Business 401k Plans

As a small business owner or manager providing a 401(k) Plan to employees, there are certain facts that must be disclosed to your employees participating in the plan.  This Summary  Plan Discrption includes documents to keep participants of the 401(k) plan informed of the basic operations of the plan,  as well as disclosing any changes in the 401(k) plan. 

The Summary Description Plan should be in plain language explanation listing the following: 

-  When & how the employees become eligible to participate in the 401(k) plan

-  The contributions to the plan

-  How long it takes to become vested

-  When employees are eligible to receive their benefits

-  How to file a claim for those benefits

-  Basic rights & responsibilities participants have under the federal retirement law

-  Employee Retirement Income Security Act (ERISA)

-  This Summary Plan Description should also include an explanation about the administrative   expenses that will be paid by the plan.

The Summary Plan Description should be given to all participants  or intended participants when they become qualified employees, and again, when they join the 401(k) plan.  It should also be distributed to all participants within a given period of time (generally within 30 days) of any changes in the plan.  the 401(k) Summary Plan Description should also be redistributed periodically during the life of the plan.

So you have determined a 401 (k) Plan is right for your small business.  One of the first requirements is adopting a Written Plan.  This wirtten plan serves as the foundation for the day-to-day operations of the 401(k) plan.  If you have hired an outside entity to manage your 401(k) daily operations, they will, most likely, work with you on adopting the appropriate written document.  It is important for you to keep in mind that, one completed, you and your business are bound by the terms of the 401(k) plan’s written document.   If you are intending to prepare on you own, it would be wise to consult a financial agent experienced in adopting such plans.

As we have disucssed in earlier wirtings, you must first identify what type of 401(k) plan you have decided is best for your small business.   Once you have determined the type, you must include (in your written document)  you will be in a position to outline details such as which employees can contribute, how much they are allowed to contribute,  will you as the employer contribute and at what point.

There are other features written into the plan that are required by law; such as how certain key functions are carried out.  This includes how contributions are deposited in the plan and trustee of the account.  The legal requirements make consulting a professional important.  There are a number of sources for contacting an appropriate consultant.  Do your research and, as I always recommend, consult with a minimum of three consultants prior to retaining the one that best fits your business.

As a small business owner preparing to establish a 401(k) Plan for you and your employees, should must remember your fiduciary responsibility.  An important part of your fiduciary responsibility is to establish a trust fund to place the 401(k) Plan’s assets.

The trust fund established  must assure assets of the 401(k) Plan are used soley to befefit those employees and their beneficiaries. 

The trust established must have at least one trustee whose responsibility is to  handle the contributions, investments and distributions to and from the Plan.  This is probably the most important decision you will make in establishing a 401(k) plan  as the financial integrity of the plan depends on the chosen trustee.  Unless you are experienced in the investment field, it is wise to look to those experienced and willing to provide references.

Interview at least 3 prospective trustees from financial institutions and/or insurance companies experienced in managing 401(k) Trust Funds. 

As a small business owner or manager, you are responsible for compliance with Federal law in establishing and maintaining a 401(k) Plan for your employees. Selecting a competent professional consultant or service provider to establish and monitor your 401(k) Plan makes the most sense.  Selecting the appropriate consultant can be one of the most important decisions you will make in establishing a 401(k) Plan. 

As a small business owner or manager, you need to first consider what specific services you will require for your plan.  Will you require legal advice?  Will you require long term accounting, recordkeeping, investment management, or a trustee?  Don’t select the first consultant you talk to.  Talk to a minimum of three consultants prior to making a decision.  Ask potential consultants / service providers about the services they provide. 

Present each prospective professional consultant / service provider with identical outline relating to the needs of your 401(k) Plan.  Request a written proposal from each potential consultant along with detailed fees and expenses they require to establish, and or maintain the 401(k) plan.  Also ask potential consultants to be specific about what, if any services they do not provide.  You do not want to be surprised with unexpected fees or lack of services once you have retained a consultant.  Also ask for customer references or other information relating to the quality of their services or customer satifaction with their services - as well as any possible alliances the potential consultant may have with other services or service providers.  (These arrangements are often called “bundled services”). 

Once you have chosen a professional consultant or service provider for your 401(k) Plan, it is a good practice to periodically review the performance of your consultant or service provider to ensure they are providing the services at the cost per your service agreement. 

