PEOs and 401(k): How Does it Work?

PRemployer on April 10, 2019

PEOs and 401(k) How Does it Work

Retirement plans, like a 401(k), support employees with their retirement savings goals and help employers recruit and retain top talent. But despite its value, 53% of small businesses do not have a retirement plan for employees or owners. Why is that? Most employers cite cost as the biggest barrier, but administrative difficulties and regulatory compliance are also challenges for small to midsize employers.

The question is, what is the most efficient way to provide employees with this crucial benefit? The answer: Partner with a PEO. A PEO can help employers overcome these challenges to provide a quality and affordable retirement plan option for employees.

Here are a few things you need to know about the process:

The Co-Employment Relationship

401(k) planWorking with a PEO creates a co-employment relationship where responsibilities are contractually shared between the PEO and client company. These responsibilities are typically outlined in detail in the client service agreement (CSA). In most cases, your employees will appear to be on the PEO’s payroll for the purpose of taxes and compliance, but employers retain full oversight of your staff. This means you will receive all the productivity and cost benefits without the overhead or paperwork of handling responsibilities like HR administration, employee benefits, payroll, and 401(k) administration.

Learn if a PEO is Right for You

What to Expect: PEO 401(k) Plans

With a PEO, you and your employees join the organization’s 401(k) plan, and the PEO becomes the plan co-sponsor. This means, as an employer, you will save on retirement costs. This occurs because the PEO pools employees from other companies together to leverage economies of scale and reduce plan costs. Put simply, the more plan participants, the less you pay in costs and fees.

You also transfer liability. Retirement plan sponsors have fiduciary liability, which is a high level of responsibility for the plan, as outlined by the Employee Retirement Income Security Act (ERISA). Your PEO partner will take on the burden of fiduciary and ensure you remain protected and compliant with your 401(k). What does this mean? The organization takes charge on the following activities:

  • Meeting investment-related responsibilities

  • Managing administrative duties

  • Paying only reasonable expenses from plan assets

  • Depositing timely employee contributions

  • Maintaining adequate ERISA fidelity bond coverage

  • Selecting and monitoring 401(k) service providers

Just in case you were wondering – yes, it is quite a lot to manage, especially for a small or mid-sized business. Being a fiduciary is an important role, and as plan sponsor, you must adhere to all regulatory measures. Failing to comply can put you at personal risk and lead to lawsuits, penalties and other consequences. It is not a position to be taken lightly, and having a PEO handle that task can be well worth the investment.

Administrative responsibilities are also reduced as a plan co-sponsor. The PEO takes charge of the administrative tasks, including auditing and plan management to save you time while allowing you to focus on strategic business initiatives. Plan audits, which must be performed annually if you have more than 100 eligible plan participants, can cost anywhere from $6,500 to $13,000, depending on several factors. Therefore, hiring a PEO allows you to receive both time and cost savings with your 401(k).

Partnering with a PEO is one of the best ways to provide a quality and affordable 401(k) plan for employees. The best solution is to find a partner that can fill in the gaps while protecting your best interests from the start. Having qualified HR experts take the reins on this important function is a smart and strategic business move.

Before taking the next step, speak with someone from PRemployer who can help you learn more about PEOs and 401(k) and how you can provide a quality and affordable retirement plan for your employees.

401k for small business: 5 reasons to use PEO

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