401(k) plans that can grow with your startup.

A plan recordkeeper administering a 401(k) plan may charge the sponsoring employer the following fees: a one-time startup fee, administration fees, and transaction fees. However, it’s difficult to get accurate ranges on a 401(k)’s average costs because a plan can vary widely. For example, plans with less than $1 million in assets can cost employers between $5,000 to $10,000 a year: an initial startup fee of $500-$3,000, quarterly per-participant charges of $15-$40, and $800-$1,000 in administrative fees.⁶

A 3(16) fiduciary is a service provider hired by an employer to function as a “Plan Administrator,” by fulfilling a comprehensive set of duties that many plan sponsors find demanding, including keeping the plan in compliance with ERISA guidelines. Overall, the purpose of a 3(16) fiduciary is to take on all or some of the employer’s fiduciary duties related to plan administration and reduce the administrative hassle involved in managing a 401(k) plan and its assets. 

For example, rather than the employer having to work through issues like loan and distribution approval, a 3(16) fiduciary may do this for you. Some 3(16) fiduciaries will even handle signing and filing the annual Form 5500 required of many 401(k) plans. Not all service providers are willing to act as a 3(16) fiduciary and the exact 3(16) services provided vary from one provider to the next. 

Currently, there’s no federal legislation requiring any employer to offer a retirement plan. However, since 2012, 46 states have either implemented a state-based retirement savings program, studied program options, or considered legislation in order to encourage people to save for their future. Additionally, there are a handful of states that have passed legislation requiring businesses to offer a state retirement plan to their employees if they do not offer another retirement plan such as a 401(k).

Providing comprehensive benefits such as a 401(k) plan can be critical to building a people-first culture. According to a Human Interest study, a 401(k) is the most-wanted benefit after health insurance.

There are numerous 401(k) plan design types and options for employers, including safe harbor provisions, employer matching and profit sharing options, Roth and traditional deferral types, and solo or SIMPLE 401(k) plan designs. The main differences between these 401(k) plan types are contribution limits, eligibility requirements, and the type of compliance testing required.

In an auto-enrollment setup, newly eligible employees will have a default percentage of compensation contributed pre-tax to their plan from each paycheck unless they opt out within a certain period of time. Employers set the default election in the plan document.

Auto-enrollment is designed to increase employee 401(k) participation rates. According to Vanguard, auto-enrollment plans raised participation by nearly 50% in plans they administered, and tripled participation rates among new hires in plans they oversee. There is also a tax advantage for small businesses that offer auto-enrollment. Small businesses may be able to claim a tax credit of $500 per year, for up to three years, when adding an auto-enrollment feature to a new 401(k) plan.

There are plenty of tax advantages for startups looking to start a 401(k). These advantages can come in the form of tax credits, which may apply to businesses that are looking to cover the costs of starting a 401(k) plan or make contributions to their employee’s 401(k) plan. According to the IRS, eligible employers may be able to claim a tax credit up to $5,000 for three years to cover the costs of starting a qualified retirement plan.

Employers can also deduct from the matching contributions they make to their employee’s 401(k) plans up to a maximum limit on their corporate tax returns. 

According to the federal laws governing 401(k) plans, employees that are at least 21 years of age and have completed at least one year of service are eligible to participate in a 401(k) plan. This rule generally applies to both full-time and part-time employees. Employers may design their 401(k) plan with less restrictive eligibility requirements (e.g. age 18 and no service requirement). Employers may be able to exclude some employees from participation if they can meet certain coverage testing rules.

Nondiscrimination testing (NDT) is required by the IRS to ensure that 401(k) plans do not unfairly favor highly compensated employees (individuals who received compensation of more than $135,000 if the preceding year is 2022, $150,000 if the preceding year is 2023, or owned more than 5% of a business at any time in the current year or the preceding year). These series of tests measure the participation rates of both highly compensated and non-highly compensated employees.

If an employer fails nondiscrimination testing, their 401(k) plan may lose its qualified status (although there are steps a business can take to correct failed NDT). At Human Interest, we monitor our client’s status to help them avoid failing nondiscrimination testing if possible. We also offer safe harbor 401(k) provisions, which are specifically designed to exempt employers from some major nondiscrimination tests.

To change the provider of your 401(k) plan, contact your new 401(k) provider to help you transfer your assets and restate your retirement plan document. Once you’ve completed the entire transition process, your new 401(k) provider will take over the administration of your retirement plan. Changing your provider may take around two to three months.

Solo 401(k)s are designed for self-employed individuals or business owners who only employ their spouses. They are not meant for businesses with employees. The primary difference between a solo 401(k) versus other 401(k) types is that nondiscrimination testing does not apply. Since the owner is the plan sponsor, they can make both the full deferral contribution for the year (as can the spouse) and choose that the company make the full, permissible, employer contribution for the year as well. As of 2023, the total contribution limit for an individual in a solo 401(k) is $66,000, or $73,500 if over age 50.