As an accountant, you play an essential role in helping your clients achieve important short and long-term financial goals. One of those goals may be planning for retirement.

Your experience and confidence in the complex world of retirement planning might vary. But, whether you're a retirement novice or a seasoned expert, your clients may ask you to help guide them through setting up — and even managing — a 401(k). In fact, according to our research, 80% of financial and benefits professionals say they have advised their clients on offering a 401(k), of which nearly 60% say their clients asked them for retirement advice.¹ Where do you land?

Offering retirement plans to your clients can be a great way to grow your business and boost your reputation as a trusted advisor. In this post, we'll explain everything you need to know to confidently help your clients offer a 401(k).

Let's get started.

Why your clients care about 401(k) plans

There are a few reasons why your clients may be eager to offer retirement benefits to their teams, including:

1. There are tax advantages for offering retirement benefits

More than two-thirds of benefits decision-makers who don't offer a retirement plan said they believe offering a 401(k) is cost-prohibitive. However, thanks to new tax credits established under the SECURE 2.0 Act, offering a retirement benefit can be easier and more affordable than ever before.

In fact, if your client is offering their first 401(k), they may be eligible for up to $16,500 in tax credits that could cover 100% of the cost for the plan’s first three years. You can learn more about the SECURE 2.0 retirement plan tax credits and calculate your client’s potential costs on our blog.²

And don't forget — employer contributions are generally 100% tax deductible on an employer's federal income tax return.

2. Keep your clients compliant with retirement state mandates

Currently, multiple states have active mandated programs that require businesses to offer a retirement benefit, and many others have introduced or passed legislation to implement state-mandated retirement programs. While the rules of these programs can vary from state to state, there are consequences for businesses that fail to comply, including hefty fines and legal consequences. By helping your clients offer a qualified 401(k) plan, you can help them meet the mandate and reap the benefits we outlined above.³

3. 401(k) plans can help your clients attract and retain top talent

While retirement plans can help employees save for their futures, there are also many benefits for businesses that offer a 401(k) — and the proof is in the pudding. Research shows that a retirement benefit like a 401(k) can be a powerful tool to help your clients attract new talent, keep their teams happy, and may even help with retention.

Your role in designing and implementing a 401(k) plan

Long story short — the role you might play helping your clients with a 401(k) can vary depending on your client's wants and needs and whether or not you serve as a fiduciary on the plan.

Here's a look at some of the ways you may be asked to support your clients' retirement benefits:

Building and customizing a plan

Businesses of all sizes can set up a 401(k) plan. When designing a 401(k), your client can customize their plan with several types of provisions. These include but aren’t limited to:

• A traditional 401(k) is a standard plan that can offer the most flexibility in plan design for your clients. This especially comes into play when deciding how much in employer contributions (if any at all) they’d like to offer. With flexibility comes more responsibility to ensure a plan passes non-discrimination tests. Note that failing these tests could result in your clients incurring unexpected expenses to make the plan compliant.
• A Safe Harbor 401(k) plan can be a great solution for clients who want to play it safe with compliance. These plans come with built-in protections that automatically satisfy most IRS nondiscrimination tests. However, your clients must contribute to their employees' 401(k) plans in exchange for these protections.
• Starter 401(k) plans help employers offer a retirement benefit by streamlining two of the most significant barriers when it comes to offering retirement savings plans: cost and ease of administration. These plans have fewer restrictions on employee participation, eliminating the need for nondiscrimination testing. But note that with a Starter plan, your clients won’t be able to contribute to their employees’ savings, resulting in lower overall contribution limits.  

As you're helping your clients choose a 401(k) plan that supports their goals, you should consider the following factors:

Can your client’s business afford to offer a 401(k) match? Offering a 401(k) match can help your clients keep their employees happy and engaged. The numbers don't lie — 72.5% of employees want 401(k) matching from their employers more than any other financial benefit, ranking higher than performance-based pay bonuses, standard-of-living raises, health savings accounts, and financial planning services.

Is your client looking for a plan that automatically satisfies IRS requirements? Offering a 401(k) can feel overwhelming from a compliance perspective. If this rings true for your client, you may want to suggest a Safe Harbor 401(k), which generally satisfies IRS nondiscrimination tests. Smaller companies may also consider a Starter 401(k), which satisfies nondiscrimination tests but has more plan limitations.

Does your client want to offer profit sharing? Profit sharing is a pre-tax contribution your clients can make to their employees’ 401(k) accounts at the end of the year. It’s a way for businesses to offer an end of year bonus directly into their employees’ retirement account, which offers tax advantages for both parties. If this benefit sounds advantageous to your client, you may want to avoid recommending a Starter 401(k), which doesn’t allow for employer contributions.

Plan administration and compliance

On a day-to-day basis, your client may ask you to monitor 401(k) contributions and account balances. But you also may be responsible for making sure their plan is compliant with IRS regulations and requirements, as well as making sure the plan meets legal standards and avoids penalties.

Keeping 401(k) plans compliant can feel like one of the most important and challenging aspects of managing a retirement benefit. If your client offers their team a 401(k), they'll need to file and submit Form 5500 each tax season. Learn more about these responsibilities below:

• Filing Form 5500
• 401(k) nondiscrimination testing

Answering client questions and providing support

Whether this is your client's first or fifteenth time offering a 401(k), they'll likely have questions for you. If the ins and outs of retirement benefits are new to you, don't worry. There are many resources and programs you can leverage to help you set your clients up for success.

Help your clients offer a modern 401(k) with Guideline Pro

Guideline Pro is a free platform we created to make it simple for accountants and benefits professionals to offer 401(k) plans to their clients. By offering retirement benefits, you can grow your own accounting business and strengthen your offering as a service provider. The program costs nothing and features many tools, support, and perks, including:

• Keep all your clients' plans in one place: The Guideline Pro dashboard makes it easy to set up, track, and manage all your clients' 401(k) plans.
• Affordable plan pricing: Our 401(k) plans come with low monthly costs and no transaction fees. So your clients won’t have to pay extra for plan setup, plan transfers, or 5500 prep.⁴
• Stay in compliance: You and your clients can rest easy knowing that we keep our plans compliant with year-round compliance testing.⁵
• Access to a dedicated relationship manager: As a Guideline Pro partner, you'll be matched with a dedicated relationship manager who can answer you and your clients’ questions and help you navigate any outstanding tasks. From understanding your dashboard to managing your plan details, we're your partner throughout every step of the 401(k) process.
• Pass on plan discounts to your clients: Guideline Pro partners can pass on meaningful savings to their clients year-round. For example, we’ll give  4 months of no employer fees for each client you sign up and we’ll  waive 6 months of employer fees for your firm’s own Guideline 401(k) plan.⁶
• Reap the benefits of referral rewards: As a Guideline Pro partner, you can earn $100+ for each new 401(k) you add. Plus, rewards are doubled for eligible plans with more than 50 employees.⁷
• Stay updated: It can be challenging keeping up with the ever-changing retirement industry. But as a  Guideline Pro partner, we’ll always keep you in the know and provide education about everything from the latest on state mandates to the SECURE Act and beyond.

Disclaimers:

The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.

¹ Source: Guideline research run with Suzy. Insights based on data collected December 2023 through January 2024, from a survey of 474 US-based financial and benefits professionals. Guideline was not identified as the survey sponsor. The experiences of the respondents in this survey may not be representative of all people.

² This content is for informational purposes only and is not intended to be taken as tax advice. Please consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.

³ This information is general in nature and is for informational purposes only. Deadlines, fees, and other program details are subject to change by the state without notice and should be checked prior to making any decisions.

⁴ Third-party auditor fees will apply to large plans where an audit is required. These fees are not charged by Guideline.

⁵ All plans of related entities must be administered by Guideline in order to provide compliance testing.

⁶ Employer fees include the monthly base fee and a monthly participant fee after the new plan begins. Other participant-paid fees will apply.  See our Form ADV 2A Brochure for more information regarding Guideline’s fees. This offer can’t be combined with other offers.  Guideline reserves the right to modify or discontinue this promotion at any time without prior notice.

⁷ A new Guideline 401(k) plan invited through your dashboard, provided that you do not act as a fiduciary for the plan, is eligible for referral payment. A new plan is defined as a start-up 401(k) plan and does not apply to a preexisting 401(k) plan transferring to Guideline.

What is a Safe Harbor 401(k) plan? What do you have to do to offer one? And what do all those acronyms mean?

Don't worry. We’ve helped many companies set up compliant 401(k) plans, and we can walk you through all the basics. This guide explains everything from the different 401(k) compliance tests to what you’ll need to do to set up a Safe Harbor plan. Let’s start with some background information.

You probably already know that offering a 401(k) makes it easier for employees at your company to save more for retirement. But the government wants to make sure that everyone — not just highly compensated employees — gets to participate in a meaningful way. The goal of 401(k) plans, after all, is to prepare more people for retirement, not to create a tax break that’s exclusively for business owners and executives.

To make sure everyone has a chance to benefit from the plan their employer offers, the IRS has set up a series of what it calls nondiscrimination tests that are designed to measure whether a 401(k) plan unduly favors highly compensated employees. If your plan were to fail one of these tests, it could mean making expensive corrections, a lot of administrative work, and potentially even refunding 401(k) contributions to highly compensated employees.

What is a Safe Harbor 401(k) plan?

A Safe Harbor plan is a special kind of 401(k) that automatically satisfies most nondiscrimination testing. It has certain built-in elements that are intended to help employees save by requiring companies to contribute to their employees’ 401(k) accounts. When employers take this step to encourage more employees to participate, the IRS offers them “safe harbor” from certain nondiscrimination testing processes and the consequences of failure.

If you’re thinking about offering a Safe Harbor 401(k), here’s what you need to know. Let’s dive in:

What are nondiscrimination tests, and how do they affect your 401(k) plan?

There are three main types of nondiscrimination tests required by the IRS to help ensure that 401(k) plans benefit both owners and employees. Two of these tests compare how highly compensated employees (HCEs) and all other employees use your company’s 401(k). The third looks at how much of all plan assets are owned by key employees.

Actual Deferral Percentage

The Actual Deferral Percentage (ADP) test measures what percentage of their income your HCEs contribute to their 401(k), compared to rank and file employees.

Actual Contribution Percentage

The Actual Contribution Percentage (ACP) test is similar, but it compares employer matching contributions to HCEs with everyone else.

Top-Heavy test

A third test, the Top-Heavy test, looks at individuals the IRS defines as “key employees” and measures the value of the assets in their 401(k) accounts, compared to all assets held in the 401(k) plan.

To get a detailed look at all these definitions, how the tests are applied, and see examples, check out our overview of the three 401(k) nondiscrimination tests.

If your plan fails any of these tests, you’ll have to deal with some administrative hassle, potentially expensive corrections, and the possibility of refunding 401(k) contributions. A Safe Harbor 401(k) can generally help you avoid the uncertainty surrounding annual nondiscrimination testing.¹

Setting up a Safe Harbor 401(k) plan

Does passing these tests seem like a bit of a pain? If so, then a Safe Harbor 401(k) that's generally available to all employees might be a better way to go, depending on your specific circumstances. There are two types of Safe Harbor 401(k) plans that have different requirements, but both lead to the same results with regard to annual testing.

• A traditional Safe Harbor 401(k) plan has requirements related to contributions, distributions, vesting, and participant notifications.
• A Qualified Automatic Contribution Arrangement (QACA) combines the safe harbor provisions with automatic enrollment and allows for a lower match and the ability to apply a vesting schedule. You can find more information about the automatic enrollment and automatic escalation portion of the QACA here.

Safe Harbor plans require that you contribute to your employees retirement 401(k) accounts in one of two forms: a match or a nonelective contribution. This requirement is important because it can help increase savings. According to a recent survey, more than half of Americans feel they haven’t saved enough for retirement.

In exchange for letting your plan automatically satisfy most nondiscrimination testing, you’ll have to follow some rules.

If these requirements are at all confusing, we’d be happy to help. Schedule a quick consult to get hands-on help setting up your 401(k).

Contribution requirements for a Safe Harbor 401(k)

The main requirement for a Safe Harbor 401(k) is that the employer must make contributions. In a traditional Safe Harbor 401(k) plan, those contributions must vest immediately. In a QACA plan, those contributions can be subject to a maximum of a 2 year vesting schedule. Contributions can take three different forms, the first two of which are matching, which means employees must defer funds to their accounts in order to receive contributions. The third option requires your company to make a contribution, even if employees don’t defer any of their income into their plan.

