How does my retirement plan transfer to my new payroll provider? 

I am going to level with you. I’m getting a pedicure right now, and I had a difficult choice to make. What paint color do I want for my toes? After all, there are a variety of colors available to me, and I have to consider what’s on my social calendar over the next few weeks and which outfits I’ll want to wear and if this color is a good choice for that… and don’t get me started on what shape I want, and if I’m doing dip or shellac. The choices can be overwhelming!

As I decide between OPI 54 and Azura 55 (you want 55, ladies), I am honestly amused at the similarities between choosing a nail color and choosing the right retirement option for your business. The choices can feel overwhelming! Depending on who you are and what you like, you may not want to do something common. Or, you may have an interesting business that weighs into how you can choose to invest.

In either case, this article is for companies who want to change payroll companies but have a 401k plan service of some kind with their current payroll company.

Why?

Because we get asked this question all the time when meeting new companies, especially if they are working with a national company like ADP or Paychex.

First, let me introduce a common scenario:

You own a small, but growing, business. You want a retirement plan (primarily as an investment vehicle for you as the owner), and you love the idea of offering key individuals some kind of retirement option too. You might even see it as a recruiting tool, and you want to offer a benefits package that helps you compete with larger competitors. Or maybe you got a call from a nice consultant one day who advised you on the pros of having retirement options for your staff, and you loved the idea. You weren’t quite sure what to do, but every company out there has a 401k option, so you decided to set one of those up.

You may have talked with your CPA, your payroll partner, or a financial advisor. You may have gone with an option that your business peers suggested or listened to that sales consultant, but either way, you started a 401k plan.

Now that you’ve had one for a while, you realize it’s a lot more work than your consultant prepared you for. A 401k plan Retirement plan includes plan creation, setup, managing contributions, plan compliance, and testing. This is likely a lot more work than you probably wanted on your plate when you set yours up.

That’s why today, in this article, I’m going to make two suggestions as a business consultant.

Suggestion #1: Make sure you really understand all your options and requirements before picking a 401k plan as your company retirement option.

There are many retirement plans options and a 401k option may be the right option for you; however, you might be better off with a simple IRA, a Sep, etc... (It’s kind of like my nail colors - OPI 55 is a great color for someone, but it’s definitely not the one for me!) If you want to compare the retirement plan options available to small business owners and understand the tax consequences, see this breakdown.

Suggestion #2: Make sure your new payroll company or financial advisor is really helping you during the transition so nothing is accidentally missed in the shuffle.

Make them help you do your due diligence because they make these transitions all the time, but you will only be doing this once. Nothing is worse than hearing, “Yeah, we can do that!” during a sales call, only to be slowed down or slowed during implementation because “Well, we can’t actually help with that...” Due diligence first!

Now that I’ve given my two cents on setting up a 401K plan, let’s get to the heart of this topic today: What happens to a 401k plan during a payroll transition?

Usually, a business owner outsources some of their 401k functions to their payroll company, but not all components. Let’s start with the basics.

What is a 401k plan?

According to the IRS website, “A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.

• Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).
• Employers can contribute to employees’ accounts.

• Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).”
• (See more from the IRS here.)

If we put it in simple terms, a 401k plan allows your employees to make pre-tax contributions to the stock market. They can defer the income they should receive now so that they can invest in the market to help them plan for retirement. The gains and contributions that they make are taxed when they take the money out at retirement or in some cases, if they withdraw funds early in the form of a loan. You may also invest contributions on behalf of your employees on a vested schedule.

Before you started your business, you likely accepted a job with a 401K option and the employer elected to match your contribution up to 3%. This means your employer contributed a portion of their money to your retirement on your behalf. Pretty nice perk, Huh?

What is required to set up a 401k plan?

This is where the water gets murky. Every 401k plan can have different rules. As you choose your plan and options, you will also have compliance and requirements to meet. Basic requirements of all 401K plans include:

• All 401K plans must file a form 5500 at year end.

• All 401K options must include a test that ensures that your plan does not favor highly compensated employees over other employee contributions to the plan. (Hint hint, business owner-- this is usually you!)

Now that you understand the basic requirements, here are four basic actions necessary to have a tax-advantaged 401(k) plan:

• Adopt a written plan
• Arrange a trust fund for the plan’s assets
• Develop a recordkeeping system
• Provide plan information to participants.”
• (Cited from the IRS website. See more here.)

When do I talk to a broker or advisor?

