U.S. DEPARTMENT OF LABOR
2
Establishing a 401(k) Plan
When you establish a 401(k) plan, you must take certain basic actions. One of your rst decisions will
be whether to set up the plan yourself or to consult a professional or nancial institution – such as a
bank, mutual fund provider, or insurance company – to help you establish and maintain the plan. In
addition, there are four initial steps for setting up a 401(k) plan:
n Adopt a written plan document,
n Arrange a trust for the plan’s assets,
n Develop a recordkeeping system, and
n Provide plan information to employees eligible to participate.
Adopt a written plan document – Plans begin with a written document that serves as the foundation
for day-to-day plan operations. If you hired someone to help with your plan, that person likely will
provide the document. If not, consider getting assistance from a nancial institution or retirement plan
professional. In either case, you will be bound by the terms of the plan document.
Once you have decided on a 401(k) plan, you will need to choose the type of plan best for you – a
traditional 401(k) plan, a safe harbor 401(k) plan, or an automatic enrollment 401(k) plan. In all the
plans described below, participants can contribute through salary deductions.
A
traditional 401(k) plan
offers the most exibility. Employers can decide whether to contribute for
all participants, to match employees’ deferrals, to do both, or to do neither. These contributions can be
subject to a vesting schedule that provides that an employee’s right to employer contributions becomes
nonforfeitable only after a certain amount of time. Annual testing ensures that benets for rank-and-
le employees are proportional to benets for owners/managers.
Several kinds of 401(k) plans are not subject to the annual contributions testing that traditional 401(k)
plans require. These are known as
safe harbor 401(k)
plans
and, in exchange for avoiding annual
testing, employees in these plans must receive a certain level of employer contributions. Under the
most popular safe harbor 401(k) plan, mandatory employer contributions must fully vest when made.
An
automatic enrollment 401(k) plan
allows you to automatically enroll employees and place their
salary deductions in certain default investments, unless the employee elects otherwise. This is an
effective way for employers to increase participation in their 401(k) plans.
The traditional, safe harbor, and automatic enrollment plans are for employers of any size.
This booklet addresses traditional and safe harbor 401(k) plans. For more information on automatic
enrollment 401(k) plans, see Automatic Enrollment 401(k) Plans for Small Businesses (Publication 4674).
Once you have decided on the type of plan for your company, you have exibility in choosing some of
the plan’s features, such as which employees can contribute to the plan and how much. Other features
written into the plan are required by law. For instance, the plan document must describe how certain
key functions are carried out, such as how contributions are deposited in the plan.