Insider Tips to Help Make a 401(k) Work for Your Small Business

Small employers desiring to establish or enhance a retirement plan for their employees have many different options available and may take advantage of some unique plan design opportunities. However, there are compliance issues that typically only impact small retirement plans that the small employer should be made aware. In addition, sponsoring a retirement plan may take up valuable time for the small employer with fewer internal resources and may be another employee cost that the employer would rather not incur.

By Joni L. Jennings, CPC, CPFATM, QPA, QKA
Retirement Services Compliance Manager
Newfront Retirement Services, which partners with ALLtech to offer the EVOLVE 401(k)

Before joining Newfront Retirement Services, I spent 30 years of my career working as a third-party administrator (TPA) in the small plan market. That experience provided valuable insight into the challenges that small employers face when establishing and maintaining a retirement plan. Likely the most common roadblocks for small employers are time and cost. Small employers may not have the knowledge or expertise to comply with all the regulatory requirements that come with plan sponsorship and may fall prey to service providers promising low administration fees, which can be synonymous with a “self-service” arrangement.

Why should small employers have a retirement plan? How do small employers navigate all the plan options? How do small employers find the best service providers? How can small employers reduce costs and meet fiduciary obligations? Let’s see if we can help …

What is the employer’s objective?

One of the first questions that should be answered is whether the employer intends to make employer contributions to the plan. If that answer is yes, then it should be determined at what percentage of compensation the employer is willing to contribute on behalf of the employees. I have experienced a wide range of responses from small employers, which can vary between none to 5% (and sometimes more).

The other question for the business owner is how much they would like to fund for their own retirement. If the owner is older than the rank-and-file employees by more than 10 years, there are unique plan design opportunities if the employer is willing to commit to some level of employer-funded contributions for the employees. That it usually accomplished by some combination of safe harbor 401(k) plan in conjunction with a profit-sharing contribution. That type of plan design can be quite beneficial for both the business owner and the employees.

If the employer wants to encourage employees to save for their own retirement, then the retirement plan may include employer matching contributions. The employer commits to making an employer match solely for employees who elect salary deferral contributions.

Depending on the type of plan adopted, the plan may be subject to annual non-discrimination testing to demonstrate that the contributions under the plan do not discriminate in favor of highly compensated employees (HCE).

  • Note: HCE includes anyone who owns more than 5% of the business (family attribution between spouses and lineal ascendants and descendants), and anyone who earns more than the IRS annual limit in the prior year (e.g., $135,000 in 2022 for the 2023 year). Knowing who is considered an HCE is one of the most important determinations when designing a retirement plan. 

How do I determine the right retirement program for my small business?

The first step is identifying the service partnerships that will be needed. Regardless of the type of plan, you will need an investment advisor to assist you with the plan investments offered through the retirement program. Investment advisors can be a great ally when navigating the myriad of investment options and plan types available.

IRA options (payroll deduction IRAs, SEPs or SIMPLEs) are generally offered through banks or other financial institutions. The bank or financial institution will handle all the paperwork and will likely offer some investment education to the employees. However, these are IRA accounts that belong to the employee. The options under those arrangements are limited and employer involvement is also limited. The contribution caps are reduced, so the IRA backed retirement plans may not provide the flexibility and contribution levels desired to meet retirement savings goals.

Qualified plans (401(k), 403(b), and profit-sharing) are the most flexible retirement plans; however, these retirement plans require a service team consisting of investments advisors, third-party administrators (TPA), recordkeepers and plan document providers. Some providers offer “bundled” arrangements that may include annual administration services, recordkeeping services and legal plan documents.

An “unbundled” arrangement is when the employer retains the services of an independent TPA firm for the annual compliance administration and plan document services but uses an investment platform independent of the TPA for the recordkeeping services. Some small employers prefer using a TPA because of the level of hand holding offered by dedicated service professionals familiar with the plan. Other small employers prefer using the bundled approach because everything they need is available through a centralized website.

Small employers may be offered retirement services through their payroll company. Sounds like a great plan because they have the deferral information readily available; however, consider whether you would get your hair styled at a nail salon. You may be better served by a service provider that specializes in retirement plans.

