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401(k) For Small Businesses
401(k) plans provide a great benefit for both owners and their employees, but small business owners face a unique set of challenges.
- How do you control costs in a small plan?
- What if employees don't participate enough to allow highly compensated employees or owners to maximize their savings?
- With endless plan design options, how do you design a plan that's right for you?
- Which 401(k) provider works best with plans like you?
- What are my fiduciary responsibilities?
Some business owners want the plan participants to carry the costs of the plan, but typically small business owners have the largest accounts in the 401(k) plan. As a result, the business owner ends up carrying the majority of the costs anyway. Here are some key methods to controlling costs:
- Tax Benefit For New Plans. 50% tax credit to cover startup plan costs up to $500 for the first three years of a plan. See the IRS website here.
- Consider expensing costs through the business instead of passing along to 401(k) participants. For plans where the business owner is the largest account this can be especially beneficial to the owner.
- Shop for the right financial advisor. Many advisors build their practice with one or two Recordkeepers and place all of their business with them. Yet Recordkeepers have specialties where they are more competitive with pricing. An advisor with most of their business with one 401(k) provider should be a red flag. Many other advisors have high minimum fees that they charge. 401(k) fees add up quickly between the Recordkeeper, Third Party Administrator, and financial advisor. All three should have to compete for your business.
WHAT IF EMPLOYEES DON'T PARTICIPATE?
Even the best designed and most generous plans have employees who don't participate or participate to a minimal degree. Some plans are at a higher risk of failing "testing" than others. This includes plans with low participation or a low contribution rate for non-highly compensated employees among other factors. Failed testing often leads to corrective distributions which are an administrative nuisance and a frustration to employees who want to maximize their savings.
Proper plan design is the best tool to combat corrective distributions, with a Safe Harbor or QACA plan the most likely outcomes. Read below to learn more about these two plan designs.
WHAT'S THE RIGHT PLAN DESIGN?
With literally hundreds of plan design combinations available it can be a daunting task to find the perfect one for you. Here are a few popular choices:
- Safe Harbor: used for plans battling end of year testing issues as Safe Harbor plans automatically pass testing. Safe Harbor contributions by the employer are always 100% immediately vested. There are two variations of the Safe Harbor plan design:
- 3% Nonelective: the employer contributes 3% to every participant's account whether the employee contributes or not.
- Safe Harbor Match: the employer matches 100% of the first 3%, and 50% of the next 2%. So if the employee contributes 0% of their salary then the employer contributes nothing. If the employee contributes 5% then the employer contributes 4%. An employer can also elect to match 100% of the employee's first 4% instead.
- QACA: used for plans with high turnover. Similar to a Safe Harbor plan, the QACA automatically passes testing. Unlike the traditional Safe Harbor options, the employer can add a 2 year vesting schedule from the employee's date of hire. This vesting schedule can be 0% vested until two years, and then 100% vested at year years. Under the QACA, participants must be automatically enrolled in the plan with at least a 3% contribution rate, and an automatic escalation up to 6%. The employer must match 100% of the first 1%, and 50% of the next 5%. For example, if the employee contributes 6%, the employer must contribute 3.5%.
- Profit Sharing: often combined with a Safe Harbor plan, the profit sharing is subject to testing. Owners like a profit sharing plan, because employer contributions can be subject to a six year vesting schedule.
While these are your basic plan designs, there are many other design features to consider. This includes offering a Roth 401(k), automatic enrollment, automatic escalation, and when to allow participation among many other decisions. Many financial advisors expect the Third Party Administrator to design the right plan, but your financial advisor is often in the best position to know your situation. You need an advisor on your plan that understands proper plan design.
WHICH 401(K) PROVIDER IS RIGHT FOR YOU?
As a fiduciary, Integrity Advisory is platform agnostic, so our goal is to place you with a company that best fits your needs. Every Recordkeeper has a niche, and their pricing reflects that niche. You need a provider that specializes in plans like yours, and you need to take your plan to market every three years.
WHAT ARE MY FIDUCIARY RESPONSIBILITIES?
Business owners have enough liability concerns with their business. Their 401(k) plan shouldn't be a concern as well. To minimize your fiduciary responsibility, we offer full 3(38) investment fiduciary coverage on all plans. For those offices where daily plan logistics are a challenge we can offer 3(16) fiduciary coverage through our third-party administrator partners.
WHY INTEGRITY ADVISORY
How We Are Different:
- Platform Agnostic: We put you with a provider that fits you
- Fiduciary Standard: We don't sell on commission, and your interests always come first
- Investment Integrity: We don't offer our own investment funds to your employees to make extra revenue.
Services We Offer:
- Individualized meetings for you and your employees
- Annual review of plan performance
- Annual benchmarking toward a plan/participant goal
- Price comparison at least every 3 years
- Group 529 Plans: Helping employees save for college
- Access to preferred partners
- Business Consulting
- Healthcare Captive
- Among many others