As a small business owner or manager wanting to establish a 401(k) Plan you should be aware of certain requirements and responsibilities.  There are four basic actions required in establishing a 401(k) Plan in order to have certain tax advantages.

You will be required to (a) Adope a written plan, (b) Arrange a Trust Fund for the 401(k) Plan’s assets, (c) Develop a record keeping system for the 401(k) plan, and (d) Be prepared to provide 401(k) plan information to participants in a timely manner.

Most small businesses choose the option of consulting with a professional consultant - such asa bank, mutual fund provider, or an insurance company.  Professional consultants are available not only in establishing the 401(k) Plan by meeting all the requirements necessary in insuring the Plan will be able to take all tax advantages associated with establishing the 401 (k) plan, but also in maintaining the Plan. 

A professional consultant is also able to assist the small business in determining which type of plan is best for your business, yourself and your business’s employees who will be taking advantage of the 401(k) Plan you will ultimately offer.  They will also assist you in choosing some of the 401(k) Plan’s features, such as employee’s contribution (if any), as well as features required by law - such as how contributions are deposited into the Plan. 

The professional consultant will also assist you in estabishing the trust and taking care of timely record keeping on a regular basis.  All time consuming requirements that are performed by a professional consultant - freeing you, the business owner or manager, to direct your valuable time towards operating your business.

There are many advantages for a small business establishing a 401(k) program for both employers and their employees.  The proper plan will provide security for retirement for both the employers and their valued employees.

Many employers consider various 401(k) options for their tax advantages.  Employers are entitled to a tax deduct for their contribution to employees account/s.  As an employer, you have the option of how much (if anything) you plan to contribute.

A properly designed 401(k) plan can be tool in keeping valuable employees, or attracting the right people.  As a small business owner or manager, you open the ability to personally participate, taking advantage of the personal tax deductions and as well a defurring taxes on capital gains derived from 401(k) accounts. 

In future articles I plan to focus on procedures required in establishing a 401(k) program for your small business.  I would like to hear comments from my readers.

In today’s tight financing environment, many individuals consider the option of selling a portion of their 401(k) investments for necessary cash.  You can withdraw money from a 401(k) retirement account at any time, but you will be charged a penalty for withdrawing money before the age of 59 1/2.  This early withdraw penalty is usually 10% of monies withdrawn.

In addition to early withdrawal penalties, depending on the type of 401(k) retirement plan you have, you may owe taxes at thed time of withdrawal on any gains (or profits) you have earned from your investments in the account.   

One should consider penalties  incured from early withdrawal verses necessary capital needs before proceeding.

In the wake of the colapse of Bear Sterns (just weeks ago ranked as one of the top U.S. Banks) employees of Bear Stears saw the value of their stock in Bear Sterns drop for $70 a share to $10 a share in just one week.  One in reminded of the  retirement losses incurred by thousands of Enron employees. 

I bring this up because too often, employees tend to trust their 401(k) retirement investments in the company where they are employeed.  Although you may feel inclined to invest in your company, remenber to diversify your 401(k) investments  by investing in other securities or mutual funds with a strong performance background.   A general rule is to never invest more than 20% of investing capital in one entity. 

401(k) deadlines vary from plan to plan, and are separate from any deadlines a contributing employer may impose.   The  IRS  outlines firm annual  401(k) enrollment and contribution deadlines.  Understanding  meanings of these deadlines will enable you to plan and budget to meet IRS requirements.

Enrollment Deadlines:   Enrollment deadlines specify the date which you must set up the 401(k) retirement plan account.

Contribution Deadlines:  Contribution deadlines speficy the date or dates which you must make contributions into your 401(k) plan.

Check with your employer and tax advisor for specific deadlines for any 401(k) plan you may be currently enrolled in or plan to join.  They will assist you in ensuring you maintain your 401(k)  tax advantage.

People often ask “When do I have access (or official ownership) of any monies my employer has contributed to a 401(k) Retirement Plan?” 

All monies you contribute to a retirement plan are yours.  You can access (with penalty in most cases) at any time.  Employer matched contributions, though, may not be yours to keep immediately.  The “Vesting Schedule” of a 401(k) Retirement Plan refers to the timeframe in which your ownership of your employer’s contributions vests, or takes effect.

An employer’s contributions might vest one year from each contribution date.  If you cancel your plan, or leave your job during the period your employer contributions are held, you will not receive any uninvested employer contributions.  You will be able to keep all vested contributions to date, and, of course all monies you have personally contributed.