401(k) plans aren’t one-size-fits-all.
Instead, they’re a fully customizable retirement plan that can be modified to fit the needs of your small business. But, every business is different, and determining the right 401(k) plan for your small business is no small feat. It requires a unique understanding of your small business, and the various 401(k) plan features available.
However, some small business 401(k) plan features are more popular than others, and for a good reason. Here are the most popular ones.
Feature 1: 3-month eligibility
When designing your 401(k), you must decide when employees are eligible to participate.
Eligibility options range from as little as immediate eligibility to as much as 21 years of age with 1 year of service. And while employers consider different eligibility options for various reasons, the most common eligibility option we see is 3-month eligibility.
3-month eligibility offers employees a quick path to 401(k) participation while restricting the participation of any transient employees who leave before the 3-month mark.
When deciding what’s suitable for you, consider your business, turnover rate, and employee profile. For example, quicker eligibility rules, like immediate to 3-month, are better at recruiting top talent, as new employees won’t have to wait long to participate in your 401(k) plan. But longer eligibility rules are better for businesses with high turnover and more transient employees.
So, while 3-month eligibility is very common, choose an eligibility period that fits best for your small business.
Feature 2: Monthly Entry Point
Next, you must choose when employees can enter the plan once eligible.
Common entry dates are bi-annual, quarterly, monthly, or immediately after reaching eligibility. We find that many small business owners prefer monthly entry for a few reasons:
- First, it lets employees enter the plan shortly after becoming eligible.
Monthly entry lets eligible employees quickly take advantage of their 401(k) benefits. This helps increase employee satisfaction, reduce turnover, and increase plan participation. Alternatively, quarterly or bi-annual entry requirements can cause eligible employees to wait extended periods before entering the plan, causing them to miss out on valuable retirement benefits.
- Second, it allows employers the time needed to provide enrollment materials.
Monthly entry is also popular because it allows employers some time to provide enrollment materials to eligible employees. Simply put, once an employee becomes eligible, the employer must provide enrollment material before the entry date. This enrollment material explains how employees can sign up to participate and set up contribution amounts.
But, if an employer fails to provide the enrollment material in a timely manner, they can face penalties and must take corrective action. This is one reason that monthly entry can be better than immediate entry—allowing employers time to provide enrollment material and avoid a “missed deferral opportunity.”
Feature 3: QACA Plan Design
Lastly, employers also have the option to set up automatic contribution arrangements in their 401(k) plan.
This is a way to increase employee participation by requiring employees to opt-out of the plan rather than opt-in. In other words, once employees are eligible, they’re automatically enrolled in the plan at a pre-set contribution amount at their next entry date.
The most popular automatic contribution arrangement we see small business owners use is called QACA (Qualified Automatic Contribution Arrangements).
“A QACA is an automatic contribution arrangement with special “safe harbor” provisions that exempts 401(k) plans from annual nondiscrimination tests.” according to the IRS. This is a valuable plan feature as it simplifies employer testing requirements.
QACAs have a few unique considerations:
- Default Employee Contribution Amount.
Employers have to choose a default employee contribution amount when setting up an automatic contribution arrangement (ACA). To be a qualified ACA, the default contribution amount must be a minimum of 3% but can be set as high as 10%.
- Automatic Employee Contribution Increases
In addition, if the employee contribution amount is set below 6%, it must automatically increase yearly by at least 1% until it reaches 6%. Afterward, automatic increases can continue as high as 15% of compensation if employers choose. This is an excellent way for employers to increase the amount their employees save over time, setting them up for a healthy future retirement.
- Employer Matching Requirements
Lastly, QACAs have specific rules regarding employer matching contributions. According to the IRS, employers must make a minimum of either:
- “a matching contribution of: 100% of an employee’s contribution up to 1% of compensation and a 50% matching contribution for the employee’s contributions above 1% of compensation and up to 6% of compensation; or
- a nonelective contribution of 3% of compensation to all participants, including those who choose not to contribute to the plan.”
In addition, employees must be 100% vested after two years of service, and employer matching contributions cannot be distributed during financial hardship.
Ultimately, QACAs are a popular option for small business 401(k)s because they offer employees the benefit of automatic enrollment, increases, and employer matching while providing employers the benefit of a uniform and qualified plan type without the need for annual nondiscrimination tests.
Your Partner in Plan Design
At 401GO, we know the value a 401(k) plan can offer your business.
That’s why we use a combination of automation and bundled solutions to help small businesses design a 401(k) plan that stands out, reducing turnover and increasing employee satisfaction in the process. We’ve helped many small business owners design their unique 401(k) plan and have identified the most popular small business 401(k) plan features in the process.
So if you’re interested in setting up a 401(k) for your small business but aren’t sure where to start, we’re here to help.
Our streamlined approach allows you to get up and running in just minutes with simple and affordable pricing to fit your unique business.
