The ultimate guide to starting a small business 401(k)

1. Choose the type of retirement plan you want to offer 

Different types of retirement plans meet different needs. The first step in setting up a plan is deciding which type of plan is best for your business.

401(k) plan

To reiterate, the 401(k) plan is one of the most common retirement plans¹. These plans allow for high contribution limits, do not limit the number of eligible employees, and offer flexibility in design options. Employees may appreciate the opportunity to contribute several thousand dollars more per year to their retirement accounts compared to an IRA.

Contribution limits for 401(k) plans 

Participants in 401(k) plans can save up to the contribution limits established by the IRS:

• Contribution limits for 401(k), 403(b), and profit-sharing plans are $23,000 in 2024 (up from $23,000 for 2024). 

Employees with a 401(k) or 403(b) account who are over, or will turn, age 50 in the calendar year can contribute additional funds annually to their plan. Catch-up contribution limits are $7,500 in 2024 for a total contribution of $30,500. Click here to learn more about the benefits of 401(k) catch-up contributions for older workers.

Ultimately, a 401(k) can help your business scale without needing to change plans. They may be offered with other retirement plans to give your business flexibility. 401(k) plans have become increasingly attainable for small businesses. Technology can automate some of the manual processes required by 401(k) plan administration, helping to make plans easier and affordable to maintain.

Roth 401(k) deferrals (post-tax)

Some 401(k) plans also allow participants to contribute Roth deferrals, which are made on an after-tax basis. Also known as a post-tax deduction, taxes are paid from the employee’s gross pay before the contribution is deposited in the retirement account. Because Roth contributions are determined after federal and state taxes are taken out, employees don’t pay taxes on deferrals when the funds are later withdrawn during retirement. 

If a plan chooses to add a Roth deferral component, the amount the participant can contribute to the plan is the same as pre-tax deferrals—$23,000 for 2024 plus $7,500 in eligible catch-up contributions—and is the sum of both pre-tax and Roth deferrals. 

More on Roth deferrals are below.

Differences between SEP-IRA, SIMPLE-IRA, and SIMPLE 401(k)

Employer-provided retirement plans come in many shapes and sizes beyond the 401(k). For example, a simplified employee pension plan (SEP) allows employers to contribute to traditional IRAs (in the form of SEP-IRAs) on behalf of employees. Businesses of any size can set up a SEP-IRA, including self-employed individuals. These easy-to-administer plans are funded exclusively by employer contributions (meaning employees cannot contribute) and are similar to a traditional IRA account.

Similarly, the SIMPLE IRA and SIMPLE 401(k) were designed to help small employers with fewer than 100 employees. For small businesses, SIMPLE 401(k)s and SIMPLE IRAs plans can simplify some of the processes of adding a retirement plan. For example, SIMPLE 401(k) plans are not subject to the nondiscrimination testing rules that apply to 401(k) plans. However, both SIMPLE IRA and SIMPLE 401(k) plans come with downsides, including lower contribution limits, inflexible plan design options, and required employer-matching contributions. 

Eligible participants may make pre-tax salary deferrals to a SIMPLE IRA (Roth deferrals are not permitted). Unlike their SIMPLE IRA counterpart, SIMPLE 401(k) plan participation can depend on age and service requirements, up to a maximum of age 21 and one year of service. The annual max contribution limit for both SIMPLE IRA and SIMPLE 401(k) plans is $16,000 (compared to the traditional 401(k) limit of $23,000), and catch-up contributions for employees aged 50 and over max out at $3,500.

Safe harbor 401(k) plan

A safe harbor 401(k) plan design includes a mandatory employer match or nonelective contribution for eligible employees. In exchange for making required contributions, the 401(k) plan is deemed to pass some of the required annual compliance tests, allowing highly-compensated employees (HCEs) to defer up to the annual limit each year without fear of refunds. 

Any 401(k) plan can be designed to include a safe harbor contribution—but employers should understand that these contributions are fixed and mandatory and cannot be removed before the end of the plan year. In most cases, the employer contribution is required to be immediately 100% vested. 

