401(k) plans can help small businesses keep talented employees

401(k) plans can be a powerful tool in promoting financial security in retirement. They are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers.Employers start a 401(k) plan for a host of reasons: •A well-designed 401(k) plan can help attract and keep talented employees. •It allows participants to decide how much to contribute to their accounts. •Employers are entitled to a tax deduction for contributions to employees' accounts. •A 401(k) plan benefits a mix of rank-and-file employees and owners/managers. •The money contributed may grow through investments in stocks, bonds, mutual funds, money market funds, savings accounts, and other investment vehicles. •Contributions and earnings generally are not taxed by the Federal Government or by most State governments until they are distributed. •A 401(k) plan may allow participants to take their benefits with them when they leave the company, easing administrative responsibilities. 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. In addition, there are four initial steps for setting up a 401(k) plan: 1.) Adopt a written plan document, 2.) Arrange a trust fund for the plan's assets, 3.) Develop a recordkeeping system, and 4.) Provide plan information to employees eligible to participate. Adopt a written plan document: Plans begin with a written document that serves as the foundation for day-to-day plan operations. If you have hired someone to help with your plan, that person likely will provide the document. If not, consider obtaining assistance from a financial institution or retirement plan professional. In either case, you will be bound by the terms of the plan document. Once you have decided on a 401(k) plan, you will need to choose the type of 401(k) plan that is best for you - a traditional 401(k) plan, a safe harbor 401(k) plan, or an automatic enrollment 401(k) plan. In all of these plans, participants can make contributions through salary deductions. A traditional 401(k) plan offers the maximum flexibility among the three types of plans. Employers have discretion over whether to make contributions on behalf of all participants, to match employees' deferrals, or to do both. These contributions can be subject to a vesting schedule (which provides that an employee's right to employer contributions becomes nonforfeitable only after a period of time). Annual testing ensures that benefits for rank-and-file employees are proportional to benefits for owners/managers. There are several kinds of 401(k) plans that aren't subject to the annual benefits testing required with traditional 401(k) plans. These are known as safe harbor 401(k) plans and, in exchange for avoiding the annual testing, employees in these plans must receive a certain level of employer contributions. Under the most popular safe harbor 401(k) plan (discussed in this publication), mandatory employer contributions must be fully vested when made. An automatic enrollment 401(k) plan allows you to automatically enroll employees and place deductions from their salaries in certain default investments, unless the employee elects otherwise. This is an effective way for many employers to increase participation in their 401(k) plans. The traditional, safe harbor, and automatic enrollment plans are for employers of any size. Once you have decided on the type of plan for your company, you will have flexibility in choosing some of the plan's features - such as which employees can contribute to the plan and how much. Other features written into the plan are required by law. For instance, the plan document must describe how certain key functions are carried out, such as how contributions are deposited in the plan. Arrange a trust fund for the plan's assets: A plan's assets must be held in trust to assure 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 trustee is one of the most important decisions you will make in establishing a 401(k) plan. If you set up your plan through insurance contracts, the contracts do not need to be held in trust. Develop a recordkeeping system: An accurate recordkeeping system will track and properly attribute contributions, earnings and losses, plan investments, expenses, and benefit distributions. If a contract administrator or financial institution assists in managing the plan, that entity typically will help keep the required records. In addition, a recordkeeping system will 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 employees eligible to participate: 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. (For more information on the required contents of the SPD, see Disclosing Plan Information to Participants below.) You also may want to provide your employees with information that discusses the advantages of your 401(k) plan. The benefits to employees - such as pretax contributions to a 401(k) plan (or tax-free distributions in the case of Roth contributions), employer contributions (if you choose to make them), and compounded tax-deferred earnings - help highlight the advantages of participating in the plan. For more information, visit the Small Business Administration's website at sba.gov. Contributed by Small Business Administration

********** Published: January 19, 2012 - Volume 10 - Issue 40