401(k) rules for employers: Basics, benefits & guidelines

21 MIN READEditorial Policy

Key Takeaways

  • 401(k) plans are a good way to save money for the future—and for both employers and employees to save on taxes.

  • From establishing vesting schedules to satisfying IRS requirements, there are steps businesses must take to set up a plan.

  • Learn how to find a 401(k) plan that fits your organization’s needs regarding size, administration, and ease-of-use.

A 401(k) plan is one of the most common retirement investment options offered by employers in the United States today. It’s not surprising why. These plans provide both employers and employees a flexible way to save money for retirement—and they've been around for more than 40 years.

At Human Interest, we offer 401(k) plans for small businesses, startups, and beyond. If you’re an employer who hasn’t offered a 401(k) plan benefit before (and even if you have) it’s important to understand the basics of 401(k) plans for employers, including types of plan offerings, the benefits you receive, and regulations to follow.

Want to get started today? The ultimate guide to starting a small business 401(k) which will walk you through every step of launching a 401(k). But for now, we’ll review the basics of a 401(k) plan.

Start a 401(k) with Human Interest

A Human Interest 401(k) plan can connect directly with your favorite payroll provider and has zero transaction fees.

What is a 401(k) plan, and how does it work?

A 401(k) is a type of retirement plan, known as a defined contribution plan, that allows employees to contribute a percentage of their salary into the plan to save for retirement. Employees and employers alike can make contributions into a 401(k) plan, offering both an opportunity to save on taxes. In traditional 401(k) plans, deferred contributions are made on a pre-tax basis and are taxable only when the employee makes a withdrawal: typically at retirement. 

Contributions to 401(k) plans are typically invested in a portfolio made up of mutual funds, stocks, bonds, money market funds, savings accounts, and other investment options.

Some 401(k) plans also allow Roth deferral contributions which are made with after tax dollars. If certain conditions are met, Roth deferrals and related earnings are not taxable upon distribution. 

Is a 401(k) plan mandatory for employers to offer?

The short answer is, “not quite” (or maybe better, “not yet”). In lieu of federal law requiring private-sector employers to provide a retirement plan, states are taking things into their own hands. Many states have passed laws that require businesses to provide retirement plans—and some have important upcoming registration deadlines

So far, these states haven’t required businesses to offer traditional 401(k) plans. Instead, many states require most businesses to enroll eligible workers in a state-sponsored Roth individual retirement account (IRA) plan—or offer employees a qualified retirement savings plan. This means that the state-sponsored plan is not mandatory in most states. Although businesses are legally required to offer some kind of retirement plan, many business owners have options—and in many cases, that may include offering a 401(k) as a type of qualified retirement plan. Read more about state-mandated retirement laws and how state-provided plans compare to a 401(k).

Employer benefits of offering a 401(k) to employees

One reason companies offer 401(k) plans is to attract and retain top talent at every level of the organization. A 2022 survey commissioned by Human Interest and conducted by market research company OnePoll, found that retirement plans are the most-wanted benefit after health insurance. Human Interest internal data from March 2022 also found that offering a 401(k) plan may lead to lower turnover rates for small to medium-sized businesses. 

A 401(k) is attractive to employees as it provides an easy, cost-effective way to save for retirement while deferring income tax on contributions until the future (for traditional pre-tax contributions). But employees aren’t the only ones who receive tax benefits from a 401(k) plan. Employers can deduct match or profit-sharing contributions made to employees’ 401(k) accounts (more on this below). 

What’s more, the government incentives qualified small businesses to start 401(k) plans. Eligible employers can take advantage of a startup costs tax credit of up to $5,500, per year for the first three years of the plan, to cover the “the ordinary and necessary costs” of starting a new 401(k) plan and by adding an automatic enrollment feature.

See how much a 401(k) would cost with SECURE Act tax credits applied.

What are the rules & requirements of offering a 401(k) plan?

