From the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®


(June 23, 2005) — For small business owners, a 401(k) qualified retirement plan can be powerful tool for attracting and retaining talented employees and for helping them to achieve a secure retirement. 401(k) plans offer tax benefits as well — for both the employer and the employee — reports the Virginia Society of CPAs.

As an employer, you will be responsible for making important decisions regarding your company’s plan. Because establishing and administering a 401(k) plan is fairly complex, many business owners use the services of outside professionals. The following four steps are an overview of the key actions you need to take to establish a 401(k) for your employees. Remember, your choices and actions must comply with specific, detailed rules.

1. Adopt a written plan.

The written plan governs the day-to-day operation of your 401(k) plan and ensures that your plan conforms to legal requirements. Your first task is to decide on the type of 401(k) plan you want to open — a traditional 401(k), a safe harbor 401(k) or a SIMPLE 401(k) plan.

Once you have selected the best plan for your company, you can determine what investment options to make available to the plan’s participants. You will also need to decide how much of the employees’ contributions will be matched by you, although employers are not required to match employee contributions. Keep in mind that federal law dictates who is eligible to participate in such plans and the amount employees can contribute.

2. Arrange a trust fund for the plan’s assets.

The assets invested in your company’s 401(k) plan must be held in trust. This is a security measure that safeguards the plan’s assets and assures that those assets are used solely for the benefit of the plan’s participants and their beneficiaries. You will be required to name at least one trustee to oversee the trust funds. The integrity of the plan depends on the trustee because the trustee handles contributions, investments and distributions to and from the 401(k) plan.

3. Develop a recordkeeping system.

Once your plan is operating, you’ll need to have a comprehensive recordkeeping system in place to keep track of contributions; earnings and losses in participants’ accounts; expenses; plan investments; and benefit distributions. The plan administrator typically carries out this function. An accurate recordkeeping system will also help you or your plan administrator to prepare the plan’s annual report which must be filed with the federal government.

4. Provide plan information to employees.

The Summary Plan Description (SPD) is a plain-language document with information about the plan’s benefits and requirements. The SPD must be distributed to all plan participants. The document must include information about features of the plan, including: when and how employees become eligible, contributions to the plan, how long it takes to become vested and when and how to claim benefits. The SPD must also explain the basic rights participants have under the Employee Retirement Income Security Act.

You may also want to provide additional information that highlights the benefits of joining the plan, such as pre-tax contributions, employee matches if you choose to make them, and compounded tax-deferred earnings.

5. Consult with a CPA.

With proper education and research, small business owners can provide retirement benefits to employees — and to themselves — in a cost-effective manner. If you need help in determining whether you should establish a 401(k), you should consult with a CPA.


The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at


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