  • Best Practices: Build your retirement services team with great care and due diligence. Read the service agreements with your providers taking great care in noting your responsibilities versus the service providers. Read the legal plan documents before you sign them to make sure that you fully understand all the provisions contained therein, especially any required employer contributions.

How do I select the retirement services team?

With so many options, small employers are often overwhelmed when beginning this process. Start with an investment advisor partner that you can trust. The investment advisor should have a practice devoted to retirement plans and should be certified and registered. From there, a good advisor who is knowledgeable in the retirement plan market can assist you with deciding between a bundled or unbundled arrangement and/or a single employer plan or a multiple/pooled employer plan.

The important part of building your team is understanding your internal resources and the amount of assistance you may need to operate the plan. That team may be different for a small employer with 10 employees and a small employer with 60 employees.

Research the service providers, check to see if any are under investigation by any government agencies, in particular the Department of Labor. Obtain several different quotes and make sure that you understand the services provided and the fees being charged for those services.

What should we expect regarding costs to offer a retirement program?

Fees can vary depending on the size of the service provider, the provisions contained in your plan (more complexity can increase costs) and the number of employees covered by the plan. The employer is a fiduciary with respect to a qualified retirement plan. A fiduciary has the duty of care and prudence with respect to the investments offered in the plan and a duty to monitor the service providers, fees, and investment performance on a frequent and regular basis. The investment advisor can be a great partner when it comes to benchmarking plan administration expenses and investment options.

A few words of caution:

  1. Do not sacrifice quality for cost. The regulations that govern retirement plans are complicated and you will want service providers who have the expertise to keep your plan compliant.
  2. As the saying goes, you get what you pay for. Nothing is free, so be very wary of providers offering retirement plan services “at no additional cost.” The service provider is getting paid from somewhere and it may be an expense against the investment funds in the plan. For a new plan, that can be a huge percentage of an employee’s account. Until the plan is established, the employer should pay for the plan related expenses out of pocket (deductible as a business expense).
  3. Providers should be paid reasonable fees for the services they perform. All plans are not created equal and more complex plan designs may require more service than a plan of similar type without all the bells and whistles.

Are there any start-up tax credits available?

Indeed, there are tax credits up to $5,000 for three years! Your small business will qualify for the credit if your have fewer than 100 employees making at least $5,000 and your plan includes at least one non-HCE. In addition, those employees could not have been covered by another plan your company sponsored or any related employer sponsored (related by virtue of a controlled group of entities).

Who can help meet the fiduciary obligations?

Qualified retirement plans require fiduciaries to act in the sole interest of the plan participants to provide retirement benefits. ERISA (Employee Retirement Income Security Act) requires fiduciaries to act with care and diligence under the prudent man standards. Further, fiduciaries must offer diversified investments and operate the plan in accordance with the legal plan documents. Therefore, it is vitally important that you have a great service team including an investment advisor, third-party administrator, recordkeeper and plan document provider. Each of these parties play a distinct role in assisting the plan sponsor with maintaining the overall compliance and complying with fiduciary obligations.

What compliance issues impact small employer plans?

Qualified retirement plans offer higher limits than the IRA options. The trade-off for higher limits is annual nondiscrimination testing that must be performed to demonstrate that the benefits under the plan do not significantly favor HCEs and owners. Below are a few of the most common tests for qualified plans that will impact small employers:

  • Actual Deferral Percentage (ADP) Test — If your plan includes 401(k) salary deferrals, the deferrals must satisfy the actual deferral percentage (ADP) test under IRC §401(k)(3). An actual deferral percentage is calculated for each participant and is the ratio of the deferral for the year to annual compensation.
    The plan may prove non-discrimination if the average of ADPs for the HCEs is less than or equal to 1.25 times that for the NHCEs or if the HCE ADP is less than or equal to 2 times or 2% plus the ADP of the NHCEs.
  • Actual Contribution Percentage (ACP) Test — If your plan includes 401(m) matching contributions, the match must satisfy the actual contribution percentage (ACP) test under IRC §401(m)(3). An actual contribution percentage is calculated for each participant (like the ADP Test) and is the ratio of the match for the year to annual compensation.
    The plan may prove non-discrimination if the average of ACPs for the HCEs is less than or equal to 1.25 times that for the NHCEs or if the HCE ACP is less than or equal to 2 times or 2% plus the ACP of the NHCEs.
  • Participation/Coverage Testing — Retirement plans are required to make benefits available to a non-discriminatory group of employees. Under IRC §410(b), minimum coverage may be demonstrated by satisfying either the 70% ratio percentage test or the average benefits test.
  • Top Heavy Test — A plan is top-heavy for the current year if the account balances of the key employees are at least 60% of the total plan account balances as of the last day of the prior plan year, or in the case of the first plan year, the last day of the current plan year.