Here are examples of the different contribution formulas:

Basic matching:

• Traditional: The company matches 100% of all employee 401(k) contributions, up to 3% of their compensation, plus a 50% match of the next 2% of their compensation.
• QACA: The company matches 100% of all employee 401(k) contributions, up to 1% of their compensation, plus a 50% match of the next 5% of their compensation.

Enhanced matching

The company matches at a level that is at least as good as the basic matching formula (maximum limits may apply depending on ACP safe harbor status)

• Traditional example: 100% of all employee 401(k) contributions, up to 4% of their compensation
• QACA example: 200% of all employee 401(k) contributions, up to 2% of their compensation
• Non-elective contribution: The company contributes at least 3% of each employee’s compensation, regardless of whether employees make contributions

Safe Harbor contribution limits

In 2024, the basic employee deferral limits for a Safe Harbor plan are the same as any employer-sponsored 401(k): $23,000 per year for participants under age 50, and $30,500 when you include catch-up contributions for employees over age 50 or older.

As an added benefit, with Safe Harbor provisions in place and less to to worry about when it comes to nondiscrimination testing, owners and highly compensated employees can truly max out their deferrals. That means they can take full advantage of their contribution limits.

Safe Harbor deadlines

For new plans, October 1 is the final deadline for starting a new Safe Harbor 401(k). But don’t wait until a few days before the deadline to set up your plan, because if you’re making a matching contribution, you’re also required to notify your employees 30 days before the plan starts, and it can take a week or more to set up your plan. So, make sure you talk to your 401(k) plan provider well before September 1. For existing plans, the deadlines depend on the type of Safe Harbor contribution you are adding to the plan and are detailed below.

Important dates for new plans:

• August 23, 2024: Deadline for setting up your Guideline Safe Harbor 401(k) Plan for the current year.
• September 1, 2024: 30-day notice must be sent to employees
• October 1, 2024: Safe Harbor 401(k) Plan is effective and exempt from most nondiscrimination testing for 2024.

It is important to be aware that if a Safe Harbor feature is added to a new plan, it must be in place for the entire plan year. If the plan year is set up retroactive to January 1, contributions will be required based on eligible compensation for the entire year.

Important dates for existing plans-Safe Harbor match

• November 20, 2024: Deadline for requesting the addition of a Safe Harbor matching provision to your 401(k) plan with Guideline for the following year
• December 1, 2024: 30 day notice must be sent to employees
• January 1, 2025: Safe Harbor provision takes effect for 2025

If you want to add a Safe Harbor matching provision to an existing 401(k), your administrator can make a plan amendment that goes into effect January 1 of any future year. Remember, there is an employee 30-day notice requirement, and it may take some time for your administrator to amend the plan, so try to get this taken care of by the end of November to go into effect January 1. (At Guideline, November 20, 2024 is your last day to add Safe Harbor matching provisions to your 401(k) to take effect in 2025.)

Important dates for existing plans-Safe Harbor nonelective contributions

• December 1, 2024: Deadline for adopting a 3% Safe Harbor Nonelective provision to your 401(k) plan with Guideline for the 2024 year (request the amendment by November 4, 2024)
• Under the SECURE Act, if you want to add a Safe Harbor Nonelective provision to your plan, but it is after December 1, 2024, it must be at least 4%.
• December 31, 2025: Deadline for adopting a 4% Safe Harbor Nonelective provision to your 401(k) plan with Guideline for the 2024 year (request the amendment by December 1, 2025). Plans can amend to add a Safe Harbor Nonelective through the end of the following plan year, although it must be 4% if added to the previous plan year.

If you want to add a Safe Harbor nonelective provision to an existing 401(k) to take advantage of Safe Harbor status for the year, you may do so at any time before December 1st, so long as you are willing to pay the minimum 3% contribution for the entire plan year. After December 1st, you can still add a Safe Harbor nonelective contribution for the year in question, up to the deadline of December 31st of the following year, so long as you increase the contribution to 4%.

Employee notice requirements

Each eligible employee must be notified in writing about their rights and obligations under the plan annually if the plan includes matching or automatic enrollment features. Notice must be given within a reasonable amount of time — at least 30, but not more than 90 days — before the beginning of the plan year.

Making mid-year changes to a Safe Harbor plan

If you already offer a Safe Harbor 401(k) plan but would like to make changes, there are special rules that you need to follow. All the details for mid-year changes are included in IRS Notice 2016-16, but these are the basic things the IRS requires:

• Give employees an updated Safe Harbor notice that describes any changes. Notice should be given 30 to 90 days before the changes go into effect.
• Give each notified employee at least 30 days to change their cash or deferral election.
• A combined notice may be provided.

Once you’ve satisfied the notice rules above, you may be able to make changes to certain aspects of the plan including, for example, increasing future safe harbor non-elective contributions from 3% to 4%, or changing the plan entry date for eligible employees from quarterly to monthly.

Several types of changes are not permissible during the year, however, so review the rules carefully if you wish to amend your plan.

Is a Safe Harbor 401(k) plan right for my company?

In general, Safe Harbor plans are a good choice for companies that do any of the following:

• Plan to match employee contributions anyway
• Worry about passing nondiscrimination testing
• Fail the ADP, ACP, or Top-Heavy tests
• Have low participation among NHCEs and non-key employees
• Care deeply for the wellbeing of their employees

In terms of pros and cons, the biggest downside to offering a Safe Harbor plan is the cost of the contributions your company will make. It's possible they could increase your overall payroll by 3% or more if all employees participate.

But many companies think the upside more than outweighs the cost. Offering a Safe Harbor 401(k) plan can result in happier employees, tax savings, and greater certainty that your plan won’t fail nondiscrimination tests.

Disclaimers:

The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.

¹ Safe Harbor 401(k) plans generally automatically satisfy Top Heavy requirements, except for plan years in which the employer makes discretionary contributions (such as profit sharing contributions) in addition to Safe Harbor contributions.

💡 Key takeaways:

• 401(k) plans can have many tax advantages for savers, and different tax rules exist for different types of contributions.
• Generally, if you don't make a withdrawal from your 401(k), you don't have to report anything in your annual tax filing.
• If you've made withdrawals from your 401(k), you must report them on your annual tax filing with Form 1099-R.

Finally, it’s everyone's favorite season. No, not spring — we're talking about tax season. If you're saving for retirement with a 401(k), making sense of your plan's tax implications can feel challenging. In this post, we're tackling some of the most frequently asked questions about 401(k)s and taxes, including:  

• Do you pay taxes when you contribute to a 401(k)?
• Do you pay taxes when you take money out of a 401(k)?
• What 401(k) tax forms do I need?
• Does contributing to 401(k) reduce your taxable income?
• What are the deadlines and penalties related to 401(k) taxes?

But first, let's start with the basics.

A 401(k) is an employer-sponsored retirement savings plan that can help you save for retirement. 401(k)s also have certain tax advantages, which can depend on the different types of contributions you make.

When you put money into your 401(k), you can make two types of contributions — traditional and Roth. The biggest difference between traditional and Roth 401(k) contributions is when you're taxed. Both types have tax advantages, but contributions to a traditional 401(k) are pre-tax, and Roth 401(k) contributions are post-tax.

With a traditional 401(k), your contributions are pre-tax, which lowers your adjusted gross income the same year you contribute. This means you receive the tax benefit today, and related taxes are deferred until you withdraw your money in retirement. The contributions and their growth will be included as ordinary income when you withdraw them from the plan, unless you roll them over to another plan or IRA.

On the other hand, Roth 401(k) contributions are funded with after-tax money, which means you can withdraw the actual contributions tax-free whenever allowed by the plan. Any growth is tax-deferred, and may even be tax-free if the distribution is a qualified withdrawal when you take it out.

Tax implications of 401(k) contributions

There are two questions we see pop up often when it comes to taxes on 401(k) contributions:

How do traditional 401(k) contributions reduce my taxable income?

As mentioned above, contributions you make to a traditional 401(k) are made with pre-tax dollars; money is deposited directly to your retirement account without getting taxed. Since the contributions are pre-tax, every dollar you save in a 401(k) lowers your taxable income by an equal amount. For example, if your gross annual income is $65,000, and you contribute $10,000 pre-tax dollars into your 401(k), your annual taxable income is actually $55,000 for the year.

Are my 401(k) contributions tax deductible?

No, you can't deduct your 401(k) contributions on your tax form. However, this does not mean your contributions may not have affected your taxable income. Depending on the types of 401(k) contributions you've made, your taxable income may have already been reduced — it's just already reflected on your W-2, so there's no need to report it on your taxes to receive the benefit.

How are my employer’s contributions to my 401(k) taxed?

Taking advantage of your employer's 401(k) match can be a great way to boost your retirement savings. Generally, contributions from your employer are made pre-tax, which means they'll be taxed when you withdraw them.

Tax implications of 401(k) withdrawals

There are generally two factors for how your 401(k) withdrawals are taxed: your age when withdrawing funds and the contribution type. We've already covered contributions above, so let's dive into age.

In general, you can withdraw funds from your 401(k) when your plan allows, often at a specific age, and anything before that is considered early and has subsequent penalties. So, in summary:

• Standard withdrawals are distributions on or after the date you turn 59 ½. Standard withdrawals don't have any additional tax penalties.
• Early withdrawals are those made before you turn age 59 ½. These withdrawals are subject to an additional 10% penalty tax unless you meet one of the IRS exceptions, which include distributions due to death or disability and to cover medical expenses.  

Now, let's dive a bit deeper on early withdrawals.

In general, the IRS assumes that you’ll leave the money you’ve saved in your 401(k) alone until you retire, which is why they let the earnings grow tax-deferred. That said, the IRS recognizes that withdrawals may be necessary in certain circumstances. If you need to take money out of your 401(k) before you turn 59 ½, you may be exempt from the penalty tax if you meet one of the exceptions, including but not limited to:

• Automatic enrollment refund: Withdrawals requested within 90 days of being automatically enrolled in the 401(k) plan.
• Birth or adoption: Withdrawals for qualified birth or adoption expenses ($5,000 per child).
• Death: Withdrawals made by the beneficiary after the passing of the participant.
• Disability: Withdrawals made after a participant becomes "permanently and totally disabled," as defined by the IRS.
• Disaster recovery distributions:  Withdrawals made due to a federally declared disaster (up to $22,000).
• Domestic abuse victim: Withdrawals taken by a victim of domestic abuse up to the lesser of (1) $10,000 or (2) 50% of their vested account balance.
• Emergency personal expense: Withdrawal taken for personal or family emergency expenses — one per year up to the lesser of (1) their vested account balance or (2) $1,000.
• Medical expenses: Withdrawals for unreimbursed medical expenses.
• Pension-linked emergency savings account (PLESA): Withdrawals taken from a PLESA.
• Qualified military: Withdrawals made when on qualified military duty.
• Separation from service: Withdrawals made after a participant leaves employment for any reason after age 55 (or age 50 for public safety employees).
• Terminal illness: Withdrawals made as a result of terminal illness. (Note — these withdrawals must be on or after the date a physician has certified the terminal illness.)

While the IRS grants a penalty exemption when you meet one or more of these requirements, your 401(k) plan determines if you can take a distribution at all. A penalty exemption does not automatically mean you can take money from your 401(k).

Often, the 1099-R provided by your employer won't show that you have an exception to the 10% early withdrawal penalty tax — usually because they don't know that you've met a requirement. If you qualify for one of the exemptions, you can indicate that on your tax filing using IRS Form 5329. Speak with your tax advisor or accountant to determine the forms you must complete when you file your taxes.

Now, let's look at some special cases, including 401(k) loans and rollovers.

Tax implications of retirement plan rollovers

If you want to transfer or “rollover” funds from one retirement account to another, there are typically two ways to do it: direct and indirect.

Direct rollovers

A direct rollover is when you transfer your retirement savings directly to another retirement plan. This can be through a wire, ACH, check mailed directly to the new financial organization, or a check mailed to you but payable to the new financial organization. The key element of a direct rollover is that you won't be able to spend the money or deposit it into a personal account.

With a direct rollover, the amount will not be included in your taxable income and isn't subject to the 10% early withdrawal penalty tax. You will still receive a 1099-R and need to report the rollover on your taxes, but it will not affect the final calculations.

Indirect rollovers

With an indirect rollover, the distribution is paid to you as a standard cash distribution. However, as long as the amount is eligible to be rolled over, you can deposit the distribution to another retirement plan or IRA within 60 days.

The 60-day time frame begins the day after you receive the distribution. If you miss this deadline, the pre-tax portion of the distribution will be included as ordinary income, and you may have to pay a 10% early withdrawal penalty tax on the entire amount of the distribution that was not rolled over unless an exception applies.

