401(k) expenses and how to pay them with greatest benefit

When you plan for retirement, as a small business owner, you should plan for expenses related to 401k retirement plans as well.

About 94% of American businesses are sole proprietorships, S corporations, and partnerships. Among them, the 401(k) retirement plan is the most common method used to save for retirement by owners themselves and for their employees.

A 401(k) comes in several options: traditional; safe harbor; SIMPLE; individual; and Roth. If a plan is already in place it’s worthwhile – just as you do with other business costs – to periodically go back and review your plan-associated expenses.

Dollar-for-dollar tax credits of up to 50% of ordinary and eligible startup costs (up to $500 annually) are available to set up the plan and educate employees. The IRS says the basics of passing regulatory and legal muster occurs if:

· “You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;

 · You had at least one plan participant who was a non-highly compensated employee; and

 · In the 3 tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.” (For more information, https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit).

ERISA (Employee Retirement Income Security Act of 1974) is the federal law dealing with the legal aspects of retirement plan administration. ERISA sets the benchmarks; the IRS enforces them. Under ERISA, retirement plan assets are to be used only to benefit those in the plan; otherwise, it fails the fiduciary duty benchmark. All this is guided by the plan’s founding documents. The retirement plan documents are similar to an organization’s by-laws: they set out in writing the specifics of the plan’s operations.

There are various fees and costs associated with 401(k) plans. These fees generally range between less than one percent to over two or three percent. Paying too much siphons off money that could be used to grow the plan or in some other beneficial way (the Marketwatch website has a good primer on 401k fees: https://www.marketwatch.com/story/everything-you-need-to-know-about-401k-fees-2018-03-30).

There are two payment methods: using plan assets or the business paying directly, such as from a corporate bank account. Both ways work, but differently. Expense payment made from plan assets aren’t tax-deductible; direct payment by the business gets that tax advantage. Another consideration: if plan managers are paying expenses from plan assets it’s more difficult for you to know if fees are higher for services than they should or need to be, or if there are references to obscure components you don’t really need, but for which charges are assessed.

The more higher-than-necessary or unproductive fees you pay, the less your plan will produce.

Another factor: you can delegate authority, but not responsibility. When 401(k) plan administrators are delegated financial authority, it does not absolve you of responsibility for the plan’s conduct and legal compliance. Direct payment, such as from a business bank account, provides you with greater protection.

There a multitude of scenarios owners must consider depending on plan size, number of employees, structure, account balances, etc. There are accomplished and experienced advisers who can help you make sure you’re doing what’s in your interest. Look locally, check experience, and make informed decisions. How do you know what questions to ask? Here’s a good place to start: http://www.401khelpcenter.com/.

Save your money so you can save your money.

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Tagged Employee Benefit Plan