Key Employees — Officers with gross compensation of at least $185,000 (indexed), 1% owners with compensation of at least $150,000 and more than 5% owners (including family attribution). Yes, the owner’s child who works for the business is considered an HCE even if their compensation is well below $135,000.

If a plan is considered top heavy — the small employer may be required to contribute 3% of compensation to any non-key participant who is employed on the last day of the plan year.

Is there a way to avoid the compliance testing?

Safe harbor 401(k) plans are a great way to avoid compliance testing. Safe harbor 401(k) plans are a special type of 401(k) plan that provide for fully vested employer contributions (either 3% of each participant’s compensation or in the form of a matching contribution up to 4% of each participant’s compensation that elects to make salary deferral contributions). Safe Harbor 401(k) plans are exempt from the ADP Test, and in certain circumstances, will also satisfy top heavy minimum contribution requirements. Safe harbor 401(k) plans can be a great plan design for small employers with a modest contribution required for the employees.

Conclusion

Small employer plans do not have to be difficult or expensive to achieve the retirement savings goals of the business owner(s) and employees. A well-designed retirement program and a great service team are the best offense in maintaining a healthy tax qualified plan. The Retirement Services team at Newfront is available to assist you with questions regarding the EVOLVE 401(k) available through ALLtech or other retirement plan questions that may arise at 401kHelp@newfront.com

Helpful Quick Links

ALLtech Goes Beyond Health Insurance to Support Your Financial Wellness

Dedicated to helping Washington-based tech companies recruit and retain talent, the ALLtech Benefits Trust offers employee benefits that go beyond health insurance. Available exclusively to GeekWire member companies, ALLtech features comprehensive, affordable benefits that also support the financial wellness of your employees and your company.

With a focus on simplifying employee benefits, ALLtech’s flexible options make it easy to pick a plan to meet your group’s unique needs, while also easing your administrative burden. In addition to health benefits including medical, dental, vision, life/AD&D and an employee assistance program, ALLtech’s broad coverage offers access to:

EVOLVE 401(k) Retirement Plan

Offering a 401(k) plan can be costly and time-consuming – and when you’re growing a business, you need to manage your resources wisely. EVOLVE is specifically created to address the challenges small businesses face when deciding to offer a retirement plan, including:

  • Fee Transparency – EVOLVE has no hidden fees
  • Simplicity – EVOLVE offers plan options that minimize employer tasks
  • Liability Protection – EVOLVE offers investment oversight by an independent fiduciary limiting your liability for plan investments
  • Employee Focus – EVOLVE is designed to make saving and investing easy for employees

Through ALLtech’s full-service retirement plan, you can offer a nationally recognized 401(k) plan that helps you compete with larger employees, without extra hassle or cost.

Whether you need to simplify your current 401(k) plan management or want to start offering one, EVOLVE can help you offer a cost-effective plan that meets your business needs and scales along with your growth.

EVOLVE is run by Newfront Retirement Services, Inc., an experienced team of retirement services professionals who handle the details so you can stay focused on growing your business. To learn more, download the ALLtech EVOLVE 401(k) flyer or contact us at ALLtech@advprofessionals.com.

Allstate Identity Protection

Your identity is more than your Social Security number and credit score. ALLtech partners with Allstate Identity Protection to help you look after all your online activity, from financial transactions to what you share on social media. If fraud occurs, the plan’s $1 million identity theft insurance policy has you covered. The Allstate Identity Protection Pro Plus includes:

  • Identity monitoring
  • Credit monitoring
  • Remediation
  • Reporting

Protection Pro Plus is a non-taxable, non-reportable benefit, meaning employers can deduct any cost of offering this service to their employees, when enrolled as employer paid.

To learn more, download the Allstate Identity Protection brochure or email ALLtech@advprofessionals.com.

