How to Pick a Small Business 401(k) in 6 Simple Steps

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This article was written by Kevin Busque, cofounder and CEO of Guideline. Square Payroll has partnered with Guideline to offer affordable, integrated retirement benefits to small businesses.

In America, the likelihood of a comfortable retirement is not assured. Research by the Economic Policy Institute indicates that only about half of workers have any retirement savings, and the average savings for families approaching retirement is just $17,000. Half of small business employees in the private sector don’t even have access to a retirement plan. So if you’re a small business owner who currently doesn’t offer a 401(k), there’s no better time than the present.

Offering a 401(k) sends a clear message to your employees that you care about — and are willing to invest in — their future. But getting started isn’t always easy. There are loads of options and very few of them are easy to understand. Many 401(k) offerings are laden with complicated fees that prohibit participants from understanding where their money is going and who’s really benefiting from their investment.

As you can imagine, building Guideline 401(k) put me through a 401(k) information boot camp. In this post, I hope to provide Square sellers with the information they need to get started by outlining the first six steps you need to take.

What you need to do to establish a 401(k).

For businesses that are ready to take the plunge, the IRS website covers the actions you need to take to get everything set up. In the event you don’t speak tax code, here’s a more approachable look at what goes into setting up a 401(k) retirement plan.

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Step 1: Choose the plan type that’s best for your business and its employees.

When choosing a plan type, one of the biggest considerations is how you want to prepare for annual nondiscrimination testing that’s designed to make sure plans are just as accessible to entry-level employees — or those with lower compensation levels — as they are to executives.

Plans that require employers to make contributions to employees’ 401(k) accounts tend to have an easier time passing the tests, and may even be exempt from testing if they’re designed properly. Plans that don’t require employer contributions cost your company less, but may be at risk of plan failure.

Here are three popular plan types, along with some pros and cons:

  • Traditional 401(k): Employers can choose between not contributing, making outright contributions, or matching a portion of the wages employees defer. An employer can also set up contributions that are subject to a vesting period. While all this flexibility is useful, a traditional plan must pass nondiscrimination testing each year.
  • Safe Harbor 401(k): This plan type is similar to a traditional plan and companies of any size can offer it, but it requires employers to make contributions above and beyond what their participants choose to defer. The contributions you offer must be of a certain amount (at least 3% of an employee’s taxable wages) and vest immediately. By committing to making these contributions, a plan is exempt from nondiscrimination testing.
  • SIMPLE: SIMPLE, or Savings Incentive Match Plan for Employees, is for businesses with fewer than 100 employees. Like Safe Harbor plans, SIMPLE plans require employers to make contributions to their participants’ 401(k) accounts that vest immediately and are exempt from nondiscrimination testing.

There are very specific rules about how contributions are structured in these plans. It’s all spelled out in our Safe Harbor 401(k) guide if you want to learn more.

Step 2: Adopt a written plan.

Once you’ve selected a plan type, you need to adopt a written document that — according to the IRS — “serves as the foundation for day-to-day plan operations.” That language may sound a little intimidating, but your 401(k) plan administrator usually handles this paperwork for you.

Step 3: Arrange a trust fund for the plan’s assets.

A plan’s assets must be held in trust to ensure that they’re used solely to benefit plan participants and their beneficiaries. In other words, all those employee and employer contributions need to be kept in a safe place and monitored by a designated trustee. This trustee is responsible for collecting the contributions, investing them, and issuing distributions.

Step 4: Develop a recordkeeping system.

It’s important to maintain a reliable accounting of plan activity. This step helps you keep track of contributions, earnings and losses, plan investments, expenses, and benefit distributions from participants’ accounts. If you have a plan administrator, they typically help you take care of recordkeeping. Doing a good job makes the preparation of the plan’s annual reports and business tax returns easy.

Step 5: Provide plan information to participants.

As a plan sponsor, you are required to notify all eligible employees and beneficiaries about the 401(k) plan, in addition to any updates to it. Most often, this is accomplished via a summary plan description that’s circulated on a recurring basis, detailing information about your plan and its benefits, along with other documents related to fees.

Step 6: Make 401(k) contributions easy with payroll integration.

Once the above steps are done, it’s time for you and your employees to start saving. And there’s some good news on that front: Modern technologies have made complicated, laborious 401(k) contributions a thing of the past. One way to make participating in a 401(k) plan simple for your employees is to choose a payroll provider that integrates directly with a 401(k) plan, like Square Payroll does with Guideline.

For Square sellers, the integration transfers information from Square Payroll to Guideline, making contributions automatic and eliminating the need to manage employee enrollment and send payroll contribution reports every pay period. The integration relieves you of many administrative burdens of the plan, allowing you to spend time focusing on what’s most important: your business and its employees. To integrate Square Payroll with Guideline, follow these simple steps.

Feeling overwhelmed? We can help.

Feels like a lot to think about, doesn’t it? Believe it or not, there’s more to consider beyond these six steps. Once you determine the right plan for your business, you still need to navigate fiduciary responsibilities, compliance, and investment selection. But modern 401(k) plan administrators like Guideline can affordably automate nearly all of this on your business’s behalf.

At Guideline, we encourage all Square sellers to speak with one of our retirement specialists to learn how we can help you and your employees save for a better retirement. You can schedule a free call with a specialist today here.


About Kevin Busque

Kevin is cofounder and CEO of Guideline, the modern and affordable retirement plan that automates all the heavy lifting involved in offering a 401(k). Under Kevin’s leadership, Forbes Magazine named Guideline to its annual list of the 50 companies shaping the future of money. Kevin founded Guideline after seven years at TaskRabbit, the online and mobile labor marketplace, which he cofounded with his wife, Leah, and which was acquired by IKEA in 2017. Kevin has been featured in Inc., the New York Times, and the Wall Street Journal, and is a contributor for Entrepreneur Magazine. The son of an Army intelligence sergeant, he grew up in several cities across North America and Europe but considers himself a New Englander. He now lives in San Mateo, CA, with his wife and two children. Find him on Twitter: @KevinBusque.


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