Businesses that offer retirement plans to their employees will often encourage employee loyalty. Some smaller businesses don’t know how to set up a 401K plan for their employees. Here are some tips to help your through the process.

When you begin to set up your 401K, you will find that you will have to meet some legal requirements in order for your business and your employees to get the most tax breaks. There are 3 types of 401K plans to look at before you decide:

-Traditional 401k plan: This is the most flexible plan. You have to option of making contributions, either by percentage or matching, or both. Or, you may not wish to contribute at all. You can also decide when your employees can withdraw those contributions.

-Safe Harbor 401k: This is similar to a traditional 401K, but your employees are totally vested in your contribution when they are made. You also don’t have to make sure your higher-salaried employees don’t get more than your lower-salaried, or hourly employees. With a traditional 401K, you have to make sure that doesn’t happen.

-Simple 401k: This is closely related to a Safe Harbor 401K, but only business with less than 100 employees can benefit from this plan.

Regardless of the type of plan you implement, a written plan must be drawn up. Federal law states that certain employees are eligible and decides how much they are allowed to contribute. You, as an employer, can decide on your own how much you will contribute and how much of your employees’ contributions you’ll match, if you choose to do so at all.

Next, you will have to set up a trust fund for the 401K plan’s assets, and name a trustee of those funds. They will take care of all of the contributions and will invest the assets and distribute money from the plan.

Detailed records must be kept of all contributions, investments, earnings, losses, expenses, and distributions. There must be separate accounts for each employee who contributes their earnings and a yearly report must be filed with the government.

Once all other steps are completed, you will have to give your all of your contributing employees detailed information regarding the benefits and requirements of the plan. This information will explain the 401K and how it works, when the employee is eligible, how contributions are invested, matched and distributed, and how and when the employee may withdraw from their 401K. It also explains the employee’s rights under the Employee Retirement Income Security Act.

Where to go for additional help

Any bank, insurance company, or brokerage firm can set up a 401K trust for your business. They can also assign a trustee for you, if you wish, as well as someone who can keep records of all of your transactions. Talk to a tax professional for more detailed information about any tax implications due to starting a 401K plan in your company.

Daniel Stoica Accounting Professional