contributions and also looking for ideas on how to save better this year. My current employer offers a 401(k) retirement savings plan. Christopher, North Carolina.

A. Yes, it is true. An increase in the 401(k) contribution limit has been announced by the government after its annual reassessment. This means that almost 80 percent of the workforce that counts on its 401(k) accounts as a key source of income after retirement can expect benefits.

In 2018, the 401(k) contribution limits will be increased by $500 to reach $18,500. 401(k) is an excellent option for retirement savings since the money continues to grow without being taxed, even though there is a restriction on the amount you can withdraw each year.

Today, a 401(k) plan is the most popular retirement savings scheme offered by an employer to the workers. And now, with an increase in the contribution limit, you can expect bigger savings opportunity and greater security for your post-retirement life.

The optional deferral limit was kept constant by the IRS in 2017. However, this year, it has chosen to increase the limit so that it is par with the continuously rising living costs. While there has been an increase in the contribution limit for 401(k), it is important to note that the catch-up limit for contribution remains the same in 2018 i.e. $6,000 on a total of $24,500. This is the limit that permits people who are 50 years or more to make higher contributions.

It will be vital for payroll and HR managers to make adjustments to their systems and to communicate about the new contribution limits to their employees in annual enrollment materials. The increase in the 401(k) contribution is the only one that has happened since the 2015 plan year and indicates a 1.97 rise in the consumer price index (2016-17 third quarter comparison).

You need to note that the limits are only applicable to optional 401(k) deferrals. This means that they are the contribution limits which one chooses to withhold from their paycheck in order to make contributions their account. In the given scenario, it might be a good idea for high earners to make slightly higher contributions as it will help them reach their maximum annual limit.

 

Nondiscrimination Testing with 401k Plans

I want to set up a 401k plan for my auto parts shop. Do I need to ensure that it complies with the nondiscrimination regulations year after year? Michael P. Ladd, Oklahoma City, OK 

A 401k plan is a retirement benefit plan that was created with the intent of allowing employees to save in an effective manner for their future. The many benefits and tax advantages offered with these plans are all established in line with this objective. This is also the reason why the government insists that these plans are offered to all employees irrespective of their position within your business or the total compensation they earn.

To get all the tax benefits that a 401k plan offers to participants, it should give benefits to all employees, including the rank and file staff. A plan that only benefits the business owner or top level management fails to pass theIRS’s non discrimination test. This test compares the plan’s participation as well as contributions made by rank and file employees with those of top level employees and the owner/ management.

Annual testing is mandatory for all regular/ traditional 401k plans to verify that they are non discriminatory. Through this testing it is verified whether the contributions made on behalf of rank and file employees is in proportion with that made for the top brass of your business.

If you want to avoid getting into the testing and verification loop then aSafeHarbor401k is the right 401k plan for your business.SafeHarborplans are exempt from the annual non discrimination testing that is required for the other 401k types. This plan has some inbuilt features that ensures that all employees are given equitable treatment when it comes to contributions.

Talk to an investment advisor to know more about Safe Harbor 401ks and the advantages they offer for your business. If you will be using a DIY 401k package like http://401keasyonline.com/, you can browse through their website or ask their support staff for help on setting up and managing aSafeHarbor plan.