The IRS outlines 401(k) plan qualification requirements that encompass a host of criteria. This means that all plan providers must adhere to specific standards, including:

  • Plan eligibility

  • Contribution limits

  • Distribution rules

Plan eligibility

Eligibility refers to the conditions employees must meet before they’re allowed to participate in a qualified retirement plan. Generally speaking, employees must be allowed to participate in a qualified retirement plan after meeting the following requirements:

  • Age 21

  • One year of service (defined as working 1,000 hours or more in a 12 month period)

Plans can be designed to use the maximum exclusions above. However, plan sponsors may find that allowing employees to participate in the retirement plan sooner is advantageous. For example, rather than require an employee to wait a full year before becoming eligible, a plan sponsor may choose to allow employees to participate in a plan after six months of service or even immediately. 

For more information, check out our article on the basics of 401(k) plan eligibility.

Contribution limits

Each year, the IRS determines contribution limits for 401(k) plans. These limits are subject to annual cost of living adjustments. There are two main limits for 401(k) plans:

  1. Employee contributions: In 2023, individuals may contribute up to $22,500 to a 401(k). However, if they’re at least 50 years old, that limit increased by $7,500, also known as a catch-up contribution.

  2. Total employee and employer contributions: The IRS limits total contribution to a 401(k) from both the employer and the employee, meaning that total contributions can't exceed the lesser of 100% of an employee's salary or $66,000 in 2023.

Distribution rules

The money inside a 401(k) plan grows tax-deferred, but withdrawals must meet specific conditions as set forth in the plan document, such as the employee’s retirement, death, disability, or separation from employment. Depending on plan design, if an employee reaches the age of 59 ½, or experiences a hardship they may also withdraw funds. There is a 10% penalty for early withdrawal (before age 59 ½) unless an exception applies. 

Note: Not all plans offer hardship withdrawals. Refer to your plan’s Summary to determine whether hardship withdrawals are available under the plan and in what circumstances. 

What is a matching employer contribution? Are employers required to match contributions?

Unlike a pension, most employers aren’t required to make contributions to employee’s 401(k) retirement accounts. This flexibility can make overall costs more manageable for some employers. However many employers choose to match their employee’s 401(k) deferral contributions up to a certain percentage as an added benefit for their employees. In fact, as of January 2022, 75% of all Human Interest plans offer an employer match*.

So, what’s an average employer match? This is a tough question. Each business has their own motivations for providing different match types. However, at Human Interest, as of January 2022, 42% of total plans that provide a match offer a dollar per dollar contribution on the first 4% of deferred compensation to their employees*.

Common employer matching contribution formulas

Employers have options when selecting a match contribution formula. Four of the most common formulas are:

  1. Employer matches employee contributions dollar for dollar up to a set dollar amount per employee

  2. Employer matches employee contributions at a set percentage of each employee-contributed dollar up to a set dollar amount per employee

  3. Employer matches employee contributions dollar for dollar up to a percentage of the employee’s salary

  4. Employer matches employee contributions at a set percentage of each employee-contributed dollar up to a percentage of the employee’s salary

Example: An employer might match 100% of an employee’s 401(k) contributions up to 4% of their total compensation. If an employee makes $100,000, their employer will contribute up to $4,000 (4% of their annual compensation) to their account. However, the employee can only realize that $4,000 if they contribute $4,000 themselves. 

Ultimately, the company’s plan document must state whether a matching formula will be applied per pay period or annually. For more information, check out our article on matching formulas.

What is an employer profit-sharing contribution? Are employers required to make profit-sharing contributions?

While not required, some employers choose to make a profit-sharing contribution to their 401(k) plan. Despite its name, a profit-sharing contribution does not have to be based on profits. It’s simply an additional contribution an employer chooses to make to all eligible participant accounts to help employees save more towards retirement.  

Profit-sharing contributions aren’t based on employee participation. In other words, an employee doesn’t have to make deferrals into the plan to receive an allocation of the profit-sharing contribution. The plan may have a fixed (i.e. required) profit-sharing formula—or it may have a discretionary formula (i.e. the employer decides each year if it will make a contribution). 

For more information, check out our article on profit-sharing plans.

What is a vesting schedule?

401(k) employee deferrals are 100% immediately vested (meaning they belong to the participant). However, an employer may wish to incentivize longer-term employment by offering partial ownership of employer contributions over time. This requires that the plan set a vesting schedule that establishes what percentage of the employer contributions an employee owns as they continue employment with the plan sponsor. 