Indirect rollovers are like regular cash distributions, so they follow standard state and federal tax withholding rules. If the amount is eligible for rollover, there's a mandatory 20% withholding for federal income tax on any pre-tax amount. In short, your employer has to keep back 20% of the pre-tax amount and forward it on to the IRS as a pre-payment of  federal taxes.

To avoid possible penalties, you'll need to make up both the state and federal withholding out of pocket. Any amount not rolled over will be included as ordinary income (if it is pre-tax) and will be subject to an early withdrawal penalty tax unless an exception applies.

The rules surrounding in-direct rollovers are complex, so let's look at a couple of examples. For these examples, we’ll assume that the entire amount of the distribution is from pre-tax deferrals and that the state the individuals live in does not require withholding on retirement plan distributions.

Sarah takes a distribution of $10,000 and $8,000 is deposited into her personal banking account on March 31. The other $2,000 is withheld and submitted as federal tax withholding. Before May 31 (the 60 day deadline), Sarah Jane deposits $5,000 in her IRA as an indirect rollover. Sarah will include $5,000 as taxable income ($10,000 distribution - $5,000 rollover contribution).

Donna takes a distribution of $10,000 and $8,000 is deposited into her personal banking account on May 10. The other $2,000 gets withheld and submitted as federal tax withholding. Before July 9 (the 60 day deadline), Donna rolls over $10,000 to her new employer's 401(k) plan. To do this she added $2,000 from her personal savings to the $8,000 that was deposited. Because the full $10,000 was rolled over before the 60 day deadline, none of the distribution will be included as taxable income and the $2,000 that was withheld will be refunded or applied to her outstanding tax balance when she files her taxes for the year.

For a deeper dive on rollovers, visit our help center.

Tax implications of 401(k) loans

If you need to tap into your 401(k) savings, you may be able to take a loan from your 401(k). Generally speaking, you'll have five years to repay the loan with interest. If your plan allows 401(k) loans, the interest you'll pay may partially offset the earnings you'd miss out on while the loan amount isn't invested under the plan.

Note that loans are not considered a withdrawal from your plan, provided certain requirements are met. Because they are not withdrawals, the money borrowed from your account is not included in your taxable income and you will not receive a 1099-R reporting the loan amount.

If you don't make the required payments or fail to repay the loan on time, it may be considered in default. Defaulting on a 401(k) loan can result in the loan being "deemed distributed" and taxed as a distribution. This means the entire outstanding pre-tax amount of the loan will be included as ordinary income in the year the deemed distribution occurs. Additionally, the whole amount, including accrued interest, will be subject to the 10% early withdrawal penalty tax unless an exception applies.

It's also important to note that if you leave your job and have an outstanding 401(k) loan, you may need to repay it in full when you leave. In fact, some plans require that all loan payments must be made via payroll deduction. If you no longer have a paycheck from that employer, your loan may go into default because you cannot meet that requirement.

Your plan may also require you to be a current employee to keep the loan active. In some cases, you can roll the loan over to a new retirement plan and continue to make payments. But if you can't roll it over and don't pay it back, the loan will be considered a distribution.

How to report 401(k) contributions and withdrawals on tax returns

Long story short, your personal situation will determine what you’ll need to file. In general, you don’t report contributions to your 401(k) on your tax return; they’re included on your W-2, and have automatically lowered your taxable income for the year.

If you haven't taken withdrawals, distributions, or loans:

Generally, if you've made no withdrawals or rollovers from your 401(k), you don't have to report anything on your tax return. Your contributions are already reflected in your income through your W-2.

That said, even if you haven't made any withdrawals, reviewing your 401(k) for recordkeeping and accuracy is still a good idea. Look at your contributions to ensure you have stayed within the annual limits. This can also be a great time to evaluate how well your 401(k) is performing and consider any changes in contributions or investments for the future.

If you've taken withdrawals, distributions, or loans:

If you've taken withdrawals from your 401(k), you must report them on your annual tax filing.

Whenever you withdraw from your 401(k) plan, your plan administrator will send you a Form 1099-R, which reports distributions from a 401(k) plan. You can use the information on this form — including the total withdrawal and taxable amounts — to assist you in filing your taxes.

If you had a loan deemed distributed, offset, or qualified plan loan offset, you will receive a 1099-R for that amount. The pre-tax portion of the outstanding balance will be considered ordinary income, and the entire amount may be subject to a 10% early withdrawal penalty unless an exception applies.

Understanding the tax implications of your 401(k) plan can feel challenging, but it's manageable if you pay close attention to the requirements. You should always consider consulting with a tax professional and don’t be afraid to ask for support from your 401(k) provider.

Disclaimers:

The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.

If you’re a business owner looking for ways to attract new talent and improve retention, offering a retirement benefit like a 401(k) can be a great way to give your company a competitive advantage. Sounds great, right?

As good as it may sound, many companies still don’t offer a retirement plan, with many business owners citing cost as a barrier. In a recent survey, more than two-thirds of benefits decision-makers who don’t offer a retirement plan said they believe offering a 401(k) is cost-prohibitive.¹ While retirement benefits are often perceived as expensive to start and complicated to manage, that's no longer always the case.

To make these benefits more accessible, Congress established retirement plan tax credits under the SECURE Act, which took effect in 2019 and was later expanded and revised in 2022. SECURE 2.0 aims to make it easier for businesses like yours to provide affordable retirement plans and expand access to benefits. In fact, thanks to the SECURE Act and SECURE 2.0, eligible businesses may receive up to $16,500 in tax credits over a plan's first three years. These credits include:²

• Startup tax credit
• Automatic enrollment credit
• Employer contribution cost credit
• Military spouse credit

While these tax credits were established to increase 401(k) access, our research shows that many businesses don’t know about them — nearly 50% of benefits decision-makers are unaware of the retirement tax credits their companies may qualify for.³

If you’re uncertain which retirement tax credits are available for your business, you’re not alone. In this post, we’ll break down the four credits that you may be eligible for that can help you affordably offer a 401(k), and show you how to claim them for your business.

Is your business eligible?

First things first – these tax credits aren't automatic, and several factors will determine if you're eligible and how much you can claim. You should consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim. But generally, your business may qualify if:

• Your business had 100 or fewer employees who earned at least $5,000 in the previous year.
• If you have yet to sponsor another retirement plan in the three tax years prior. (Note: This rule only applies to the startup tax credit and employer contribution cost credit)
• The plan will cover at least one non-highly compensated employee (NHCE), which for the 2024 tax year is generally anyone who did not own more than 5% of the company and did not earn more than $150,000 in 2023. (Note: This rule doesn't apply to the automatic enrollment credit.)

Now, let's review the tax credits your business may qualify for.

Startup tax credit

What it is:

If your business qualifies for the startup costs tax credit, you can claim a credit for your 401(k) startup costs for up to three years after establishing the plan, so long as you continue to qualify.

This credit equals a percentage of your qualified startup costs, including what the IRS calls "the ordinary and necessary costs" to set up and administer your plan. These costs can include record-keeping fees, payroll deduction software, printing costs for enrollment materials, and money spent educating your employees.

How it works:

You can claim the startup tax credit for the first 3 years of your company’s plan. Note, you’re able to begin claiming the credit the year before the tax year in which your plan becomes effective. When used, the credit will reduce your business' federal income tax liability on a dollar-for-dollar basis.

The amount of the credit may vary depending on the size of your business:

• For businesses with 50 or fewer employees, the credit covers 100% of administrative costs for the plan’s first three years.
• For businesses with 51 to 100 employees, the credit covers 50% of administrative costs for the plan’s first three years.

Credit amount:

The credit covers a maximum of $250 per eligible NHCE, but not more than $5,000 or less than $500 in any single year.

Automatic enrollment credit

What it is:

The automatic enrollment tax credit was established to encourage more employees to participate in their company-sponsored retirement plans. And as a business owner, you benefit from this tax credit simply by offering a qualified plan.

How it works:

If your business qualifies, you can choose one of two automatic enrollment arrangements:

• An eligible automatic enrollment arrangement (EACA), which automatically enrolls participants who fail to make a deferral election at a default deferral rate, or:
• A qualified automatic enrollment arrangement (QACA), which combines the automatic enrollment of an EACA with an automatic increase provision as well as a safe harbor provision.

Unlike the startup tax credit, your retirement plan doesn't need to be new to qualify — only the EACA or QACA feature needs to be new.

Credit amount:

If you're eligible and add auto-enrollment to your company's plan, you can claim a tax credit of $500 per year for three years, beginning with the first year you include auto-enrollment.

It's important to note that you must keep automatic enrollment active to continue to qualify for this credit. For example, if you stop auto-enrollment after two years, you'll only be eligible for the credit for those two years.

Employer contribution cost credit

What it is:

The employer contribution cost credit is a tax credit for the contributions you make to your employees’ retirement savings.

How it works:

The number of employees you have determines this credit’s value. For a business with 50 or fewer employees, the tax credit can be up to:

• 100% of contributions in the plan’s first 2 years;
• 75% in the third year;
• 50% in the fourth year, and;
• 25% in the fifth year.

If your company has 51 to 100 employees, your tax credit would be reduced by 2% for each employee over 50. For example, if your business has 62 employees in the first year, your percentage would be 100 - (12 x 2) or 76% of employer contributions.

Credit amount:

The maximum credit is up to $1,000 per eligible participant. However, the amount will vary depending on how many employees you have, how long you've offered the plan, and the actual contributions made to each employee.

Military spouse credit

What it is:

The military spouse credit encourages those employing spouses of active duty service members to allow them to participate in their retirement plan right away. Military spouses often change employment frequently, which may delay their retirement savings if they have to keep re-meeting service requirements. This credit was established to help those spouses save for their futures.

How it works:

If your business has 100 or fewer employees and employs a military spouse who is an NHCE, you can claim $200 per military spouse, as well as 100% of all employer contributions for the spouse, up to $300. This military spouse credit is available for three years per military spouse.

There are a few requirements to qualify for this credit, including but not limited to:

• The spouse must be eligible for your company’s plan no later than two months after starting employment.
• The spouse must be 100 percent vested immediately in all employer contributions and those contributions must be the same as made to other eligible participants.

For more details, check out the IRS’ military family tax benefits resource.

Credit amount:

The maximum credit is $500 per military spouse per year for three years.

Potential tax credit savings

As we’ve stated above, the tax credits your business can claim depend on several factors, but to help give you an idea of how much you could potentially save, let's look at an example.

Suppose your business employs 12 people, and they all participate in your company's newly established 401(k) plan. Three of your employees are highly compensated, and the other nine are NHCEs.

In this example, you offer a 401(k) with Guideline's Core plan, which costs $89 per month + $8 per participant. Your monthly costs amount to $185, or $2,220 annually.

(Note: In this example, we’ll assume that all employee information and pricing stays the same for the three years of tax credit eligibility.)

First, let’s look at the startup tax credit. If you qualify, the credit covers up to $250 per eligible NHCE, for a total credit of $2,220 ($250 x 9 NHCEs.)

Then, we have the automatic enrollment credit. All Guideline 401(k) plans include automatic enrollment without exception, which means you'll be eligible for an additional $500 tax credit each year for three years.

In this example, retirement tax credits would offset your total annual 401(k) costs completely. (Note: This doesn't include employer contributions, which may be 100% tax deductible.)

Estimate your costs

Use our tax calculator to estimate the costs of offering retirement benefits to your employees and uncover the potential tax credits you might be eligible for.

How do I claim retirement tax credits?

If you qualify for these tax credits, claim them on your organization’s tax filing using the IRS’ Form 8881, Credit for Small Employer Pension Plan Startup Costs. The IRS’ instructional guide provides in-depth guidance on how to complete this form.

Unlock tax credit savings for free with help from MainStreet

If you’re looking for support with preparing the paperwork to claim your tax credits, you’re in luck. MainStreet⁴ is offering Guideline's customers help with claiming their retirement tax credit services — for free.

How does it work? It’s simple.

1. MainStreet’s AI-enhanced system will scan 77,000 pages of tax code to identify the credits you’re eligible for.
2. Then, they’ll provide the paperwork for your businesses to include in your tax filing.
3. MainStreet will waive their service fees on any retirement plan related credit claims paperwork.

Whether it’s the first time you’re offering a 401(k) or your benefits program is a well-oiled machine, MainStreet can help you claim the tax credits your business deserves. Learn more today.

Disclosures:

This information is general in nature and is for informational purposes only. It shouldn’t be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. Investing involves risk and investments may lose value. Tax laws and regulations are complex and subject to change. You should consult a qualified financial adviser or tax professional before relying on this information.

