How to Start a Company 401(k)

Deciding whether or not a 401(k) plan is right for your organization is not just about looking at the size of your staff. Because of changes in federal tax laws, there are now plans that can cover every type of business from start up to international mega-enterprises.

Understanding 401(k) Basics

First, it is important to understand that a 401(k) plan (named after the Internal Revenue Code section) is a retirement plan that allows employees to voluntarily place part of their income - generally a percentage - into a tax-deferred account that offers a variety of savings and investment options. It is seen as an alternative to traditional company-sponsored pension plans (which are becoming rare) and standard self-managed IRAs (which have lower annual savings limits).

Next, you need to determine what type of 401(k) works best for your company. There are three types to choose from:

• Traditional: This plan offers the most flexibility because employers can make contributions on behalf of participants, match employee deferrals or both. The plan can be subject to a vesting period, allowing employer contributions to be forfeited if an employee terminates prior to vesting. Participants can make pre-tax contributions and the plan is subject to discrimination testing. That is, annual testing to ensure that the benefits to the workers are proportional to the benefits to management.

• Safe Harbor: This plan is similar to the traditional plan except there is no vesting period and there is no annual non-discrimination testing.

• SIMPLE: This plan was created for small businesses with 100 or fewer employees. It is not subject to non-discrimination testing and employers must make full-vested contributions. Participants must earn at least $5000 annually and not receive any contributions or benefit accruals under other plans from the employer.

Finally, you need to create and manage the plan. This means developing a plan document which establishes the guidelines and outlines who is eligible to participate in the plan. Based on government regulations, this means participants must be at least 21 years of age and have completed one year of employment. In addition, you must arrange a trust fund with at least one trustee to manage contributions, investments and disbursements along with implementing a recordkeeping system.

Of course, you don't actually have to do this yourself. You may want to consult with a financial institution to help establish and maintain the plan.

Understanding 401(k) Benefits

Naturally, before you choose to add a 401(k) plan to your list of benefits, it is important to determine if it's needed. Here is a short list of benefits that 401(k) plans bring.

• 401(k) plans have become increasingly popular as a tool to help attract and keep quality employees.

• They are voluntary self-contribution plans that allow participants to choose the amount on a pre-tax basis.

• Employers can receive a tax deduction for their contributions to participants' accounts.

• Participants may be able to take their benefits with them when they leave, thereby easing administrative burdens.

Understanding 401(k) plans and what they can offer your organization is the first step in developing a plan for your firm. For more information on developing and implementing a 401(k) plan for your business, check out the U.S. Department of Labor, Employee Benefits Security Administration.