Launching A 401(K) Retirement Plan For A Growing Company

After a new business starts to expand and add more employees, it becomes increasingly likely to also offer various fringe benefits. One of the most valuable perks for attracting and retaining employee talent is a 401(k) retirement plan. Small companies that don't have a retirement specialist on staff may need to utilize the services of a third-party administrator to manage the details of a 401(k) plan.

Wages contributed to a 401(k) plan by your employees generally remain tax-deferred until eventually withdrawn. A matching company contribution not only provides your business with a tax deduction but also results in additional tax-deferred income to your employee. To maintain the mutual tax advantages of a 401(k) plan, numerous administrative requirements must be carried out in a precise manner.

Dual regulatory oversight

Both the IRS and the U.S. Department of Labor have jurisdiction over 401(k) plans. The Internal Revenue Code has specific sections, such as section 401, that prescribe conditions under which a retirement plan remains tax-deferred. In contrast, the Department of Labor is more concerned with the various reporting requirements that ensure employees receive adequate retirement plan disclosures.

Document preparation

A comprehensive written plan is required before offering a 401(k) plan. The specific provisions of your retirement plan must be presented to your employees. Future amendments to your 401(k) plan must also be communicated to employees. Once your plan is set up and launched, there are ongoing requirements that must be met to remain qualified for special tax treatment.

Remaining compliant

A 401(k) plan is very specific in detail, so there are inadvertent actions that can cause a plan to fall out of compliance. Examples of noncompliance include the following mistakes.

  • Classifying employees as eligible for participation either too early or too late
  • Misclassifying various types of employee compensation
  • Incorrect income tax withholding on early distributions

A regular 401(k) plan cannot discriminate in favor of owners or managers. Employee contributions are always 100 percent vested, which means employees cannot lose their tax-deferred salary contributions. The vesting of employer contributions depends on the specific type of 401(k) plan.

Annual reporting

Operating a 401(k) plan in strict accordance with the applicable regulations is essential in order to file an accurate informational return each year. The sponsors of 401(k) plans must file one of the 5500 series of forms annually.

Accuracy in the administration of a retirement plan helps to fulfill employee expectations of predictability. Contact a 401(k) administrator like Uniglobal Pension Planning LLC about establishing a retirement plan for your business.