¹ Source: Guideline research run with Suzy. Insights based on data collected February 2024, from a survey of 350 US-based employers who do not offer a retirement benefit. Guideline was not identified as the survey sponsor. The experiences of the respondents in this survey may not be representative of all people.

² This content is for informational purposes only and is not intended to be taken as tax advice. Please consult a tax professional for l to determine what types of tax credits or deductions your company is eligible to claim.

³ Source: Guideline research run with Suzy. Insights based on data collected February 2024, from a survey of 422 US-based employers who do not offer a retirement benefit. Guideline was not identified as the survey sponsor. The experiences of the respondents in this survey may not be representative of all people.

⁴ Guideline is not affiliated, associated, authorized, endorsed by, or compensated by the company listed, and their subsidiaries or its affiliates. Nor, does Guideline endorse or recommend any of the services or products marketed by this company. Please contact a financial, tax, and/or legal advisor to determine if any of these vendors or their applications and products are appropriate for your specific circumstance.

Accountants, financial advisors, and benefits professionals have long stood as a bridge between business owners and the complex world of finance and compliance. Planning for retirement is one of those important topics. Research shows that 80% of financial and benefits professionals have advised their clients on offering a 401(k).¹

In 2019, we launched Guideline for Accountants and Guideline for Advisors® to support these professionals and help them deliver even more value to their clients through retirement planning. Since then, over 3,000 professionals have joined the platform, leveraging our expertise and resources to help their clients save for retirement.

But this was just a first step.

Today, we’re excited to celebrate the next phase of growth with the announcement of Guideline Pro, a free platform for accountants, financial advisors, and benefits professionals to help grow their retirement business. Guideline Pro is designed to make it easy for professionals to help their clients offer a meaningful benefit, deepening their role as their clients’ trusted partner.

Whether retirement planning is something you routinely manage or have shied away from in the past due to its complexities, Guideline Pro is a platform for you. With an expansion of our plan offerings through Starter and Enterprise, Guideline can better serve companies of all sizes, structures, and industries.² Similarly, the partners on our Guideline Pro platform serve businesses of all types — which is why we’ve invested in helping them grow their retirement services to meet the unique needs of their clients.

Why join Guideline Pro:

Growing the retirement arm of your business can help you become an even more trusted full-service firm. With Guideline Pro, you can help your clients set up a modern 401(k) they’ll love, access advice, plus get the tools to monitor all of your plans in one place — at no additional cost to you or your clients.

With Guideline Pro, you can:

• Streamline plan monitoring: Imagine overseeing all your clients' retirement plans from a single, intuitive dashboard with minimal effort. Guideline Pro empowers you to invite, track, and monitor multiple 401(k) plans seamlessly, giving you a comprehensive view and advanced plan visibility.
• Access support from your dedicated relationship manager Your clients turn to you for professional advice. Now you can turn to us for 401(k) insights. With Guideline Pro, every partner is matched with a dedicated relationship manager to help you with outstanding tasks and answer your questions. From acquainting yourself with the dashboard to understanding intricate plan matters, we're here for you.

You may qualify for even more benefits:

• Pass on discounts to your clients: Guideline Pro partners can pass on meaningful savings to their clients year-round, starting at 4 months of no employer fees for each client you sign up. We’ll also waive 6 months of employer fees for your firm’s own Guideline 401(k) plan.³
• Earn referral rewards: Guideline Pro partners can earn $100+ for each new 401(k) added. Rewards are doubled for eligible plans with 50+ employees.⁴

Who Guideline Pro is for:

We've built Guideline Pro to support a diverse network of financial and benefits professionals, including but not limited to:

• Accounting professionals: CPAs, bookkeepers, and outsourced CFOs can leverage exclusive discounts and earn rewards on easy-to-manage 401(k) plans.
• Financial advisors: Broker dealers and RIAs can now offer robust retirement plans with built-in billing, enhancing their service offerings.
• Benefits professionals: HR consultants and brokers can enhance benefits packages with an affordable 401(k), plus earn referral rewards if they qualify.
• Business consultants: We're here to support a variety of consultants, ready to collaborate. If you don’t see your role mentioned, reach out to our team.

We’ve built Guideline Pro to grow with you. We’re committed to helping you become a trusted advisor and grow your own business with a better platform experience, resources, and support. Join for free today.

Disclosures:

¹ Source: Guideline research run with Suzy. Insights based on data collected  December 2023 through January 2024, from a survey of 474 US-based financial and benefits professionals. Guideline was not identified as the survey sponsor. The experiences of the respondents in this survey may not be representative of all people.

² Go here for more information on Guideline plans. Go to Form ADV 2A Brochure for more information about our fees.

³ Employer fees include the monthly base fee and a monthly participant fee after the new plan begins. Other participant-paid fees will apply.  This offer can’t be combined with other offers. Guideline reserves the right to modify or discontinue this promotion at any time without prior notice.

⁴ A new Guideline 401(k) plan invited through your dashboard, provided that you do not act as a fiduciary for the plan, is eligible for referral payment. A new plan is defined as a start-up 401(k) plan and does not apply to a preexisting 401(k) plan transferring to Guideline.

💡 Key takeaways:

• 401(k) plans and profit sharing plans are both forms of employer-sponsored retirement benefits.
• The primary difference between profit sharing and 401(k) contributions is who is contributing to the plans.
• Profit sharing can boost employees’ retirement savings without increasing their annual taxable income.
• Businesses of any size can participate in profit sharing, even if the business isn't profitable.  

If you’re an employer designing a retirement benefits program for your employees, you have many options to consider. Among those options are profit sharing and 401(k) plans — both are ways you can help your employees grow their retirement savings.

In this guide, we'll break down the benefits and key differences of each to help you identify which type of benefit is best for your team.

Key differences: Profit sharing vs 401(k)

The main difference between profit sharing and 401(k) plans is who can contribute to the plans. Only employers can contribute to profit sharing plans, while both employers and employees can contribute to 401(k) plans.

With a 401(k), all employee contributions are 100 percent vested, meaning they belong to the employee. However, with contributions in profit sharing plans, the employer can place vesting restrictions that require the employee to work at the company for a specific amount of time before being eligible to keep the total contributions.

Basics of a 401(k) plan

Businesses of any size can set up 401(k) plans for their employees. A 401(k) is a tax-advantaged, employer-sponsored retirement savings plan where employees contribute some of their salary to individual accounts. Employers can contribute to these individual accounts as well.  

There are several types of provisions that you can include in a 401(k) plan:  

• Traditional 401(k) employee contributions are made pre-tax and give employees a benefit today. The contributions come from an employee's paycheck before income taxes are paid. The individual pays taxes on the basis as well as all gains and earnings at the time of distribution, typically in retirement.
• Roth 401(k) employee contributions give employees a tax benefit in retirement. Employees pay tax on the contribution before it is deferred into the plan. As long as certain requirements are met, the entire amount will be tax free, including any earnings, when they are distributed from the plan.
• A Starter 401(k) plan is available to businesses with 50 or fewer employees. These plans only allow for employees to contribute (meaning employers cannot contribute directly to their employees’ retirement savings) and there are significantly lower contribution limits. Because these plans also have limited ability to exclude employees from participation, nondiscrimination testing isn’t required.
• Safe Harbor 401(k) provisions require that employer contributions are made to all eligible participants.  These plans aren't subject to most annual nondiscrimination tests, and in exchange, employers must meet a few requirements every year, including notifying eligible employees in writing and applying strict limits on when participants can withdraw their contributions.

Employer contributions can be set up as mandatory or discretionary. A 401(k) plan can include several different types of contributions. Two of the most common types of contributions are matching and profit sharing contributions. Profit sharing contributions are typically given to all employees eligible to participate in the plan, and matching contributions are only given to those who chose to contribute their own money.

The IRS limits how much employers and employees can contribute to retirement accounts, including 401(k) plans. Plan contribution limits are evaluated annually and may be adjusted for factors like inflation and cost of living.

Basics of a profit sharing plan

A profit sharing plan is a plan set up by a company that only allows the employer to make contributions. The examples given below also work for profit sharing contributions made to a 401(k) plan. Since profit sharing contributions are generally done after the end of the plan year, this gives employers time to determine if and how much they want to contribute on a year to year basis. Profit sharing contributions are generally tax deductible for employers.

Employers can make contributions any year, even if the business isn’t profitable. Often, profit sharing is used as a year-end bonus for employees. These contributions can boost employees’ retirement savings without increasing their annual taxable income. (Note: employees cannot make profit sharing contributions.)

There are a wide variety of profit sharing formulas your company may use depending on your business needs and situation. The three most common are pro-rata, flat-dollar, or new comparability, also known as cross-tested.

Pro-rata

With the pro-rata formula, employees receive fixed contribution amounts in equal percentages based on their relative compensation. Pro-rata is the default type of profit sharing formula for Guideline 401(k) plans.

Example:
Atmos Inc. wants to give a profit sharing contribution totaling $10,000. The amount of all eligible employee compensation is $200,000. In this case, each participant receives a contribution equal to 5% of their compensation.

Flat dollar

Known as "same dollar amount," flat-dollar is the easiest type because each eligible employee gets the same contribution amount, regardless of how much each employee earns. The amount is determined by dividing the profit pool by the number of eligible employees.

Example:
Atmos Inc. wants to give a profit sharing contribution totaling $10,000. Three employees share it equally, receiving $3,333 each.

New comparability

Another formula, new comparability, offers different contributions to different groups of employees. In new comparability the testing looks at what the benefit will be worth at an assumed retirement age. Because it takes into account earnings over time, a new comparability formula often allows older, more highly compensated employees to receive a larger portion of the contribution than they could under other formulas. New comparability plans have to pass additional IRS nondiscrimination testing.

The below sample contribution shows how it works for a small business where the owner is 50 years old with a high income. Using new comparability, the owner can receive a larger contribution than younger employees with lower income.

Example:

Most employer contributions, including profit-sharing contributions, can be distributed when the employee reaches a stated event. This event is often a certain age, being a participant in the plan for five years, or becoming 100% vested.

Safe harbor contributions and employee contributions are more restricted. They generally cannot be distributed any earlier than age 59 ½ or when the employee leaves service.

Regardless of when the plan allows participants to take a distribution, if the participant is under 59 ½, there is a 10 percent penalty for early distribution unless a penalty exemption applies.

Employers can choose distribution types when they establish the plan, including lump-sum, installment, and annuity distributions. Distributions are included as ordinary income when the individual files their taxes.

• A lump-sum distribution is when the entire vested benefit is taken in a single distribution.
• With installment payments, a specified amount is paid out in regular intervals for a set period, such as $1,000 a month for 10 years, or until the account is empty.
• Annuity payments are payments stretched over the participant's lifetime but are rarely permitted in a profit sharing or 401(k) plan.

Can employers provide both a 401(k) and a profit sharing benefit?

You don't have to choose between having a 401(k) and profit sharing. If you’re designing a retirement benefits program for your company, you can provide both a 401(k) and profit sharing benefits either separately or in the same plan. While profit sharing contributions are flexible and give you the option to make contributions if you choose, 401(k) contributions allow employees to set aside some of their own money for retirement directly from their paycheck. Some years, you may not contribute to profit sharing, while other years, you may choose to contribute a lot. There's no set amount required or restrictions on business size.

Withdrawal rules and tax considerations

Both 401(k) and profit sharing contributions are opportunities for employees to save for their financial futures. But the sources have different rules about withdrawals and may have different tax consequences for both the employer and the employees. When it comes to distributions each individual plan will set when an employee can withdraw their savings. The IRS determines the earliest opportunity, but the plan may choose more restrictive options.

Withdrawal rules and considerations for 401(k)s

Individuals can withdraw their 401(k) contributions when they reach age 59 ½, terminate from service, or become disabled. The payments can be lump sum or periodic, including installment or annuity payments. If a withdrawal is taken before 59 ½, the individual may have to pay a 10% additional tax on the early distribution unless they qualify for a penalty exemption.  

Because 401(k) contributions are the employee’s money, they are always 100% vested in those contributions. This means it does not matter how long they have worked for the employer sponsoring the plan — they will always receive 100% of their 401(k) contributions when they are eligible to take a distribution.

Withdrawal rules and considerations for profit sharing contributions

Individuals can withdraw their profit sharing contributions upon a stated event, which are typically related to age, length of service, or how long the money has been in the plan. Just like with 401(k) contributions, the payments can be lump sum or periodic, including installment or annuity payments. If a withdrawal is taken before 59 ½, the individual may have to pay a 10% additional tax on the early distribution unless they qualify for a penalty exemption.

