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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 plenty of tax advantages for small businesses 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.

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.⁵

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.

Automatic enrollment is a retirement plan provision that automatically deducts funds from an employee’s wages to defer into their 401(k) account. Employers set the default election in the plan document, but employees can choose to opt out of plan participation at any time. 

Employers may qualify for a tax credit of $500 each year for three consecutive years when adding an automatic enrollment feature to their new 401(k) plan.

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 $130,000 if the preceding year is 2021, $135,000 if the preceding year is 2022, 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.

Throughout the year, there are several 401(k) deadlines that employers must be aware of. Some important deadlines include: 

• Safe harbor match plans: Safe harbor match plans must provide a notice to participants at least 30 days in advance of the upcoming plan year that details certain plan provisions. 

• Deductibility deadline: Employer contributions must be deposited into the plan no later than the filing of the sponsor’s corporate return, including extension, in order for the contribution to be considered deductible. 

• Form 5500 deadline: Every year, a business must submit Form 5500 to document their company’s employee retirement plan and meet ERISA requirements. Failure to submit Form 5500 on time can result in hefty penalties. Calendar year plans must file Form 5500 by July 31 of the next year. This due date can be extended to October 15.

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. 

The IRS has increased contribution limits for 2023, which enables employees to save more for their retirement. The 2023 contribution limits for 401(k)s is $22,500, which is a significant increase compared to 2022. The catch-up contribution has also increased to $7,500 for participants aged 50 years old and up.