How to Set Up a 401(k) for Your Small Business

Setting Up a 401(k) for Your Small Business

For small business owners, 401(k) plans can be a powerful tool to enhance financial security in retirement for both you and your employees. Plus, a 401(k) plan can help you attract and retain top talent and even offer your business significant tax advantages. However, navigating the complexities of setting up a 401(k) plan can feel daunting.

Getting started is easier than you might think. Here’s an overview of what you need to know to establish and maintain a 401(k) plan.

401(k) basics for small businesses

Before you establish your small business 401(k) plan, it’s important to understand some 401(k) basics.

Small business 401(k) rules

There are a variety of 401(k) plan types, each with its own rules. Small business owners with employees have a few 401(k) options to consider:

A traditional 401(k), where employees contribute pre-tax dollars from their salaries.
A Roth 401(k), where employees contribute post-tax dollars from their salaries. If you offer this type of 401(k), you must also offer a traditional 401(k).
A safe harbor 401(k), where you as the employer must make contributions to your eligible participants. Safe harbor plans automatically satisfy nondiscrimination testing.

Small business owners without employees still have the option to establish a 401(k). This would be a solo 401(k), also known as an Individual(k)TM plan. These plans are established for businesses that consist of just an owner, or an owner and their spouse. Under a solo 401(k), you can choose whether you want to make pre-tax contributions (traditional 401(k)) or after-tax contributions (Roth 401(k)).

401(k) contribution limits

The Internal Revenue Service (IRS) sets a maximum limit you and your employees can contribute to your retirement plan each year:

Make sure to keep track of these contribution limits since contributing too much can result in costly penalties. Luckily, most 401(k) plans have built-in fail-safes to prevent excess contributions.

Small business 401(k) costs

As a small business owner, you might think that 401(k) plans are an expensive benefit exclusively for large businesses, but 401(k) plans can be affordable to businesses of all sizes.

Some common costs when establishing a 401(k) plan are:

Setup fees: This one-time fee will generally cover the plan design and implementation phases of getting your plan up and running, including educating employees about the plan. These fees usually range from $500 to $2,000 but will vary depending on the provider you choose and the complexity of your plan.
Administrative fees: These cover the day-to-day operations of your plan. While you can manage some administrative duties on your own, many small business owners hire a plan provider like a recordkeeper or third-party administrator (TPA) to help oversee and maintain the plan. The more complicated the plan, the higher these administrative fees will be, usually ranging from $750 to $3,000 annually. You may also have to pay a “per-participant” fee, which covers the administrative cost for each participant enrolled in your plan. These usually range from $15 to $60 annually per participant.

Keep in mind that there are tax credits that can help cover startup and/or administrative costs to help you offer an affordable 401(k) plan.

How to compare small business 401(k) retirement plan providers

Choosing the right 401(k) plan provider is crucial for your retirement plan’s success. Key considerations when comparing various plan providers include:

Look for a provider that specialize in the needs of small businesses since they’ll have the expertise and experience to help you achieve your goals.
You might also consider looking exclusively for a plan provider that offers flexible plan designs and a range of investment options so you can build a custom solution unique to your business.
Evaluate the administrative services they offer, like recordkeeping and compliance support. As a plan sponsor, it will be your fiduciary duty to monitor and review your retirement plan. The right plan provider will have options to help you offload some of the day-to-day management of your new 401(k) plan and to help you manage fiduciary risks.
Use a checklist to help you as you are exploring your options.

One note about cost: While it’s an essential factor when selecting a 401(k) plan provider for your small business, the cheapest 401(k) plan option isn’t always the best. Low-cost providers may offer limited investment options, subpar customer service, or outdated technology that could frustrate you and your employees—and potentially cost you more down the line. A low-cost 401(k) plan might also have hidden fees that can add up over time, negating your initial savings. Investing in a proven, reputable provider often ensures a better, more well-rounded retirement benefit.

Small business 401(k) plan benefits

Setting up a 401(k) plan for your small business requires careful planning and evaluation, but there are key reasons to offer a 401(k) plan, including:

Tax benefits: The SECURE 2.0 Act increased tax credits available to small businesses that establish a 401(k) plan. The start-up credit can help small business owners offset the administrative costs involved with starting a new 401(k) plan. 401(k) plan sponsors can also decide to offer a matching contribution agreement, which can act as a benefit to employees while also providing a tax-deductible vehicle for employers. In addition, there is also a contribution credit available to small businesses that adopt a new retirement plan and make contributions for their employees. This credit is calculated as a percentage of employer contributions up to $1,000 per employee and is incrementally decreased from 100 percent down to 25 percent over a period of five years.

How much can you save? Calculate the potential tax benefits of starting a plan based on the specifics of your business and employee population.
Employee benefits: By offering a 401(k) plan, you can help attract top talent. Studies have also found that employees are less likely to leave their employer within the first year when they are offered retirement benefits, so your 401(k) plan can also help with employee retention.

Establishing a retirement plan can benefit both your business and employees for years to come. When you’re ready to get started, explore the retirement solutions Ascensus has to offer, including options specially designed for small businesses like yours.

Ascensus is a leading 401(k) plan provider known for its comprehensive services, robust yet user-friendly technology, and commitment to customer satisfaction—making it an excellent choice for small business owners. With Ascensus, you can design a plan that will work for your unique business and employees, and that can flex with you as your business grows. With more than 40 years of experience in the industry, our experts will be here to support you with exceptional service every step of the way.

Learn more about how an Ascensus CoPilot 401(k) can be right for your small business.