Unlike 401(k) contributions, profit sharing contributions can be subject to a vesting schedule. This means that the employee may need to work a certain amount of time with the employer — no more than 6 years — or they may forfeit a certain percentage of their profit sharing contributions.

Profit sharing vs. 401(k) plans: Key considerations for employers and benefits providers

There are many factors that employers and employees should consider when looking at profit sharing and 401(k) plans.

Administrative costs and complexity

401(k) plans can require more administrative oversight than traditional profit sharing plans. As the sponsor, you are responsible for record-keeping, answering participant questions, ensuring the plan meets regulatory compliance, and providing summary plan descriptions for participants, as well as individual benefit statements for both plan types; the complexity can be greater for 401(k) plans. Because 401(k) plans involve employee contributions that will need to be collected, tracked, and applied to payroll correctly each paycycle, this plan type can be more of an administrative burden than a plan where you are only making contributions once a year.

Regulatory compliance and testing requirements

While all profit sharing and almost all 401(k) plans require nondiscrimination testing to make sure the plans are fair to all employees, there are additional tests that apply to plans with most 401(k) contributions that do not apply to plans that only allow for profit sharing contributions.

While certain profit sharing contribution formulas can result in more complex testing, most 401(k) plans have additional testing to make sure that employee and matching contributions are non-discriminatory. However, much of this complexity can be alleviated by adding a Safe Harbor provision to the 401(k) plan.

Tax implications for employers and employees

401(k) contributions are tax-deductible for employers. Traditional 401(k) contributions are taken from employee’s pay on a pre-tax basis, while Roth 401(k) contributions are taken on an after-tax basis. When an employee takes a distribution of their traditional 401(k) contributions, the entire amount will be taxed as ordinary income.

On the other hand, Roth 401(k) contributions will always be distributed tax-free, as they were taxed as the employee contributed to the plan. The earnings on Roth 401(k) contributions may come out completely tax-free if specific requirements are met, commonly called a “qualified distribution.”

Contribution limits and opportunities

Profit sharing contributions can be a great way to help employees feel empowered, rewarding them with a piece of the company's overall success.  

On the other hand, 401(k) contributions empower employees with the flexibility to save for retirement in a way that best suits their personal situation and goals — whether that's pre or post-tax, or a small or significant percentage of their overall earnings. With that in mind, both contribution types are subject to some limitations.

When looking at profit sharing contributions, the total contribution cannot be higher 25% of total eligible compensation. Any amount over that 25% would not be deductible and would be subject to penalty taxes. Also, the total yearly amount an employee can contribute, which includes both what the employer puts in and what the employee defers, cannot exceed either 100% of the employee's pay or the annual additions limit, whichever is lower.

In addition to being included in the annual additions limit, each individual’s 401(k) contributions are limited to the annual deferral limit. This limit is an individual limit and will include all deferrals that an individual may make under any 401(k), 403(b), SAR-SEP, and SIMPLE-IRA in a calendar year.

Implementation and administration

Employers are responsible for setting up 401(k) and profit sharing plans. There are a lot of factors to consider when starting a plan, but you don't have to do it alone — we’re here to help you implement and manage your company’s retirement plan.

Implementing a profit sharing plan

When establishing a profit sharing plan for the first time, there are specific steps you'll need to follow, including:

• Complete and sign a plan document: This will include making decisions regarding the specific plan provision like eligibility, vesting, and distributions.
• Determine when the plan will be effective: For profit sharing plans, you can set up a new plan for a prior year up until your organization's tax filing due date.
• Arrange to work with service providers: This may include a recordkeeper, financial advisor, payroll provider, and custodian.
• Provide employees any required notification about the plan and their rights under it: The specific notices may vary based on plan provisions, such as if participants can choose their own investments.

Implementing a 401(k) plan

When establishing a 401(k) for the first time, the same formal steps that are needed for a profit sharing plan are also needed. However, since 401(k) plans include employee contributions there will be additional steps:

• Complete and sign a plan document: This will include making all of the decisions regarding the specific plan provision like eligibility, vesting, automatic enrollment, and distributions.
• Determine when the plan will be effective: To set up a 401(k) plan, the starting date must be in the future. This allows you to collect deferral elections from participants before the 401(k) becomes active. If your 401(k) plan includes profit sharing, you can establish a new plan for a past year until your organization's tax filing deadline. You can make this plan effective retroactively. In such a scenario, you'll also need to specify a future date for when deferrals will commence.
• Arrange to work with service providers: This can include a recordkeeper, financial advisor, payroll provider, and custodian. You can also work with a provider like Guideline that works directly with payroll providers for a simple, affordable solution.
• Provide employees any required notification about the plan and their rights under it: Specific notices may vary based on plan provisions, such as if the participants are going to be able to choose their own investments.
• Ensure timely employee deferrals: It's important to give all qualified employees the chance to choose a deferral, and make sure that their choices are put into action promptly.

We’ve helped more than 45,000 businesses of all sizes offer retirement benefits. Explore how 401(k) and profit-sharing plans could work for your team today.

Disclosures:

*This content is for informational purposes only and is not intended to be construed as tax advice. You should consult a tax professional to determine the best tax advantaged retirement plan for you.

2023 was a landmark year for Guideline. We reached 47,000+ plans signed and our assets under management reached nearly $12 billion, with our savers contributing close to $3 billion to their retirement savings this year alone. We strengthened our commitment to making retirement more accessible with a series of launches, including the first Starter 401(k) plan to market and a mobile app that makes it easy to manage your 401(k) directly from your phone.

We're looking forward to continued growth as we head into 2024. But first, let's take a look back on our highlights from 2023:

Disclosures:

Figures are approximate values based on internal data collected as of December 31, 2023. This information is provided for educational and illustrative purposes only.

¹ Source: PlanSponsor Survey June 2023

² The calculation is a simplified representation of possible tax credits that may have been available to employers who established new 401(k) plans at Guideline effective in or after 2020. The actual savings realized may be higher or lower as this is a hypothetical and based on the assumption that all 40,000 + newly established plans were eligible to claim at least the minimum allowed under the new plan and auto-enrollment credits.  Business owners of Guideline plans do not provide their tax credit eligibility information to Guideline. Learn more.

³ Please go to our Pricing Page for information on our plan tiers. See our Form ADV 2A Brochure for more information regarding fees.

⁴ Source: ASPPA Closing the Opportunity Gap February 13, 2023

⁵ App store rating is as of 12/31/2023 and is based upon all ratings and reviews received by Apple App Store® since the Guideline app was launched June 26, 2023. Current rating can be found on Guideline's App Store and is subject to change. App Store rating is calculated and generated by Apple based on the average of all total app reviews. Count of total ratings and reviews reflects the combined total of App Store rating and Google Play store ratings. No compensation was exchanged for reviews or ratings. Rating may not be representative of the Guideline client experience, advisory services, or investment performance. For more information go to Guideline on the App Store.

Despite its name, profit sharing in a 401(k) plan doesn’t necessarily involve your company’s profits. So what is it? Profit sharing in a 401(k) plan is a pre-tax contribution employers can make to their employees’ retirement accounts after the end of the year.

The contributions are tax-deductible for employers for the previous tax year. This delayed approach lets employers assess their finances before deciding whether or how much they want to contribute to each eligible employee’s 401(k) account.

Why businesses like profit sharing

Here are five benefits to offering a profit sharing plan:

1. It’s a bonus with tax benefits

One way to use profit sharing is as part (or all) of your employees’ year-end bonus. These bonuses boost your employees’ retirement savings without increasing their taxable income in a given year. Profit sharing contributions are also tax-deductible to the employer and aren’t subject to Social Security or Medicare withholding. As a year-end bonus, a profit sharing contribution may eventually be worth more to employees than a similarly-sized direct bonus payment.

2. The flexibility to plan your finances

Not sure if you can offer a potentially costly employee benefit? Profit sharing plans let you decide after the end of the year. Contributions must be made before the tax filing deadline (including extensions), and are still deductible on the previous year’s tax return. In February 2024, for example, your company can make a profit sharing contribution and deduct it on its 2023 tax return.

3. Take care of Highly Compensated Employees (HCEs)

A profit sharing plan may allow you to make greater contributions to HCEs without failing IRS compliance limits for nondiscrimination testing. Profit sharing contributions are not counted toward the IRS annual deferral limit.

4. A reward that can vest over time

Employers have the option to choose a contribution vesting schedule based on the employee's length of service. If employees leave the company before their contributions are fully vested, they forfeit the unvested portion. Vesting can incentivize retention, as employees receive more contributions to their 401(k) the longer they stay.

5. No extra work if you offer a 401(k) already

Some 401(k) and other retirement plan providers let you set up a plan that allows for profit sharing. That means only one fee and one benefit to manage if you set it up right.

Popular formulas for 401(k) profit sharing contributions

Along with making the decision to offer a contribution after the year is over, you will also need to determine how to allocate the contribution pool between your employees. To treat all your employees fairly (and stay compliant with the IRS), Guideline offers two design-based Safe Harbor formulas you can use to allocate profit sharing contributions, as well as one non-design-based Safe Harbor formula.

When you decide to make a contribution to your profit sharing plan, you do so by setting aside a “pool” of money that will be contributed across all your eligible employees. Let’s say you decide to contribute a total of $10,000. Here are examples of how they work with the two design-based safe harbor formulas:

Flat dollar amount method

This approach (which is also sometimes referred to as ‘same dollar amount’) is the most simple because every employee receives the same contribution amount. You calculate each eligible employee’s contribution by dividing the profit pool by the number of employees who are eligible for your company's 401(k) plan.

Example: The company profit sharing pool is $10,000 and there are three eligible employees. Each employee would get $3,333, regardless of their salaries.

The pro-rata method

Also known as the “comp-to-comp method,” this approach allocates the profit share based on employees’ relative salaries.

Example: The company profit sharing pool is $10,000, and the combined compensation of your three eligible employees is $200,000. As a result, each employee would receive a contribution equal to 5% of the employee’s salary.

New comparability

A new comparability profit sharing formula may allow a greater disparity of contributions between different groups of employees. In other words, older employees with higher salaries can have greater contributions than younger employees with lower salaries. New comparability plans are not design-based safe harbors so have to pass IRS testing to prove nondiscrimination. New comparability profit sharing is generally desirable for business owners and executives who are older, make more money than other employees, and want to maximize employer contributions to their own accounts. New comparability is included in Guideline’s Enterprise tier, but may incur a fee for Core in each year it is used.¹

The first step in making a new comparability contribution is to allocate a “minimum gateway” contribution to all Non-Highly Compensated Employees (NHCEs), usually between 3 and 5% of compensation. We generally recommend that this minimum contribution be made in the form of a Safe Harbor nonelective contribution to automatically pass nondiscrimination testing.

The next step is to make differing contributions to each employee in such a way that the future retirement benefit derived at normal retirement age is equivalent.

Example: The owner of a small business is a 50 year old with a high income. Using new comparability, the owner is able to receive a larger profit sharing contribution than the younger and lower income employees.

New comparability profit sharing may be appropriate for a small business if:

• You'd like to maximize employer contributions made to owners
• Owners are generally older than non-owner employees
• Owners receive higher compensation than non-owners
• You have a small number of employees (usually fewer than 50)

Because new comparability profit sharing calculations are based off year-end employee census information, changes in personnel can significantly impact projected contributions. As such, specific results can’t be guaranteed until year-end data becomes available.

Limitations to profit sharing plans

There are a few limitations to remember when making employer contributions, such as profit sharing:

• Employers can only deduct contributions to retirement plans of up to 25% of total employee compensation.
• Total contributions for each employee (including employer contributions and employee deferrals) may not exceed 100% of the employee’s compensation.
• Total contributions to an employee are also limited to $69,000 for 2024 (or $76,500 if an employee is over age 50).²
• For 2024, only annual compensation up to $345,000 can be used for the calculation of any employer contribution.²

Profit sharing is a great way to thank your employees while being mindful of your finances. Use this checklist to see if a Guideline plan is right for you.

Disclosures:

The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.

1 See our Form ADV 2A Brochure for more information on our fees.

² May be adjusted annually to account for IRS cost-of-living adjustments.

There’s never been a better time for employers to start a new 401(k). Why, you might ask?

Recent retirement legislation has made offering a 401(k) more affordable than ever. Thanks to the SECURE 2.0 Act, eligible employers may receive up to $16,500 in tax credits¹ over a plan’s first three years to help offset initial plan costs. The Act also introduced the Starter 401(k) plan, a retirement benefit designed to make it easier for businesses to give its employees a way to save for the future.

