making a 401(k) plan a reality for your employees
A 401(k) Retirement plan is one of the most desirable and valuable benefits you can provide your employees. Having an employee retirement plan shows you care about their future and helps employees create a nest egg for a comfortable retirement.
It’s also an expected benefit. According to the Society for Human Resource Management (SHRM), 94 percent of companies provide some type of retirement plan and 74 percent provided a match on some or all of the employee contributions.
In the past, only large companies could afford to start 401(k) plans. Prices are now more reasonable for small and mid-size companies. These plans are also made more affordable because contributions are tax deductible. Also, to help offset administrative fees, small businesses with fewer than 100 employees can get a tax credit for the first three years of a new plan. The credit is 50% of your ordinary and necessary eligible startup costs up to a maximum of $500 per year.
Here’s what you need to know about offering a retirement plan.
Know Your Costs
The Department of Labor (DOL) offers a sample 401(k) Plan Fee Disclosure Form that you can give potential plan providers for collecting the information you need. You can download the form at https://tinyurl.com/ybxal9me.
You also should request a fee schedule with details of all costs. According to the DOL, fees fall into four categories:
• Asset-based: Expenses based on the amount of assets in the plan. This usually includes custodial fees ranging from two to three percent.
• Per-person: Expenses based upon the number of eligible employees or actual participants in the plan can range from $8 to $750 or more per month per person.
• Transaction-based: Expenses based on the execution of a particular plan service or transaction.
• Flat rate: A fixed charge that does not vary regardless of plan size.
Some employers pay all fees while others have employees pay them. Other fees include recordkeeping, investment management, consulting, advisory service, revenue sharing and fees for being a smaller company. You may also have to pay for an annual Employee Retirement Income Security Act (ERISA) bond.
Part of the cost burden can be covered by investments. Ask your vendor how they generate income by managing your investments and whether they receive commissions by recommending certain funds.
Determine Which Plan is Best for Your Company
Employers who have total payrolls of at least $500,000 or more than 100 employees are good candidates for a 401(k). But you don’t have to choose a 401(k). If you are a small company with 100 or fewer employees, you can choose a SEP-IRA or SIMPLE-IRA.
A SEP-IRA, or “Simplified Employee Pension”, is for small business owners or self-employed individuals. Only employers can contribute to this IRA. Contributions are limited to the lesser of 25% of compensation or $55,000 for 2018.
A SIMPLE-IRA, or “Savings Incentive Match Plan for Employees,” is for companies with fewer than 100 employees and is the simplest plan. Simply fill out an IRS form and pay a fee. Employers have to match up to 3% of a contributing employee’s salary or what’s called a non-elected contribution. Employees can contribute up to $12,500 annually, as long as it’s not more than their salary. And if you are over the age of 50, an additional $3,000.
Starting 2018 contributions to a 401(k) can be up to $18,500 annually or $24,500 if age 50 or older.
Determine Your Matching Contribution Level
A matching contribution level is the money the employer contributes to an employee’s plan. Remember that you deduct contributions as a business expense. Employees also get a tax advantage since their own contributions are withdrawn before taxes are calculated.
If you choose a SEP-IRA, you can adjust your yearly contribution from zero to 25 percent of an employee’s income depending on your annual financial situation. A SIMPLE-IRA allows a maximum three percent contribution.
You can choose the amount and percentage. Many employers will match dollar-for-dollar up to the first six percent of salary. An employee would also contribute six percent to get the full match.
Determine Your Vesting Level
Vesting is the amount of time an employee must work at your company before they receive matching funds. This is one way to encourage loyalty in a competitive job market. Employees who do not get vested can lose all or part of the matching funds.
Vesting schedules for employer contributions are of two kinds: graded and cliff.
With a graded vesting schedule, you match funds on an employee’s anniversary at an increasing percentage. You might decide for example, that in the first year of employment the employee will get no matching funds, then start receiving matching funds in 20 percent increments each year thereafter until fully vested.
A cliff vesting schedule means that for a certain time, the employee is not vested at all. After that period of time, say three years — they become fully vested. Employee contributions are always vested.
For help with your company’s 401(k) Retirement plan, please contact us