The Frugal Fiduciary Small Business 401(k) Blog
Get the latest industry news, deadlines and tips you need to know to help tackle your fiduciary responsibility needs.
When two or more companies with common ownership meet the IRS’ controlled group definition, they are considered a single employer for 401(k) plan purposes. 401(k) plans must often benefit the employees of all controlled group members to pass the IRC section 410(b) “coverage” test annually. Put differently - overlooking a member can often mean a failed coverage test. Steep IRS penalties - including plan disqualification - are possible when a failure goes uncorrected for years. A basic understanding of the controlled group rules can help employers avoid this trouble.
401(k) plans must define a 12-month “plan year” for annual administration purposes. Most plans choose a calendar year for administrative ease. A new plan can specify a period that’s shorter than a full 12-months for its initial plan year by choosing a mid-year effective date. However, establishing a short plan year with a mid-year effective date is often a bad idea. Most plans are better off making their effective date retroactive to the first day of the normal plan year - January 1 in the case of a calendar-based plan – to establish a 12-month initial plan year.
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Believe it or not, ERISA imposes few fiduciary responsibilities on business owners when selecting investments for their 401(k) plan. They boil down to picking – and maintaining - enough “prudent” investments to allow plan participants to diversify their account “so as to minimize the risk of large losses.” Prudent 401(k) investments are simply funds that meet their investment objective for reasonable fees.
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. The legislation made many significant retirement plan changes, including enhanced tax credits for small businesses that start a new 401(k) plan and/or add an automatic enrollment feature to any 401(k) plan. For most small businesses, these changes took effect January 1, 2020.
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. The legislation made many significant retirement plan changes, including later deadlines for adopting a new 401(k) plan or amending a traditional 401(k) into a safe harbor plan. For most small businesses, these changes took effect January 1, 2020.
According to AARP, Americans are 15 times more likely to save for retirement when they can do so by payroll deduction through a workplace retirement plan. However, while most large businesses – companies with more than 100 employees – sponsor a retirement plan, 51 to 71 percent of small businesses don’t. In a Pew Charitable Trusts survey, small business owners cited “resources required to start and maintain a plan” as one of the top reasons they don’t sponsor a 401(k) plan. To help more Americans save for retirement, overcoming this concern is essential.