Setting up a small business 401(k) plan

Once thought to be reserved for large corporations, 401(k) plans are becoming part of benefits packages that more small businesses offer their employees. The increased adoption is due, in part, to more generous tax breaks, mandatory participation in some states and providers that make it easier than ever. With all this, business owners are discovering that the benefits go both ways when it comes to new tax credits.

So how do you get started setting up a 401(k) plan for a small business? While starting a 401(k) plan for your business may seem intimidating, it doesn’t have to be. With a little information, a solid plan and the right provider, you and your employees can be up and running in no time.

What is a 401(k) plan for your employees?

Before you set up a 401(k) plan for your business, it’s important to understand what it is. In straightforward terms, a 401(k) is an employer-sponsored retirement plan that allows employees and owners to invest a percentage of their wages on a regular basis — saving up for retirement.

The way it typically works is: Funds are taken out of employee paychecks on either a pre-tax (traditional 401(k)) or post-tax (Roth 401(k)) basis depending on which type of plan you choose to set up. Employees can choose their investment mix and percentage breakdowns from a list of mutual funds available within the plan.

There is no one-size-fits-all retirement plan. As a business owner, you can choose from a variety of retirement plans and providers that meet your business goals.

1. Decide whether to match or not to match.

Employees aren’t the only ones who are able to contribute to their nest eggs. As the business owner and the administrator of your company’s 401(k) plan, you have the option to match any, all or a portion of your employees’ contributions based on an amount and schedule that works for you.

In addition, you can decide how and when those contributions are put into their accounts. For instance, you may want to match a percentage of their contributions starting right away to boost participation. You can also delay the start of contributions until employees have been with you for a predetermined amount of time in order to incentivize them to stick around. Another option is to deposit a lump sum into their accounts at the end of the year as a tax-deferred bonus. Or your business can choose a 401(k) plan that is 100% employee funded.

2. Determine a vesting schedule.

The word vesting can have multiple meanings. In the investment world, it simply means the percentage of ownership an employee has of funds in their account.

Much like contribution choices, you can choose a small business 401(k) plan that has immediate vesting that entitles employees to 100% of your contributions right away. Or you can use a graded-vesting schedule that increases ownership of employer contributions over time. Whatever the vesting schedule, any funds contributed by the employees themselves are always 100% vested.

For instance, let’s say an employee contributed $5,000 into their retirement account over one year, and you matched it dollar for dollar from day one. That employee would have $10,000 in their account. But if your vesting schedule is set up as a three year cliff vesting schedule, the employee would need to stay with the company for three years in order to be vested in the three years’ worth of employer contributions. After the three years, the employee would be 100% vested in employer contributions and, of course, is always 100% vested in the employee’s own contributions.

Deciding on a vesting schedule can be a strategic part of your overall employee acquisition and retention plan. Keep in mind that some 401(k) plans have specific vesting requirements. It’s important to talk to your provider about them before you lock into a plan. Different vesting requirements may apply depending on the type of plan you sponsor.

3. Understand the benefits of a 401(k) for small businesses.

Employees are the lifeblood of any business. By offering a 401(k) plan, you send a message that you care about them and their future. This can go a long way in helping to attract and retain top talent — something that’s increasingly important in today’s business environment.

Participating businesses may also be eligible to receive yearly tax credits for starting and contributing to their company’s 401(k) plans, as well as additional credits for setting up automatic enrollments for their employees.

Plus, as an employer-sponsor, you’re also eligible to participate in the plan and take advantage of tax-deferred investments — by making contributions to your own account with before-tax dollars and allowing your investment to grow tax-deferred. If you take a non-loan withdrawal from your account, you pay income tax on the withdrawal at that time. Or, if you set the account up as a Roth, you would make your contributions with after-tax dollars while enjoying income tax-free growth on your investment. That means that when you make a qualified withdrawal from your account, no additional income tax would be due.

4. Put a 401(k) plan in place for your business.

There are many things to consider when choosing a 401(k) for your business:

• Will the business contribute to the employees’ accounts?
• What type of vesting schedule makes the most sense for your business?
• What tax benefits are you hoping to achieve?
• Do you want to use the retirement plan as a tool for talent acquisition? Retention?

Remember, you don’t need to have all the answers, but it helps to know the questions. Need someone to bounce ideas off of? Speak with a Retirement Plan Specialist about how Everyday 401(k) by J.P. Morgan can offer simple, low-cost plans for your small business.