Different types of vesting schedules for 401(k) plans

There are three general types of vesting schedules:

  1. Immediate vesting: Employees own 100% of the employer contributions immediately.

  2. Graded vesting: Employees own a growing percentage of the employer contributions over time. For example, an employee may own 25% of matching contributions after one year of employment and 50% after two years. Employers that use a graded vesting schedule must vest employees at least 20% of the contributions by the end of two years and 100% by the end of six years.

  3. Cliff Vesting: Employees do not own any portion of their employer contributions until they reach a certain period of employment. Employers that use a cliff vesting schedule must fully vest their employees by the end of three years of employment.

Vesting schedules must be clearly explained in the employer’s 401(k) plan document. Click here to learn more about 401(k) vesting schedules.

What 401(k) administration services are available?

From a high level, there are four primary “players” each 401(k) plan needs: 

  1. Plan sponsor

  2. Plan administrator 

  3. Named Fiduciary

  4. Trustee

Each “player” has different responsibilities. Plan sponsors establish the retirement plan for a company and its employees and are generally the employer or a selected employee. The Employee Retirement Income Security Act (ERISA)—the federal law that controls most aspects of retirement plans—also requires the plan document to identify the plan administrator. Unless otherwise named, plan sponsors serve as the plan administrator (and may also be the plan’s Named Fiduciary). 

Learn more about 401(k) plan administrator and sponsor duties.

Given the complexities of 401(k) plan administration, it’s common for plan sponsors and fiduciaries to also rely on specialists. This may mean building out an internal function—such as a retirement plan committee—or partnering with outside providers. Financial institutions and retirement plan service professionals can help the plan sponsor manage components of 401(k) plan administration. If you hire an outside service provider, ERISA requires that you provide oversight of that service provider. 

What are the similarities and differences between 401(k) fiduciary roles?

There are three types of fiduciaries for 401(k) plans

  1. ERISA 3(16) plan administrator: Plan fiduciary that focuses on plan administrative functions such as distributions, eligibility and providing participant notice. The plan sponsor is the 3(16) plan administrator unless it hires a service provider that agrees in writing to take some of the fiduciary responsibility for plan administration. Hiring a 3(16) plan administrator can help offset some of duties that many plan sponsors find demanding.

  2. ERISA 3(21) investment advisor: Serves as a co-fiduciary with the plan sponsor with respect to choosing the plan’s investment line up. It can provide investment recommendations, but only the sponsor retains the authority to make investment decisions for the plan.     

  3. ERISA 3(38) investment manager: Fiduciary that takes responsibility for choosing the plan’s investment lineup. The plan sponsor retains the fiduciary responsibility to provide oversight of the investment manager, but is relieved of fiduciary responsibility for investment selection if it does so. 

Learn more about the differences between 3(16), 3(38), 3(21) fiduciaries.

Start a 401(k) with Human Interest

A Human Interest 401(k) plan can connect directly with your favorite payroll provider and has zero transaction fees.

The benefits of benchmarking your 401(k) plan

Ultimately, the primary responsibility of plan fiduciaries is to act in the best interest of their plan participants—and to diversify the plan's investments and minimize the risk of loss. If you’re a plan sponsor, you have a fiduciary responsibility to ensure the fees the plan or plan participants are paying are reasonable. To help meet this fiduciary responsibility, it’s important to compare the fees your service provider charges to those charged by other providers in a process called “benchmarking.” 

Benchmarking is the process of evaluating if a retirement plan’s services and fees are competitive with other plans of a similar size or type. This can limit fiduciary liability by: 

  • Checking a 401(k) plan is paying appropriate fees for the services received 

  • Ensuring a 401(k) plan still achieves the objectives of your participant’s financial goals 

Read what you need to know about 401(k) benchmarking.

401(k) plan compliance considerations

Starting and maintaining a 401(k) plan means following ERISA and Internal Revenue Code regulations, performing annual compliance testing, and more. Below are some basics on what you can expect it takes to maintain your plan’s compliance.

Government filings: Form 5500  

A 401(k) plan must file Form 5500 annually to provide the IRS and U.S. Department of Labor (DOL) details about the plan. This includes details such as the investments, operations, and conditions of the plan.

