Total Team Solutions Blog

401(k) Plans – Pitfalls for Small Businesses

By: John Morlock

Experts estimate that Americans are not saving enough for retirement by as much as $1 trillion.  As a result many individuals may never be able to afford to retire.  To address this potential national crisis, the federal government has taken steps to make it easier for small businesses to offer a 401kj plan to their employees.  For example, they have made it easier for small businesses to join together to create a multi-employer 401k plan to share the administrative duties and related costs.

As with other employee benefit plans, offering participating in a 401(k) plan can be well received by employees and boost morale.  However, if you are unfamiliar with the 401(k) regulations, some pitfalls remain that could result in unforeseen expenses or negatively impact employees.  One of these are the annual discriminations tests that all plans are subject to.  One of these splits employees into two groups, Highly Compensated Employees (HCE’s) and Non-Highly Compensated Employees (NHCE’s).  The regulations then limit how much the HCE’s may contribute into the plan as a percent of compensation based on how much the NHCE’s contribute.  If no NHCE’s contribute into the plan, then the HCE’s are not allowed to contribute into the plan and any contributions they made would be withdrawn from the plan and returned to the HCE’s. 

As you can imagine, your Highly Compensated Employees who were excited to join the new 401(k) plan may get a little upset at the end of the year when they are told they actually were not allowed to participate and have their contributions refunded to them.  Another discrimination test could prevent the owners from being able to participate in the 401(k) plan without subjecting the company to a potentially significant penalty.

Unfortunately, this is only an issue for small businesses as large companies with thousands of employees always have enough participation to avoid this issue.  Yet, there are options that can help small businesses with these issues.  Customized plan design and enrollment strategies can alleviate these issues.  Additionally, the IRS has implemented some Safe Harbor provisions that businesses may adopt that exempt them from these annual discrimination tests.

So yes, you should consider implementing a 401(k) plan for your small business, but you should also have an experienced advisor to assist you in implementing your plan design and address these and other potential pitfalls.  Total Team Solutions has more than 30 years of experience as a human resource outsourcing (HRO) firm working with small businesses to manage their payroll, employee benefits and other human resource needs.  Plus, Total Team Solutions sponsors a multi-employer 401(k) plan that provides its clients with a turnkey solutions that is absolutely free to join.  For more information on the Total Team Solutions 401(k) Retirement Plan, contact John Morlock at 1-800-836-9678 or email at jmorlock@ttspro.com.

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