401(k) 101: How to Start a Plan from Scratch

When cash for pay raises is tight, it’s hard to use compensation as a carrot to attract and retain great em­­ployees. But the uncertain economy has many workers increasingly focused on long-term financial security. That makes better retirement benefits all the more attractive.

If you don’t currently offer a retirement plan—or if you’re thinking about stepping up from SIMPLE (Savings Incentive Match Plan for Employees) or SEP (Simplified Employee-Pension) plans—it might be time to consider establishing a 401(k) retirement plan.

401(k)s typically invest money in mutual funds, which employees can tap once they retire.

Any employer can sponsor a 401(k) plan. Many match employee contributions to 401(k) accounts, but it’s not required. Employers that do match, however, gain significant tax benefits, which your tax advisor can explain.

When you establish a 401(k) plan, you must take certain basic actions.

One of your first decisions will be whether to set up the plan yourself or to consult a professional or financial institution—such as a bank, mutual fund provider or insurance company—to help with establishing and maintaining the plan.

Note: Generally, setting up a 401(k) plan isn’t a do-it-yourself project. This article is designed just to get you started. (See the resources listed in the box below for suggestions on how to choose a plan administrator.)
Choose the right plan

Next, choose the type of 401(k) plan you want to offer: a traditional 401(k), a safe harbor 401(k) or an automatic enrollment 401(k). Each allows em­­­ployees to contribute through salary deductions.

A traditional 401(k) plan offers the most flexibility. Employers can choose to make contributions on behalf of all participants, match employees contributions, do both or neither. Employer contributions can be subject to vesting, which means employees can’t access employer contributions until a certain amount of time has passed.

Annual testing by the IRS ensures that highly compensated executives don’t benefit disproportionately from employer contributions compared to rank-and-file employees.

Safe harbor 401(k) plans aren’t subject to annual benefits testing. However, employees must receive a certain level of employer contributions. Under the most common safe harbor 401(k) plans, employer contributions must be fully vested immediately.

An automatic enrollment 401(k) plan allows you to enroll employees and place deductions from pay into default investments, unless the em­­ployee opts out. This is an effective way to increase participation in 401(k) plans.

Under all these plans, you will have flexibility in choosing some of the plan’s features—such as which employees can contribute to the plan and how much.
Administrative requirements

There are four initial steps for setting up a 401(k) plan:


1. Adopt a plan document

A written document serves as the foundation for day-to-day plan operations. As the plan’s fiduciary, you will be bound by the terms of the plan document.

If you have hired someone to help with your plan, he or she will likely provide the document. If not, seek assistance from a financial institution or retirement plan professional.

2. Arrange a trust fund

A plan’s assets must be held in trust to ensure that assets are used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee to handle contributions, plan investments and distributions. Since the financial integrity of the plan depends on the trustee, selecting a reliable one is critical.

3. Develop record-keeping system

An accurate record-keeping system will track and properly attribute con­­­­tribu­­tions, earnings and losses, plan investments, expenses and benefit ­­distributions. If you have a plan ad­­ministrator, it will typically keep the required records. A sound record-­keeping system will help you, your plan administrator or financial provider ­prepare the annual report that all plans must file with the federal government.

4. Provide plan info to employees

You must notify employees who are eligible to participate in the plan about certain benefits, rights and features. In addition, a summary plan description (SPD) must be provided to all participants. The SPD is the primary vehicle to inform participants and beneficiaries about the plan and how it operates. The SPD typically is created with the plan document.

Final note: Beyond the legal requirements, you will want to communicate to employees the benefits of participating in your 401(k) plan. There are plenty. 401(k) contributions come from pretax earnings, reducing employee tax liability. Employer contributions—if you make them—amount to free money for em­­ployees. Plus, 401(k) earnings are tax-deferred, and they compound over time.

SOURCE: http://www.businessmanagementdaily.com/20389/401k-101-how-to-start-a-plan-from-scratch