A Retirement Plan as Innovative as You Are: ALLtech 401(k)

Looking for a 401(k) plan that’s easy to manage and will help you compete with larger employers? Give your employees the tools to plan for their future with ALLtech’s EVOLVE 401(k), the ideal solution for businesses that want to offer full-service retirement benefits and keep costs in check.

Offering a 401(k) plan can be costly and time-consuming – and when you’re growing a business, you need to manage your resources wisely. EVOLVE is specifically created to address the challenges small businesses face when deciding to offer a retirement plan, including:

  • Fee Transparency – EVOLVE has no hidden fees
  • Simplicity – EVOLVE offers plan options that minimize employer tasks
  • Liability Protection – EVOLVE offers investment oversight by an independent fiduciary limiting your liability for plan investments
  • Employee Focus – EVOLVE is designed to make saving and investing easy for employees

Through ALLtech’s retirement plan, you can offer a nationally recognized 401(k) plan that helps you compete with larger employees, without extra hassle or cost.

Whether you need to simplify your current 401(k) plan management or want to start offering one, EVOLVE can help you offer a cost-effective plan that meets your business needs and scales along with your growth.

EVOLVE is run by Newfront Retirement Services, Inc., an experienced team of retirement services professionals who handle the details so you can stay focused on growing your business. To learn more, download the ALLtech EVOLVE 401(k) flyer or contact us at ALLtech@advprofessionals.com.

Enhance Your Employee Benefits with ALLtech’s New 401(k) Program

Whether your technology company has 2 employees or more than 100, ALLtech understands that choice, coverage and cost can be a challenge when you’re deciding to include a retirement plan with your employee benefits package.

That’s why ALLtech wants to help you offer full-service retirement benefits and keep costs in check by introducing the EVOLVE 401(k) retirement solution. With EVOLVE, you can offer a nationally recognized 401(k) plan that helps you compete with larger employers, without extra hassle or cost.

To learn more, download our ALLtech 401(k) Flyer and please continue reading our below Q-and-A with Newfront Retirement Services, the team of professionals who handle the details so you can stay focused on growing your business:

How can adding a 401(k) program help a small business grow and succeed?

Offering a 401(k) plan gives your business a competitive advantage to attract and retain quality employees. In addition, a retirement plan at work addresses one of the main financial wellness concerns employees have and can help you increase loyalty and productivity.

How is EVOLVE different from other 401(k) plans?

EVOLVE is specifically created to address the challenges small businesses face when deciding to offer a retirement plan, including:

  • Fee Transparency – EVOLVE has no hidden fees
  • Simplicity – EVOLVE offers plan options that minimize employer tasks
  • Liability Protection – EVOLVE offers investment oversight by an independent fiduciary limiting your liability for plan investments
  • Employee Focus – EVOLVE is designed to make saving and investing easy for employees

EVOLVE offers large plan features to small employers. It’s for businesses that dream big!

Is EVOLVE only for companies that don’t already have a 401(k) plan?

EVOLVE is for any employer, including those with an existing plan. Contact the EVOLVE team to compare your current plan with EVOLVE plan options. You will get unbiased guidance to evaluate your options.

How does EVOLVE make it easier for small businesses to set up a 401(k) plan that meets their budget while satisfying employees’ needs?

EVOLVE uses a simple questionnaire to gather essential data that will help you setup your plan. The EVOLVE team provides guidance to make sure the plan is a good fit to your business. The simplified plan types that are offered by EVOLVE are designed to reduce operational burden on the employer. The easy-to-use website and app combined with low-cost investments help employees use the plan effectively.

What resources are available to help employees wisely invest in their future?

EVOLVE focuses on what matters. The platform is designed to assist employees making the two major decisions required for successful retirement outcome:

  • How much should I have?
  • How should I invest what I’m saving?

The platform has web-based tools that will guide employees in making these two key decisions. Keeping it simple helps keep cost low while helping employees make the right decisions. The EVOLVE platform can also automate the employee decisions with automatic enrollment and annual adjustments.

Is EVOLVE suitable for employers with complex needs or on a fast growth track?

Yes. EVOLVE is a solution, not a one-size-fits-all package. The EVOLVE team has experience working with a range of clients from startups to publicly traded global companies. Reach out to us for free consultation at ALLtech@advprofessionals.com.