In my experience, most employers will consult their bank or financial advisor to help them develop their written plan. After that, you will likely work with that broker or advisor to choose your trust funds for your plans. This is the part you’re most likely familiar with -- the Empower, T Rowe Price, and Vanguards of the world – the company that is actually investing your dollars into the market and where you go to look at your own investments. Both of these items are generally secured by your advisor.

Next, you will choose a third-party administrator to develop your record-keeping system, file your Form 5500 and manage your plan compliance. If you’re working with a good financial advisor, they will bundle this service into their fee for your plan or work closely with a trusted partner for all their plan compliance so you don’t have to find your own partner. Full disclosure: This is our preferred way of handling 401k since it allows you to offload this responsibility to some nerdy dude or gal who is constantly staying up-to-date on IRS regulations and laws. When possible, we prefer experts because they usually keep owners out of the ditches over minimal cost- minimal investment plans with a national company.

Last, you will distribute information and election information through your payroll portal where you can allow employees to manage their deductions, change their contributions, and update their personal information through a self-service portal. This gives you the ability to manage contributions through payroll and move money easily.

Let’s review.

If you set up a 401k plan and you didn’t do it all yourself, then at a minimum, you will work with four consultants. You will work with a Broker of Record, an Asset Manager, and a third-party administrator (TPA), and a payroll company. You will work with your payroll partner to manage the flow of dollars and deductions from paycheck to 401K plan, to the bank, and back again. If you feel like this is a lot of work and moving pieces to keep track of, you are absolutely correct.

How does a 401k plan work with your payroll partner?

Many payroll companies actually offer plan services and TPA services so that you can start a 401k plan and manage everything through your payroll service. This is a huge benefit to you because you eliminate three different parties that you would need to work with, and you can elect to have a plan Advisor (financial advisor) helping you, and your payroll company takes care of everything else. Sometimes your payroll company might actually be the broker of record for your plan as well, but that’s less typical.

Now back to our common scenario-- you signed up for your 401k plan, and your payroll company is taking care of a lot more of the administering. They’re sending those contributions on your behalf each week to your Plan, managing your 5500 and year-end compliance, and completing your testing. You will simply check in with your banker or financial advisor once or twice a year to make sure things are going well with the plan.

But now you have a new problem-- your payroll company isn’t handling payroll issues well and you’re getting tax notices in the mail. Or perhaps you’re still having to do a lot of work to offer medical benefits and you start searching for a better payroll partner. Whatever your reason, your payroll partner isn’t helping you with your key employee issues and you’re frustrated, so you start searching for a new one. You find a good partner and are ready to move forward. But how do you keep your 401k plan and unbundle the plans from payroll?

Step 1: Confirm who is the broker of record on your plan.

If your payroll company is not the broker of record, reach out to your new payroll company and see if they handle TPA and compliance services. If they do, simply get a quote to add those services. If not, find out who is your broker of record and see if they offer those services as your advisor.

Step 1B: If your payroll company is the broker of record on your plan, you will need a new broker of record for your plan, as well as a TPA and asset manager. You can always maintain the same plans and use a broker of record notice to change brokers once you’ve decided who you want to work with. If this is the case and you can work with a local banker or financial advisor that you really trust, then it’s a great idea to make them your broker of record on your 401k plan.

Step 2: Identify which services your payroll partner was performing for you, and make sure that you are covered as you make the switch.

Seriously-- don’t skip this step if you want to avoid penalties and fines! As I mentioned, normally, payroll companies are not the broker of record, but they will be the TPA, do the plan testing, and automate your contributions through payroll. You need to ensure you have someone picked out to take over that compliance and understand how that will function in your new payroll company as you transition. If your new payroll company doesn’t offer this service, get with your broker of record for trusted recommendations. Better yet, see if your broker will do the heavy lifting for you and get those pieces taken care of on your behalf.

Step 3: Assess if 401k is the best option for your business.

As you can see, there are a lot of factors to consider when transitioning a 401k plan. Now is a great time to ensure that’s the plan you still want and need for your business before moving forward with finding new consultants and advisors to help you. We recommend meeting with your CPA to discuss your options so you can be prepared with the tax pros and cons of retirement options as you continue scaling your business.

A 401k plan is a great investment tool for the right owner. This retirement plan is an effective recruiting tool and ultimately helps promote financial well-being which is why so many owners decide to have one. Just be sure that you’ve thought about all the work required when you set one up because as you can see from the complexities of managing a plan, what works for one business doesn’t work for all.

Frustrated by your current payroll company? Download our guide, 5 Mistakes to Avoid When Choosing an HCM Partner, to continue your search.

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