ERISA bonds

All 401(k) plans must procure an ERISA bond to protect plan assets from theft or wrongdoing. Anyone who "handles funds or other property" of a 401(k) plan must be bonded (unless covered by an ERISA exemption). Bonds can be obtained from a provider ("sureties") approved by the Department of the Treasury, and are required to be reported on the plan’s annual Form 5500 filing. Learn more about ERISA fidelity bonds for 401(k) fiduciaries.

What is 401(k) nondiscrimination testing?

From a high level, 401(k) nondiscrimination testing (NDT) ensures businesses remain compliant with federal requirements and regulations. A 401(k) service provider (e.g. recordkeeper) performs NDT on your 401(k) plan annually to ensure that highly compensated employees are not benefitting disproportionately more than other employees at the company. 

While tests focus on participation levels, other factors can influence results of annual nondiscrimination testing. At Human Interest, we offer 401(k) nondiscrimination testing.

Where should you begin with your 401(k)?

Thinking about starting a 401(k) plan for your employees? You’re taking an important first step in helping secure a better financial future for your employees. If you’ve never offered a 401(k)—or are considering a switch from your current provider—it’s wise to understand the basics before you move forward. Now that you’re equipped with some information about 401(k)s, you can consult your financial, tax, and/or legal advisors to decide what’s best for your business. 

During your search, there are several factors you can consider when taking stock of different 401(k) providers, including the following:  

  • Transparent, low fees 

  • Easy setup options that decrease HR workload

  • Robust technology including payroll integration capabilities

  • Compliance support, including preparing nondiscrimination testing, annual notices, and more

  • Superior customer service for employer administrators and employees

  • Flexibility for plan design options

Know your retirement provider options 

It can take some time to find a new provider and review the ins and outs of their administrative offerings. But because you have a fiduciary responsibility to your plan participants, it’s essential to take the process seriously. You’re responsible for due diligence—although the right providers can help ease administrative burdens and lower your overall costs in the process. 

Human Interest offers an affordable, full-service 401(k) that’s meant to streamline much of the manual work of plan administration. By integrating with more than 400+ leading payroll providers, we’re able to automate things to cut costs and save you time. And by selecting a service level that makes Human Interest a 3(16) fiduciary for select plan administrative functions, you can both reduce your fiduciary liability and the amount of time you spend on plan administration.

Interested? Get started with a Human Interest 401(k) plan today.

Start a 401(k) with Human Interest

A Human Interest 401(k) plan can connect directly with your favorite payroll provider and has zero transaction fees.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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*As of 1/3/22, according to Human Interest data, 2022.


Human Interest is an affordable, full-service 401(k) and 403(b) provider that seeks to  make it easy for small and medium-sized businesses (“Plan Sponsors”) to assist their employees (“Participants”) invest for their retirement in retirement plans (“Plans”). The company was founded in 2015 to help employees have access to retirement benefits and a path to financial independence. Headquartered in San Francisco, Human Interest has helped thousands of businesses and their employees across America. For more information, please visit humaninterest.com.The content provided here has been prepared for general informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. Unless indicated otherwise, the content is not an offer of investment advisory services with regard to securities and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for their own particular situation before making any investment decision.Retirement and investment advisory services are only provided to clients who have signed appropriate documents to enter into an agreement with Human Interest. Human Interest does not provide tax, legal, or accounting advice, and you should obtain your own tax, legal, and accounting advice before engaging in any transaction. Plan Sponsors should take independent steps to validate the tax, legal, or accounting considerations of hiring any service provider for the Plan, obtaining guidance on any Plan document (or amendment thereto), and for any issues pertaining to design, implementation, or operation of a Plan. Participants should take independent steps to validate the tax, legal, or accounting considerations of using a Plan or making investment decisions.Investment Advisory services are provided to clients who have signed an agreement with Human Interest Advisors LLC, a subsidiary of Human Interest Inc. (together, “Human Interest”). Human Interest Advisors is a registered investment adviser with the Securities and Exchange Commission("SEC"). SEC registration does not imply a certain level of skill or training, nor an endorsement by the SEC. Investing involves risk and may result in loss. Past performance is no guarantee of future results, and expected returns may not reflect actual future performance. Additional Information can be found in the company’s Form ADV available at https://humaninterest.com/regulatory-filings/