In this post, we’ll break down everything employers need to know about Starter 401(k) plans, including:

• What is a Starter 401(k)?
• How do Starter 401(k) plans work?
• Who is eligible for a Starter 401(k) plan?
• What's the difference between a standard and a Starter 401(k) plan?

Read on to learn more and determine if a Starter 401(k) plan is right for you.

What are Starter 401(k) plans?

Think of a Starter 401(k) as a simplified employer-sponsored retirement plan with lower saving limits than a standard 401(k). These plans help employers offer a retirement benefit by streamlining two of the most significant barriers when it comes to offering retirement savings plans: cost and ease of administration.

Starter 401(k) plans were established under the SECURE 2.0 Act, which was signed into law in 2022. The need for retirement reform is significant and has bipartisan support. Data shows that 56% of Americans are worried about not having a financially secure retirement, and 65% worry they’ll have to work past retirement age to have enough money to retire.

The SECURE 2.0 act aims to positively impact these statistics. According to a new report, the Starter 401(k) could help up to 19 million American workers participate in a workplace-based retirement plan. The report also estimates a 22% increase in retirement plan access for Black and Hispanic American workers.

How does a Starter 401(k) plan work?

Starter 401(k)s are exempt from IRS nondiscrimination testing, but the streamlined compliance means there are more strict requirements, including:

• Employers can’t contribute.
• Employee contributions can be no more than $6,000 per year starting in 2024, the first year the plans will be available. After that, the contribution level may be adjusted each year.
• Employees over 50 can contribute an additional $1,000 in catch-up contributions for a total limit of $7,000 in 2024.
• Employees are automatically enrolled at a contribution set by the plan sponsor of at least 3% and no more than 15% of their salary.

Who can open a Starter 401(k)?

Starter 401(k) plans can start as early as January 1, 2024. Employers are only eligible for a Starter 401(k) if they don't yet provide their workers with a retirement plan. But there are a few exceptions:

• Businesses that previously had an IRA through a mandated state-sponsored retirement program can choose to convert their plan to a Starter 401(k).
• If a company previously offered a 401(k), but they terminated it and have not offered any retirement plan in at least 12 months, they may be eligible for a Starter 401(k).

Starter 401(k) vs. Standard 401(k)

From cost to flexibility, there are significant differences between a Starter and standard 401(k) that employers should be aware of. You may already be familiar with a standard 401(k), which has significantly higher contribution limits and allows employer contributions.

What's the difference between a Starter 401(k) and a Safe Harbor 401(k)?

There are similar benefits to Starter and Safe Harbor 401(k) plans regarding nondiscrimination compliance tests. But Starter 401(k) plans have more limitations.

Unlike a Safe Harbor 401(k), with a Starter 401(k), employers can not contribute to their employees’ savings. The contribution limits are also lower with Starter 401(k) than with a Safe Harbor 401(k) plan. The chart below breaks down the differences.

What's the difference between a Starter 401(k) and traditional no-match 401(k)?

Starter 401(k)s have many differences compared to a traditional 401(k), including lower contribution and catch-up contribution limits, no employer contribution match, and automatic enrollment. In order to offer a 401(k) without a match, you’ll be setting up a traditional 401(k), which will be subject to annual non-discrimination tests. See the chart below for details.

Starter 401(k) benefits

Starter 401(k) plans offer employers great advantages, including:

• Low cost and simplified administration: Starter 401(k) can be cheaper and easier to administer than standard 401(k) plans. Since they’re exempt from IRS testing, they don’t require the same amount of valuable administrative resources as a standard 401(k).
• Automatic enrollment: The automatic enrollment of eligible employees in Starter 401(k) plans may increase employee participation, since employees don’t have to do anything to get started. Employees can opt out if they choose.
• Meets state mandate requirements: Businesses can choose to offer employees the mandated state-sponsored retirement program, or they can offer their own private 401(k), such as a Starter 401(k) plan.³

Starter 401(k) limitations

While a Starter 401(k) plan may be a good fit for many employers, they pose several limitations, including:

• Lower contribution limits: With a Starter 401(k), the annual employee contribution limit is $6,000 (for 2024), which is significantly lower than the standard 401(k) limit. That means employees have less tax-advantaged savings for retirement each year.
• No employer contributions: Employers are not allowed to contribute to employees' Starter 401(k) plans, even if they’d like to.
• No flexible plan design options: Starter 401(k) plans have a one-size-fits-all approach to retirement benefits. They aren't as flexible as standard 401(k)s, which offer elective benefits such as profit sharing, vesting, and expanded eligibility requirements.

Who might a Starter 401(k) be a good fit for?

Think your company might benefit from a Starter 401(k) plan? Here are a few reasons why you might choose to consider this new, streamlined retirement savings benefit:

• Employers looking for a fast, simple, budget-conscious 401(k) solution
• Employers wanting to avoid compliance testing
• Employers who don’t plan on contributing to their employees’ retirement savings

If you think a Starter 401(k) could be right for your business, Guideline can help you give your employees a road to retirement.⁴

¹ This content is for informational purposes only and is not intended to be taken as tax advice. You should consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.

² Starter 401(k) and Standard 401(k) annual limits may be adjusted annually by the IRS to account for cost-of-living changes. Learn more.

³ This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. Deadlines, fees, and other program details are subject to change by the state without notice and should be checked prior to making any decisions.

⁴ Please note, under current IRS rules, Starter 401(k) plans can only be converted to full 401(k) plans effective the first day of the plan year. This would require you changing to the Core or Enterprise tier at the beginning of a calendar year.

Thinking of starting a 401(k) plan? Great! Not sure when to actually start it? No problem.

While many business owners want to start as soon as possible, starting a plan early in a calendar year tends to make that first year go more smoothly. Here are some reasons why starting a new 401(k) at the beginning of a new year is a smart idea.

1. Employees will have the full year to make deferrals.

In general, you can only defer out of paychecks received after the 401(k) plan starts. You can’t retroactively make 401(k) contributions from pay received before the plan started. So if an employee doesn’t make at least $23,000 from the start of the plan to the end of the year, they won’t be able to max out for that year.¹

As a business owner with a high income, you might be able to max out your contributions. But if your employees don’t have funds to max out their contributions, your plan may have nondiscrimination testing issues (see #3 below).

2. Employer matching contributions may be limited otherwise.

Many people think they can still take full advantage of an employer match late in the year, by contributing larger sums of money in just a few months. But many 401(k) plans (including Guideline plans) calculate matching on a per-pay-period basis. For these plans, your matching contribution is calculated based only on that pay period’s contribution—not the whole year.

Let’s look at an example:

Adam’s Apples sets up a 401(k) plan to start November 1, with 4 pay periods left. They provide a dollar-for-dollar match up to 5% of an employee’s pay. Adam makes $250,000 in W2 wages and contributes $12,500 over those 4 pay periods (which is a 30% contribution rate, but 5% of his annual salary).

It seems like Adam should get $12,500 in employer matching, as well. But since it’s a per-pay-period match, Adam will only get a match of up to 5% of the pay he receives for those 4 pay periods. If you assume equal pay over all pay periods for the year, then he would get 5% of his per pay period pay of $10,416.67 — $520.83 in match per pay period for a total of $2,083 in match. Whereas, he would get the full $12,500 if he contributed the same amount over the entire year.²

If you start your plan on January 1, you can generally avoid this confusion for your employees and prevent a lot of frustration. Most employees tend to spread their contributions throughout the year to keep things manageable. Be sure to also inform your employees of how the per-pay-period match works, even if it’s January, so that the certain strategic employees understand not to front or backload their contributions for the full year.

3. Nondiscrimination testing is more predictable.

Many business owners intend to put as much money as they can into their accounts before the end of the year. The biggest problem with this is that most of their employees won’t be able to do the same thing. When you have a big discrepancy between the contributions of owners and highly compensated employees, versus those of other employees, you will most likely have a problem with nondiscrimination testing — which can result in unexpected costs to the employer.

In a short plan year, there’s not much time to figure out whether your plan will pass or fail nondiscrimination testing. Starting a 401(k) plan on January 1 will give you a full 12 months to monitor your plan’s activity and assess its compliance testing risk. Some plan providers, like Guideline, will conduct preliminary testing for you throughout the year so that you can strategize on how to best make your plan work for your company.¹  

4. Safe Harbor match plans can’t be started after October 1.

Many business owners avoid nondiscrimination issues by setting up a Safe Harbor 401(k) plan. These are especially great for small businesses, since fewer employees make it harder to pass testing. The deadline to set up a new Safe Harbor 401(k) plan with a matching contribution is October 1, of any given year. Any plans that start after that aren’t eligible for Safe Harbor status using a matching contribution. There is a small exception to this rule for a newly established employer.³  

As a business owner, starting your plan as Safe Harbor on the first day of the following year is a great way to have a clean benefit offered for the full year to employees, while helping minimize compliance headaches.

5. Changing with other benefits keeps things clean.

Finally, sometimes it just makes sense to start a new benefit at the start of the new year. Many companies switch benefits providers or start new benefits on January 1 of any given year. Your employees might appreciate being able to learn about their health, retirement, and other benefits all at once, and not have to remember different start dates for different benefits.

There are many reasons why a January 1st start to your 401(k) makes sense, but that doesn’t mean you have to wait until the last minute to set one up. Guideline can help you with all the details several weeks before the plan starts, so that you won’t be rushed through the process. Contact us at hello@guideline.com or (888) 228-3491 to get started.

Disclosures:

¹ May be adjusted annually to account for IRS cost-of-living adjustments. Learn more.

² The example provided, may not be representative of the experiences of all customers and does not guarantee future results. The information provided is general in nature, is provided for informational purposes only, and should not be construed as investment, tax, and or legal advice. Clients should consult a qualified investment or tax professional.

³ All plans of related entities must be administered by Guideline in order to provide compliance testing.

💡 Key takeaways:

• The IRS limits how much employees and employers can contribute to a 401(k) each year.
• In 2024, the 401(k) contribution limit for participants is increasing to $23,000, up from $22,500 in 2023.
• Participants who are 50+ can save an additional $7,500 in 2024 in catch-up contributions.
• In 2024, the combined contribution limit is increasing to $69,000, up from $66,000 in 2023.

No matter where you are on your path to retirement, a 401(k) can help you plan for your financial future. But the big question is, how much can you save for retirement?

There are a lot of factors that can help you determine how much you should save for retirement, including your income, where you live, and what your personal retirement goals look like. But this post focuses on how much you're actually allowed to save each year.

Below we’ll deep dive on all things contribution limits: what they are, how they’re determined, and how much you and your employer can contribute to different retirement plans this year.

What are contribution limits?

Contribution limits cap how much employees and employers can contribute to a retirement plan in a given year.¹ The IRS re-evaluates these limits annually based on factors like inflation and the cost of living. The limits were established to help create fairness in retirement savings, ensuring that higher income earners don’t benefit more from a 401(k) than those with a more modest salary.

401(k) contribution limits in 2024

Employee contribution limits

Employee contribution limits for 401(k) have increased for 2024. Employees can contribute up to $23,000 in 2024, an increase from $22,500 in 2023.

Employees further along in their careers can save even more money for their future with catch-up contributions. People aged 50 or older are eligible to make additional contributions to their 401(k) plans since they're getting closer to retirement age and may need to "catch up" in their savings. The limit for catch-up contributions in 2024 will stay the same at $7,500, which means eligible employees can contribute up to $30,500 to their retirement savings in 2024.

Employer contribution limits

Employers can support their team members’ retirement goals by offering to make employer contributions.  Employer contributions don't impact your individual annual contribution limit. That's because the IRS has a higher combined limit for employee and employer contributions. In 2024, that combined contribution limit will be $69,000 or 100% of the employee's salary, whichever is lower. The limit is $76,500 if the employee is over age 50 and making catch-up contributions.

Starter 401(k) contribution limits

Starter 401(k) plans are new in 2024, and were created to encourage more employers to offer retirement benefits to their employees. These plans automatically satisfy compliance tests and have fewer employer requirements, but lower contribution limits than a standard 401(k). The contribution limits are $6,000 per employee and $1,000 in catch-up contributions for employees aged 50 and older. Employers are not allowed to contribute.

IRA contribution limits

Traditional IRA contribution limits

The 2024 limit on annual contributions to an IRA will be $7,000, an increase from $6,500 in 2023. The 2024 catch‑up contribution limit for individuals aged 50 and over will stay at $1,000, the same rate from 2023.

