Small business 401k

401(k) plans can be a powerful tool in helping promote financial security in retirement. These plans are a valuable option for businesses considering a retirement plan that will be providing benefits to employees and their employers. Best of all even small businesses can start 401(k) plans. Employers are encouraged to start a 401(k) for a variety of reasons. Some of these reasons are-

• A well-designed 401(k) plan can help attract and keep the highest caliber talented employees.
• A 401(k) allows participants to decide how much to contribute to their accounts on a before-tax basis.
• Employers benefit as well since they are entitled to a tax deduction for their contributions to employees' accounts.
• A well planned 401(k) plan can benefit a mix of rank-and-file employees and owner/managers.
• The money contributed can grow through investments in stocks, mutual funds, money market funds, savings accounts, and other investment vehicles.
• Contributions and earnings in a 401(k) generally are not taxed by the Federal government or by most State governments until they are distributed.
• A 401(k) plan can allow participants to take their benefits with them when they leave the company, thereby easing administrative burdens.

When you establish a 401(k) plan for your small business you must take certain basic actions. For example: one of your decisions will be whether to set up the plan yourself or consult a professional or financial institution (such as a bank, mutual fund provider, or insurance company) to help you establish and maintain the plan. You can consult your tax advisor to investigate which options would be most cost efficient for you.

The four basic actions necessary to have a tax-advantaged 401(k) plan are:

• Adopt a written plan-401k Plans begin with a written document that serves as the foundation for day-to-day plan operations. If you have decided to hire someone to help with your plan, that person likely will provide it. Consider obtaining assistance from a financial institution or retirement plan professional if you are planning on managing the 401 yourself. Keep in mind that in either case, you are bound by the terms of the plan document. Before beginning the plan document, you will need to decide on the type of 401(k) plan that will work best for you.Your choices are a traditional 401(k), a safe harbor 401(k), or a SIMPLE 401(k) plan.


• Arrange a trust fund for the plan's assets- A plan's assets must be held in trust to assure that assets are going to be used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee whose job it is to handle contributions, plan investments, and distributions to and from the 401(k) plan. Since the financial integrity of the plan will depend on the trustee, this is one of the most important decisions you will make when establishing a 401(k) plan. Keep in mind though that if you set up your plan through insurance contracts, the contracts do not need to be held in trust.


• Develop a record keeping system- An accurate record keeping system will help keep track of and properly attribute contributions, earnings and losses, plan investments, expenses, and benefit distributions in participants' accounts. If you have a contract administrator or financial institution that is assisting in managing the plan, that entity typically will help in keeping the required records. In addition, a record keeping system can help you, your plan administrator, or financial provider prepare the plan's annual return/report that must be filed with the Federal government.


• Provide plan information to participants-As you put your 401(k) plan in place, you must notify the employees who are eligible to participate in the plan about your plan's benefits and requirements. A summary plan description is the primary vehicle to inform participants and beneficiaries about the plan and how it operates. This summary is typically is created with the plan document. You will now need to send it to all plan participants. In addition you may want to provide your employees with any information that discusses the advantages of joining your 401(k) plan.

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