How to start a 401(k) plan for your business

Years ago, retirement plans were available only for large and midsize businesses with high revenues and a high number of employees. Today, that’s no longer the case. There are several 401(k) plans for small businesses and owners looking to save for their own retirement and help their employees cross the retirement finish line to the retirement they’ve earned.

Why start a 401(k) today?

With today’s heightened sense of how quickly things can change, employees of every age are thinking more about preparing for the future. In fact, 85% of employees in a recent survey identified retirement benefits as a key factor when deciding whether to stay with their current employer or consider a new opportunity.

Many business owners are boosting their benefits packages to attract and retain employees in today’s tough labor market. Offering a 401(k) plan is one way to do that.

Your employees aren’t the only ones who would benefit. You may be eligible to receive up to $5,000 each year in tax credits for the first three years after starting a 401(k), plus $500 per year if you choose automatic enrollment. And with the cost of 401(k) plans for businesses decreasing between 2019 and 2023, many businesses are finding low-cost 401(k) plan solutions to be a smart investment. Finally, with the recent passage of SECURE 2.0 at the end of December 2022, a new tax credit was added for employers with 50 or fewer employees that provides a credit up to $1,000 per eligible employee for employer contributions during the first five years of the plan. This credit is phased out for employers with 51 – 100 employees.

Understand the different plans

Now that you know some of the benefits, it’s time to learn about the different types of plans and how to start a 401(k) for your business. Depending on your goals and the size of your business, there are different small business 401(k) options to choose from. Within each of these plans are features that can be customized to meet the needs of your business and your employees.

• Traditional 401(k) — With a traditional 401(k), employee contributions are deducted from gross income, and no taxes are due until the employee withdraws the money. By deferring taxes on those earnings until retirement when earnings — and therefore tax rates — are most likely lower, employees may reduce the amount of taxes they pay.
• Roth 401(k) — With a Roth 401(k), employee contributions are deducted from after-tax income, and no additional taxes are due when the employee withdraws money. While employees don’t get the immediate tax benefits of a traditional 401(k), qualified withdrawals are tax-free once they meet the eligibility requirements - essentially, all growth on your contributions in the Roth will be income tax-free.
• Safe harbor 401(k) — A safe harbor 401(k) allows you to generally pass nondiscrimination testing, but it does require you to make annual contributions on behalf of your employees, which your employees are generally 100% vested in immediately. It also requires employers to follow other requirements, depending on their plan design choice.

Customize your plan

Not all businesses are created equal. And neither are all 401(k) plans. Many providers allow you to customize a plan to suit your needs. Depending on the plan you choose, here are some things you may want to consider when customizing:

• Eligibility requirements — The eligibility requirements refer to when employees become eligible to participate in your company 401(k) plan. Some companies allow employees to participate right away, while others have a waiting period before employees can enroll.
• Employee matching — Matching contributions are funds that you deposit into your employees’ retirement accounts to match a designated percentage of their contributions. Today, companies that offer some type of matching contributions often set themselves apart when it comes to attracting and retaining talent. Before you commit to any matching amount, it’s best to look at your current and forecasted financials to determine what percentage, if any, you can afford to match.
• Profit sharing — Profit sharing is another way to show employees how valuable they are by depositing a lump-sum contribution into their retirement accounts at the end of the year as a tax-deferred bonus. Keep in mind that contributions to employee retirement accounts may be tax-deductible as an ordinary business expense up to the annual corporate tax deduction limit.
• Vesting schedules — With certain plans, you can determine when employees own the contributions you make to their retirement accounts. The term for this is “vested.” For instance, you may decide that any money you contribute becomes theirs as soon as it’s deposited. In this case, employees would be vested from day one of their plan participation, and the funds cannot be forfeited back to the plan for any reason. Or employees may have to reach certain employment milestones to become fully or partially vested, which gives them more incentive to stick with your company.

Assemble your team

When it comes to something as important as the financial future of your business and your employees, it’s important to have the right team members in place, including:

• Financial advisor — If you’re looking for advice on selecting and maintaining investments for your plan but want to make the final decision on your own, you can designate or hire a financial advisor.
• 401(k) plan administrator — The plan administrator handles the compliance monitoring, testing and filing of annual forms.
• Custodian — By law, assets from every business 401(k) plan must be held in a trust account. A custodian is the person or party responsible for keeping the plan’s assets in a secure place. Everyday 401(k) by J.P. Morgan includes Custodian services in their monthly fee.
• Trustee — The trustee monitors the assets and may even collect, invest and distribute contributions or ensure that the plan administrator is doing so. Everyday 401(k) by J.P. Morgan includes Trust services in their monthly fee.

Whether to keep many of the responsibilities in-house or outsource them is one of the key decisions you’ll need to make. Keep in mind that many providers offer full service, which includes help with choosing a plan, setup and administration, and compliance forms and testing. J.P. Morgan offers Everyday 401(k) — low cost, full service plans for small businesses.

Make it official

Decide which type of plan is best for your business, nail down the features you want to include, decide who will help set up and manage the plan, and create a trust fund to secure its assets. Then put it all in writing. The IRS requires all 401(k) business plans to have a written document that outlines the plan’s day-to-day operations.

Now it’s time to share the news with participants — your employees. You’ll want to get them excited about the plan, set up the enrollment period and walk them through the process. Some plans have rolling enrollments, and others have set calendar dates. Be sure to check the sponsor deadlines for the current tax year with a financial or tax professional so you don’t miss out.

Put your plan into practice

With Everyday 401(k) by J.P. Morgan, you and your employees can start saving for the future in a few easy steps. Call 833-JPM-401K to speak with an Everyday 401(k) specialist to determine which 401(k) is right for your business, or learn more online.