Roth IRA contribution limits

Contribution limits are the same for traditional and Roth IRAs. Both have $7,000 contribution limits in 2024 and catch-up contributions of $1,000 for individuals aged 50 and over.

SEP IRA contribution limits

SEP IRA contribution limits for 2024 will be $69,000, up from $66,000 in 2023. The contributions can't be more than 25% of the employee's compensation. With a SEP, which is short for Simplified Employee Pension, contributions are only made by the employer. These flexible IRA plans are tax-deferred, have larger contribution limits, and have fewer administration requirements than other retirement plans.

401(k) contributions FAQ

We know there’s a lot more to consider than annual contribution limits when determining how much to save for retirement. Below we’ve answered a few frequently asked questions about 401(k) plans that might help you choose how to approach your retirement goals this year.

Should I max out my 401(k)?

Maxing out your 401(k) means contributing the maximum amount permitted by the IRS in a given year. If you're able to contribute that amount, that's great! We advocate for trying to save as much as possible, to the extent it makes sense for your own goals and budget. By saving more, you can reap the rewards of a 401(k), like reducing your taxable income and earning compound interest, which can help grow your savings over time. Remember — it’s always a good idea to speak with an investment or tax professional to determine your personal retirement strategy.

Can I contribute to more than one 401(k)?

Yes, you can contribute to more than one 401(k), but be aware that your contribution limits include all your accounts. That means in 2024, you'll only be able to contribute up to $23,000 across all your 401(k) accounts and not $23,000 to each.

What happens if I exceed the 401(k) contribution limit?

If you overcontribute, you may be eligible to receive a refund of your excess contributions, including any gains or losses incurred. That excess contribution will be taxed, too. Also, if your employer made matching contributions to your account, any match you received on your excess deferrals will be forfeited.

What can I do if I over-contribute to my 401(k)?

If you contribute too much to your 401(k) and catch it in time, you can fix the mistake. You'll need a corrective distribution, which means taking the excess money (and any amounts earned thereon) out of the account. The corrective distribution must be made by tax day. Guideline helps savers avoid exceeding their contribution limit by automatically adjusting contribution rates as they near the limit.

2024 retirement account contribution limits

To recap, here's an overview of the 401(k) contribution limits for 2024.  

Disclosures:

This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.  You are advised to consult a qualified financial adviser or tax professional before relying on the information provided.

¹ Starter 401(k) and Standard 401(k) annual limits may be adjusted annually by the IRS to account for cost-of-living adjustments. Learn more.

The end of the year is coming, which means it's the right time for a financial checkup. No matter how big or small your business is, this can be an overwhelming time. You may be stressing about meeting your end-of-year goals and budgeting for the upcoming year, all while planning for and enjoying the holiday season.  

But as a plan sponsor, it's important to review your 401(k) plan, ensuring that your current plan is still working for you and your employees. For example, you'll need to remind employees about their retirement benefits, collect your records, and review what's working and what could be tweaked.

Here are 8 tips that 401(k) plan sponsors should consider during their end-of-year plan checkup:  

1. Notify and remind your employees about their retirement benefits

Are you rolling out a new plan for the first time that's live on January 1, 2024? If so, tell your teams all about it now and let them know how and where they can participate.

For existing plans, remind your employees about the retirement benefits you're providing for them. The deadline for them to contribute to their 401(k) accounts for 2023 is approaching. In general, 2023 employee contributions to an employer-sponsored retirement plan must be made by December 31. For 2023, the 401(k) employee contribution limit is $22,500 for employees ($27,000 if they are age 50 or over) and a combined $66,000 for employee and employer contributions. Note that this differs from an IRA, which allows carryback contributions after the calendar year has ended but before taxes for that year have been filed.

Educate your team about contributing as much as possible within those limits. Possibly, encourage employees to meet their employer match, too, since it's like leaving part of their compensation on the table if it’s right for their situation. Tell them about any contributions you've made as their employer. After all, your contributions are helping them grow their retirement savings faster.

Also, think about pointing out to your team that contributing more to their retirement plan can help them reduce their taxable income. Or it adds more money into their Roth 401(k) balance, where the earnings are tax-free on withdrawal after specific requirements are met.

2. Audit employee 401(k) information

Use this time to review your employee information, including information gaps or changes. For example, you may need to update employees' mailing and email addresses, phone numbers, and plan statuses for new or former employees.

Reviewing retirement plan participant accounts for missing beneficiary designations is also smart. Adding or changing a beneficiary requires an employee to provide the beneficiary's name, date of birth, and social security number, if available.

3. Send required 401(k) plan information

As a plan sponsor, you're also required to provide notices to employees about their plans, including:  

• Participant fee disclosure information: On an annual basis, plans are required to give participants and beneficiaries plan administration information, such as fees that might be deducted, and a comparative chart showing comprehensive investment-related information about the plan's investment alternatives.
• Participant benefit statements: Defined contribution plans must provide Individual Benefit Statements (IBS) which include information on the benefits that a participant has earned and what their vested amounts are. For 401(k) plans where participants are allowed to direct the investment of their accounts, an IBS must be provided quarterly. A participant can also request a statement be provided at any time, but no more than once per 12 month period.  
• Summary annual report: Plan administrators must provide a Summary Annual Report (SAR), which summarizes the information reported on Form 5500, including administrative expenses incurred, the benefits paid to plan participants and beneficiaries, and the total value of the plan assets. The SAR is due 9 months after the end of the plan year.

Also, depending on the type of 401(k) you offer, you may have to provide additional annual notices by early December, such as:

• Safe harbor 401(k) notice
• Qualified Default Investment Alternative (QDIA) notice
• Automatic enrollment notice

While this can seem overwhelming, it doesn't have to be. With a Guideline 401(k), we can manage this for you and provide notices to the participants in your qualified retirement plan where you provide email addresses.

4. Make sure you've deposited 401(k) contributions by the required deadlines

Deadlines are the next thing to consider. Timely deposit of employee contributions are a key fiduciary duty of the plan sponsor. Late deferrals could be problematic, including resulting in an audit or additional taxes. Your retirement plan's Form 5500, a federal compliance tool, asks if there were any late deposits of participant deferrals for the year. Remember that the Department of Labor (DOL) requires employee contributions and loan repayments to be deposited into the plan as soon as they can be reasonably separated from the employer's general assets.

The DOL has a 7-business-day safe harbor rule for small plans with fewer than 100 participants. That provision says if the employees' contributions and loan repayments are deposited into the plan by the 7th business day following payroll, they are considered on time, even if the employer could have made the deposit sooner.

For larger plans, there is a rule that amounts must be deposited no later than the 15th business day of the following month. However, this is not a true deadline, but simply means that there is no case where amounts deposited after that time frame are not late.

Rules like this can feel overwhelming, but Guideline handles these matters so you don't have to. While you focus on managing and growing your business and keeping your employees engaged, we manage most of the administrative and regulatory stuff, including processing transactions, executing trades, safeguarding plan assets, and more.

5. Collect your plan's documents and records

During your end-of-year checkup, you'll need to gather your plan's documents. Under federal law, the Employee Retirement Income Security Act (ERISA), employers must keep records for at least 6 years.

Plan sponsors must keep the detailed following record: summary plan descriptions, participant notices and documentation of the dates and method of delivery, participant elections, including deferral and investment elections, and payroll records and employment history.

They must also provide nondiscrimination test results, copies of Form 5500, including attachments, and participant distribution forms, including special tax notices, election forms, and 1099-R forms. Documents such as the plan documents, associated amendments, and IRS determination letters must be kept for the lifetime of the plan and at least 6 years past the plan’s termination date.

These are just some of the required recordkeeping involved with offering a 401(k). But businesses who offer a retirement benefit with Guideline don't have to stress about maintaining these records. We collect and keep this documentation for the timeframe you are at Guideline, including government filings like Form 5500, compliance testing, and recordkeeping for plan balances, transactions, and deferrals.

6. Consider profit sharing

Instead of giving employees a traditional end-of-year cash bonus, consider providing a profit sharing contribution, which can boost their retirement savings without increasing their annual taxable income. Employers benefit too with tax deductions, and these contributions are not subject to Social Security or Medicare withholding.

While its name implies sharing profits, profit sharing is just a pre-tax contribution employers make to their employees' retirement accounts after the end of the year. The plan is a flexible, discretionary way for employers to reward employees with additional retirement contributions.  

Profit-sharing contributions have many employer benefits, such as tax-deductible contributions, typically for the previous tax year. Other benefits include:

• There's no minimum amount required for profit-sharing contributions.
• Plan sponsors can look at their finances before deciding whether to contribute or how much to contribute. Employers can choose to contribute even if their year isn't profitable.
• Profit sharing allows employers to contribute to all employees, even those who don't otherwise contribute to the retirement account.
• Offering profit sharing can improve employee recruitment. With vesting schedules, employees may stay longer at a company to maximize employer contributions.

With a Guideline 401(k), offering profit sharing is easier and less of an admin hassle.  We streamline the profit-sharing process, making it easy for plans to execute. Get started by checking our profit-sharing allocation formula.

Guideline offers 3 kinds of profit sharing: pro-rata, flat dollar, and new comparability. Under a pro-rata plan, employees receive a fixed contribution amount in equal percentages based on the employee's relative compensation. With the flat-dollar formula, every employee gets the same contribution amount. With a new comparability plan, an employer can choose to divide employees into different classifications so they can allocate different contributions to each group. Non-discrimination testing is used to determine the contributions. Both pro-rata and flat dollar profit-sharing formulas are available for Guideline Core and Enterprise plans. New comparability is also available for Enterprise plans or for a fee for Core plans.

7. Review plan fees you and your employees have paid this year

Many people set a goal to budget their money better in the new year. So why can't your company's retirement benefit budget be better, too?

Better budgeting starts by understanding the fees you pay. Fees are a part of all retirement benefit plans. However, a government report shows 40% of 401(k) plan participants don't understand the fee information of their plan.  Guideline is committed to keeping fees lower than average. Unfortunately,many 401(k) providers charge employers and plan participants hidden fees, which can be costly. Investment, administrative, and service fees can add up fast, and often, most employees don't know what the fees are for, even though they pay them.

Often, plan sponsors change providers if fees become too high. Guideline has low-cost 401(k) plans and takes pride in our transparent pricing. Our management fees are included, and investors could pay up to 7 times less in fees.¹ We don't have hidden fees or transaction fees, and you won't pay extra for plan setup, plan transfers, or 5500 prep.² It's all part of our commitment to making saving for retirement easy and available for everyone.

8. Review your retirement plan to see if it still fits your current needs

Your end-of-year financial checkup can be the time to assess your retirement benefit and determine if it's still a fit for your company and your employees. Providing a competitive retirement offering is often essential to attracting and retaining employees. But to stay competitive with your offerings, you may need to routinely reassess your 401(k) plan and provider.

Every year, you should consider grading your 401(k) provider by looking at measurable criteria such as:

• Plan costs, including fees
• Participant engagement
• Investment performance
• Fiduciary and compliance support
• Employee and administration services

Replace your 401(k) provider if they're not meeting your needs. Are the plans flexible? Is the provider responsive to your questions? Are they using easy-to-use tools for participants to manage their investments?

At Guideline, we offer a quick plan setup, provide an all-in-one experience, and have powerful technology to make setting up and managing 401(k) plans easy and efficient.

Beginning a 401(k) in the new year can help in both maximizing contributions and mitigating compliance risks. Open a Guideline 401(k) by December 31 and get 3 months of plan fees waived. Get started today.³

Disclosures:

The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax advice that considers all relevant facts and circumstances. Guideline makes no representations or guarantees with regard to investment performance as investing involves risk and investments may lose value. Clients should consult a qualified investment or tax professional to determine the appropriate strategy for them.

¹ The average investment expense of plan assets for 401(k) plans with 25 participants and $250,000 in assets is 1.60% of assets, according to the 23rd Edition of the 401k Averages Book, with data updated through September 30, 2022, and is inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or any other asset based charges. Guideline’s managed portfolios have blended expense ratios ranging from 0.064% to 0.067% of assets under management. When combined with an assumed 0.15% account fee, (Alternative account fee pricing is available, ranging for 0.15% to .035%), the estimated total AUM fees for one of Guideline’s managed portfolios can be under 0.22%.  Expense ratios for custom portfolios will vary. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup. The assumed annual account fee applied to assets under management is deducted on a monthly basis. Contact Sales at hello@guideline.com to learn more about exclusive pricing options available in Enterprise tier. See our  Form ADV 2A Brochure for more information regarding fees. You should choose your own investments based on your particular objectives and situation.

