401(k) Setup: What You Need to Know


Before a company can set up a 401(k) plan, some important decisions will need to be made. Many of these decisions can be tough to change, so responsible parties should consider carefully how these choices will impact their business and their employees. 

Are you ready to get started? Navigate through this five-step process.

Section One: Determine the Basics

Who will be the plan sponsor?

The plan sponsor is the fiduciary, or the person legally responsible for the 401(k) plan. This is typically one of the owners of the company. In some cases, this may be an officer, executive or human resource manager. This person needs to sign all 401(k) documents and should have decision-making power over the 401(k) for your company. We will need the name and contact information of this person.

Does the company have an existing 401(k) plan?

Setting up a new plan when a plan is already in place comes with some restrictions and limitations. We will need a copy of the current plan document to verify what can (and cannot) be done going forward.

Do you plan on making company contributions?

If your company is in a position to contribute to employee accounts, think about selecting a safe harbor plan design. These plans are often the best choice for smaller employers, because they exempt businesses from most of the mandatory IRS nondiscrimination testing. However, they require employer contributions to be made.

If your company is not prepared to provide contributions, other plan designs are available. Even if your plan design doesn’t require employer contributions, the company can still make optional (uniform discretionary contributions) to the plan, as long as these funds are fully vested immediately, and applied to all fairly using a uniform formula. 

Keep in mind that whatever you choose, it must be applied fairly to all employees, or it will fail IRS testing. A failed test can be costly, often resulting in requiring refunds to highly compensated employees, or in additional contributions to all participants.

Section Two: Choose a Plan Design

Is a safe harbor plan right for my business?

Safe harbor plans were created as a way for employers to offer a plan that meets certain IRS requirements exempting the plan from most annual compliance tests. To determine whether a safe harbor or traditional plan is right for your company, answer the following questions.

  1. Will 50 or more employees participate in the plan?  
  2. Will the owners participate in the plan? 

If the answer to these questions is no, then either plan design will work fine. However, if your company has fewer than 50 participants AND the owners will participate, it’s very likely that a safe harbor plan will be the best choice.

Safe harbor plans are ideal for smaller companies where owners or highly compensated employees would want to participate. They are exempt from nondiscrimination testing, but employers must contribute in some way to their employees’ accounts.

Traditional plans have more flexibility in how they are set up and administered, and the employer is not required to provide any contributions. However, they are required to perform nondiscrimination testing annually to ensure the plan is fair for all employees.

What are the safe harbor plan design options?

QACA (Qualified Automatic Contribution Arrangement)

Employees are automatically enrolled, and must opt out if they choose not to participate. With this plan type, employers must match 100% of the first 1% the employee contributes, and 50% of the next 5% they contribute. At most, if the employee contributes 6% of their pay, the employer will match 3.5%.

QACA designs allow for a few vesting options. 

  • The first is 100% vested immediately. 
  • The second is 50% after the first year and the remaining 50% at the end of year two. 
  • Third, 0% the first year, and 100% on year two.

As with all auto-enrollment provisions, the QACA option requires that participants opt out of participation or they will be automatically enrolled at a default deferral rate. This default rate is specified in the plan document. It is often 3% but can be as high as 6%. The auto-enrollment comes with an auto-increase of 1% per year, up to 6% total, but when participants select a specific deferral rate, the auto-increase function is not applied.

Enhanced Safe Harbor

The plan type offers matching options. The employer will choose to match 100% of either the first 4%, or 5%, or 6% the employee contributes. Employees are fully vested in the matching contributions immediately, making this a very rich plan type. 

Auto-enrollment is optional but we strongly recommend adding the provision. Participation in auto-enrollment plans is significantly higher than in non-auto-enrollment plans.

Basic Safe Harbor

This plan requires a 100% match on the first 3% of participant deferrals and a 50% match on the next 2%. This results in a maximum employer contribution of 4%. 

Vesting is required to be 100% immediate. Auto-enrollment is optional, but we strongly recommend adding this provision.

Guaranteed Contribution

The employer must contribute 3% of each eligible participant’s pay annually to their 401(k), regardless if the participant is deferring a portion of their payroll to the 401(k) or not. If an employee will become an eligible participant during a plan year, the employer must contribute 3% of that participant’s pay for the entire year, not just the time they were eligible to participate in the 401(k).

Vesting is required to be 100% immediate. Auto-enrollment is optional, but we strongly recommend adding it.

Section Three: Select Plan Options

Eligibility requirements

Decide on the amount of time employees will work for the company before they are eligible to participate in the plan. The service requirement options are 30 days, 60 days, 90 days, 6 months or 1 year. 

Decide the entry dates when participants will be allowed to enter the plan. These entry date options are immediate, monthly, quarterly, or semi-annual.

Once the employee information is added, employees will be notified of when they are eligible to participate in the plan. When you submit payroll, enter hours worked and gross pay for all employees, but deferrals will only be taken out of participants’ pay after they are eligible to participate in the plan.

Deferral change frequency

Every time a participant makes changes to their deferral amounts this requires you to make changes to how you run payroll. If you use a payroll company, you will need to report these deferral changes to your payroll provider. The deferral change frequency options are each pay period, monthly, quarterly or semi-annually. To provide maximum flexibility to your participants we recommend selecting each pay period.

We allow participants to save changes to their deferral amount at any time. However, when they change their deferral amount they will be notified when that deferral amount will take effect according to your selection. You will be emailed with a list of changes to the participant deferrals once per selected period.

Section Four: Provide Company Details

Other information we need to set up your 401(k)

The above questions cover all the business decisions we need to set up your plan. The remaining information should be looked up and available to the person completing the setup process.

  1. The company EIN 
  2. The entity type
  3. The business NAICS code. (You choose the code that best suits your business: naics.com/search)
  4. Payroll provider and schedule
  5. Bank account information (all payments are done through ACH transactions)
  6. Employee census file: enter manually or use the provided spreadsheet template
    1. First and last name
    2. Social security number
    3. Employment start date
    4. Email address
    5. Phone number
    6. Birth date
    7. Ownership %
    8. Years worked more than 1000 hours
    9. Prior year compensation
  7. If there is common ownership between this company and another company, there potentially could be a “control group.” A control group would require combined nondiscrimination testing for both companies. It is recommended that if there is a control group that the companies are combined under one plan – if one of the companies already has a 401(k) plan, then both plans would need to be tested together. If you think a control group exists we recommend you consult with an ERISA attorney, then during the setup process provide us with the ownership percentages of the other companies in the control group.

Section Five: Sign Documents and Complete Setup

The chosen fiduciary will be responsible to sign the plan documents. We’ll need the trustee to provide digital signatures verifying their agreement to serve as the plan sponsor, and verifying their agreement to the final plan details as laid out in the plan document.

After the plan setup is complete, all employees will receive links to set up their own accounts and begin deferring contributions. 

And that’s it! If you have all this information ready, you can complete the setup process in less than 15 minutes. And if you have questions, we’re always here to help.

Learn more about our 401(k) options optimized for small and medium sized businesses.


Jennifer Stott
Jen is experienced at creating and managing marketing content and blogs. She enjoys communicating about this complex industry.

Learn more about our 401(k) options optimized for small and medium sized businesses.