² Third-party auditor fees will apply to large plans where an audit is required. These fees are not charged by Guideline.

³ Employer fees include the monthly base fee and a monthly participant fee after the new plan begins. Other participant-paid fees will apply. This offer ends December 31, 2023. See our Form ADV 2A Brochure for more information about our fees. This offer can’t be combined with other offers. Guideline reserves the right to modify or discontinue this promotion at any time without prior notice.

All businesses should be able to offer an affordable and seamless retirement benefit. But not every 401(k) is suitable for every business.

That’s why we offer three distinct tiers. We know that some business owners are looking for a simple solution that checks the boxes, while others are looking for a more flexible solution that can scale as their business grows. Whatever your needs are, Guideline has a 401(k) that can help meet them.

Below, we’ll break down our three tiers: Starter, Core, and Enterprise. But before we do, it’s important to know that all of our plans include the fundamental services and features needed to offer a great retirement benefit:

• Low cost, low fees: All Guideline plans offer affordable prices for growing businesses. Guideline’s account fees are up to 7x lower than the industry average.¹
• A breeze to manage: Set up in as little as 20 minutes. Save time with employee self-enrollment and intuitive dashboards.
• An all-in-one experience: From serving as your fiduciary to ongoing compliance testing², Guideline offers end-to-end management of your 401(k).

With that said, let’s take a look at our three tiers so you can determine which one works best for your business.

Starter: A simplified 401(k) with limited features and easy administration

Starter is our most simple, out-of-the-box plan built to support employers offering a 401(k) for the first time. Starter is our lowest priced plan. In fact, for businesses with 50 or fewer employees, the cost may be free for the first three years after applying up to $16,500 in tax credits.⁶

Starter plans are exempt from IRS non-discrimination tests, which means they have fewer compliance requirements. That being said, Starter 401(k) plans have lower contribution limits than a standard 401(k), which means employees won’t be able to save as much. Employers also can’t match or contribute to their employees’ savings if they offer a Starter 401(k).⁷

Monthly base fee: $39 + $4 per active participant

Plan details:

• $6,000 employee contribution limit for 2024
• Only available to employers who haven’t previously offered a 401(k)
• No employer contributions allowed
• Must connect with an eligible payroll partner

Benefits of a Starter plan:

• Easy and affordable: Starter plans are a great fit for businesses searching for a predictable, low-cost benefit to retain and attract new talent. They’re also a sound solution for companies wanting to get started now and upgrade after the first or second year.
• Starter plans satisfy compliance tests and state mandates: All Starter 401(k) plans are exempt from IRS compliance tests, which can be particularly beneficial for businesses with limited administrative resources. Guideline’s Starter 401(k) also meets state-specific retirement mandates and offers additional support and features that many state-operated programs may lack.

Starter is a good fit for businesses that:

• Are setting up a 401(k) for the first time
• Want more predictable monthly costs, since there’s no employer match
• Are comfortable with a lower employee contribution limit

Core: Our most popular 401(k) with robust features and more plan design options

As its name implies, our Core plan provides all the core services and features needed for a great retirement benefit, with flexible plan design options like a traditional or a Safe Harbor 401(k).

Monthly base fee: $89 + $8 per active participant

Plan details:

• $23,000 employee contribution limit for 2024
• Safe Harbor or Traditional 401(k)
• Option to offer employer contributions and profit sharing
• Can connect with any payroll provider

Benefits of a Core plan:

• You can save more for retirement: With Core, you and your employees can save more for retirement, with a higher contribution limit than a Starter plan.
• More flexibility for growing businesses: When you sign up for Core, you can design your plan with employer contributions, vesting schedules, service and age eligibility requirements, and implement profit sharing after the end of the year. These options can help keep your 401(k) aligned with your objectives as your business grows.

Core is a good fit for businesses that:

• Want a standard 401(k) contribution limit of $23,000 (2024)
• Want the flexibility of plan design types — whether that's Safe Harbor or Traditional
• Want to offer a more robust employee benefit

Enterprise: Our most custom 401(k) with exclusive pricing options and premium support

As our most custom offering, Enterprise is designed to support growing businesses and their teams that may have more complex business needs. Enterprise offers enhanced features like exclusive pricing options and premium support for both employers and employees.

With our Enterprise plan, employers can open a Safe Harbor 401(k) plan or a traditional 401(k) plan. And in addition to every feature and service we offer in Core, the Enterprise plan provides access to custom features like new comparability profit sharing for no additional fee.

Monthly base fee: $149 + active participant fee

Plan details:

• $23,000 employee contribution limit for 2024
• Safe Harbor or traditional 401(k)
• Features like employer contributions and profit sharing
• Can connect with any payroll provider
• Support for 401(k) plan transfers

Benefits of an Enterprise plan:

With Enterprise, you get everything in our Starter and Core tiers, plus:

• Personalized support for you and your team: Enterprise offers preferred service, with an average 4 business-hour time to response.⁵
• Simple, streamlined onboarding: With Enterprise, you’ll get a dedicated onboarding specialist and client relationship manager, so you have support from us at every stage.
• Support your employees’ financial well-being: Exclusive to Enterprise plans, Participant Perks are special offers on financial tools and services that could help you and your employees create a more well-rounded roadmap to retirement.

Enterprise is a good fit for businesses that:

• Want more support for them and their employees
• Want a more well-rounded employee benefit, with Participant Perks
• Are larger in size and who desire more custom options

To recap, here’s a side-by-side comparison of our three pricing plans and contribution limits for 2024:

Like we stated in the beginning, there’s no right plan for every business. But we’ve deliberately built our pricing plan structure to help provide plans that work for your business — providing you and your employees with the right foundation to build a brighter future.

Disclosures:

¹ This information is provided for illustrative purposes only, and is not intended to be taken as investment or tax advice. Consult a qualified tax and financial advisor to determine the appropriate investment strategy for you. The average investment expense of plan assets for 401(k) plans with 25 participants and $250,000 in assets is 1.60% of assets, according to the 23rd Edition of the 401k Averages Book, with data updated through September 30, 2022, and is inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or any other asset based charges. Guideline’s managed portfolios have blended expense ratios ranging from 0.064% to 0.067% of assets under management. When combined with an assumed account fee of 0.15%, the estimated total AUM fees for one of Guideline’s managed portfolios can be under 0.22%. Alternative account fee pricing is available ranging from 0.15% to 0.35%. Contact Sales at hello@guideline.com to learn more about exclusive pricing options available in Enterprise tier. See our Form ADV 2A Brochure for more information regarding fees. Expense ratios for custom portfolios will vary. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup here.

² All plans of related entities must be administered by Guideline in order to provide compliance testing.

³ Guideline uses a third-party to provide custodial services. Custodial fees are paid by Guideline.

⁴ Our 3(16) fiduciary services are only available to clients who utilize an integrated payroll provider.

⁵ Based on Guideline internal metrics as of May 2023.

⁶ You should consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.

⁷ Please note, under current IRS rules Starter 401(k) plans can only be converted to full 401(k) plans (increased limits, employer contributions, and testing) effective the first day of the plan year. This would require you upgrading to the Core or Enterprise tier at the beginning of a calendar year.

Companies like 401(k) profit sharing plans because they’re a great way to reward employees without increasing their taxable income. However, because of IRS requirements, most plans require that you contribute the same percentage of pay to each employee’s account to avoid discrimination, meaning business owners can’t pay more into their own accounts. That’s where new comparability plans come in.

New comparability plans are special because you can judge each employee separately, and essentially customize the profit sharing contribution for each one, so long as certain tests show that the contributions don’t discriminate against non-highly compensated employees, known as NHCEs, in the long run.

401(k) profit sharing

First, a refresher on how profit sharing plans work. In the context of retirement, profit sharing involves an employer making tax deductible contributions to employees’ 401(k) accounts.

Despite the name, they don’t necessarily have to do with company profits. Think of it as a bonus deposited directly into employees’ retirement accounts. Profit sharing comes with a slew of benefits for employers and employees alike—learn about those here.

There are a few different ways to calculate who gets what. For example, you can give everyone the same, flat dollar amount. If you want to give high-earners more, you can instead tie the contribution to a flat percentage of employee pay. But sometimes business owners and executives want an even bigger percentage of pay. In cases like these, neither method cuts it.

New comparability plans have a different way of calculating contributions, so you may be able to reward these critical employees without running afoul of nondiscrimination testing.

Cross-testing

New comparability plans work because of cross-testing. Rather than gauge whether a profit share is discriminatory on the face value of the contribution, cross-testing uses a benefit accrual rate, which projects the future value of an individual's retirement portfolio when the individual reaches retirement age.

In many cases, NHCEs will have accrual rates that are similar or even higher to their high-earning peers, even if their current profit sharing allocations are significantly less.

Here’s a sample contribution setup where a small business owner is 50 years old with a high income. Using new comparability, the owner can receive a larger contribution than younger, lower income employees.

Whether or not this works depends on your company’s demographics. For example, having business owners that are the same age or earn a similar amount as other employees can throw off the results.

New comparability plans may be a great way to maximize tax and retirement savings for older, higher paid owners or employees. That’s especially true if they’re age 50 or older and eligible for “catch up” contribution limits.

Going further, new comparability profit sharing can be a great option for your small business if:

• You’d like to maximize employer contributions made to owners or executives
• Owners are generally older than non-owner employees
• Owners have a higher salary than non-owner employees
• You have a small number of employees (typically fewer than 50)

Gateway requirements

To become eligible for new comparability profit sharing and cross-testing, a minimum gateway requirement has to be met. You’ll need to first make a minimum contribution to all NHCEs amounting to at least:

• One-third of the highest contribution rate given to any HCE, or
• 5% of the participant’s gross compensation.

To count toward this gateway, it’s best for employers to have a Safe Harbor 401(k) plan where they contribute at least 3% of pay into all eligible participants’ accounts. Safe Harbor nonelective contributions not only count toward the minimum gateway, but also have the added benefit of allowing the plan to be exempt from some nondiscrimination tests.

A 401(k) plan that combines a 3% nonelective Safe Harbor contribution with a new comparability profit sharing component can help business owners maximize employer contributions to themselves (and other targeted employees) while still satisfying the minimum gateway requirements for most NHCEs. Keep in mind, some NHCEs may require more than the minimum gateway in order to pass the Average Benefits Test and/or coverage testing also required.

Once you satisfy these requirements, you can now make individualized profit sharing contributions, based on the individual’s benefit accrual rate–potentially increasing employer contributions for certain employees.

New comparability plans offer a lot of flexibility for small businesses looking to reward owners and other HCEs. But between the rigorous testing and maintenance, setting them up can seem daunting. You don’t have to do it by yourself.

Disclosures:

The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.

You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.

Before we dive in, give yourself a pat on the back. Shopping for a 401(k) provider means you’re thinking about your employees and helping to secure their financial future. Research shows that more than half of Americans say they don't have enough for retirement. And by offering a great 401(k) plan, you’ll be giving your employees — and yourself — a way to save for the future.  

That being said, giving employees this benefit does mean you’ll have a few additional responsibilities to consider:

Plan design and setup: Document your plan, coordinate contributions with your payroll provider and custodian, and act as a fiduciary.

Enrollment and education: Explain your plan to employees, educate them on investment options and give them timely notice of plan changes.

Administration and recordkeeping: Deduct contributions from payroll and deposit them with the custodian. Make employer contributions, and keep track of transactions.

Compliance and reporting: File IRS Form 5500 and complete compliance testing annually.

Investment management: Choose a provider and a selection of investments. investments should be considered with the best interests of employees in mind.

Consider help from a 401(k) provider

The list of responsibilities is pretty long, which is where 401(k) companies come in. They can help with a lot of the heavy lifting. And the very best 401(k) providers aim to take most (or all) of these responsibilities off your to-do list.

When shopping for a 401(k) company provider, there are a lot of little details to consider. At a high level, these are some key questions you may want to consider when looking for the best 401(k) provider for your business:

• What services do they offer?
• Which services are included in the basic fee? Which services are extra? And are there any additional fees that come up annually, in addition to the base fees?
• What fees are employees expected to pay?
• Are there diversified investment options?
• Do they have good customer service to help employees set up their plan?

The 401(k) provider checklist

To help you find the best 401(k) provider we’ve put together a detailed checklist of specific questions to ask the 401(k) providers you’re considering. To help you get started, we’ve already filled out Guideline’s answers.

Want to see how Guideline can help you take better care of your team? Check us out.

This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.  You are advised to consult a qualified financial adviser or tax professional before relying on the information provided.