Learn more about safe harbor 401(k) plans.

Solo 401(k) plan

If you’re an entrepreneur without employees, you may qualify for a 401(k) plan for you and your spouse. Solo 401(k) plans follow the same rules as an employer-sponsored 401(k), including contribution limits. These plans (also referred to as one-participant plans) have the same rules and requirements as a traditional 401(k) plan and cover a business owner with no employees (other than a spouse working for the business). The main difference is that individuals wear two hats—both employee and employer—meaning contributions can be made in both capacities:

• Elective deferrals up to 100% of compensation within annual contribution rates:

  • $23,000 in 2024, or $30,500 if age 50 or over; plus

• Employer match and nonelective contributions up to:

  • 25% of eligible compensation as defined by the plan

2. Determine the design of your 401(k) plan 

Once you determine which type of plan is best for you, it’s time to customize it to fit your needs. One size does not fit all when it comes to 401(k) plan design.

From vesting schedules to employer matching contributions, here are some plan design options to consider.

Should you offer Roth 401(k) deferrals?

Introduced in 2006, the Roth 401(k) deferral type combines elements of the Roth IRA and the traditional 401(k). Contribution limits for Roth 401(k) deferral types are the same as a 401(k), but adding a Roth component to a plan means that participants can avoid paying taxes on future withdrawals. Accordingly, the main difference between a Roth and traditional 401(k) features are in how contributions are taxed and how withdrawals are treated:

• Contributions: 401(k) contributions are made pre-tax, while Roth 401(k) contributions are made after paying taxes.

• Withdrawal rules: 401(k) distributions are deferred until the time of withdrawal, as opposed to Roth 401(k) distributions, which allow tax-free withdrawals if the participant is over age 59 ½ and has contributed to the Roth account for at least five years. With a traditional 401(k), all money is subject to income tax upon withdrawal (generally in retirement).

As a rule of thumb, Roth 401(k) features may be favorable for participants who think their overall income will increase over time. In these scenarios, it may be beneficial for participants to pay taxes on their current income, instead of paying taxes on a projected higher income. Not all 401(k) plans feature a traditional and Roth option. So if you want to provide that flexibility, it’s important to confirm a provider offers both deferral types.

Should you offer a 401(k) match?

Many businesses offer a 401(k) match in which they contribute additional money to the plan based on the employee’s deferrals, which, in turn, can help incentivize employees to increase their contributions. While not mandatory, it's a popular provision in 401(k) plans. In fact, 75% of all Human Interest plans offer an employer match². Match programs usually incorporate one of two figures when calculating total match contribution: a percentage of the employee’s own contribution and a percentage of the employee’s salary.

There are many different 401(k) employer match types. Of all the plans at Human Interest, 31% offer a single-tier match formula, while 15% of plans offer a multi-tier match formula. Of those Human Interest plans that provide a match, 42% offer a 100% match on the first 4% of compensation deferred1. 

Click here to see what a 401(k) employer match may cost your business.

Should you implement a profit-sharing feature?

A 401(k) plan may include a profit-sharing contribution (also called a nonelective contribution) in addition to, or instead of, a matching contribution. While a profit-sharing plan can be set up separately from a 401(k) plan, it’s common to include a profit-sharing contribution within the 401(k) plan. This allows the employer the benefit of a profit-sharing plan without having to set up and maintain two plans. 

If the 401(k) includes a profit-sharing contribution, the plan document must state if the contribution is discretionary (meaning the employer decides each year whether or not it wants to make a profit-sharing contribution) or fixed (meaning the employer is guaranteeing it will contribute each year). The plan document must also state how any profit-sharing contribution is allocated. 

Profit-sharing contributions can work both as an employee incentive and a retention strategy. But they can also allow small employers to contribute more to their own accounts. Profit-sharing contributions are limited to 25% of the participating employee's compensation for the year for tax deduction purposes. This limit is shared with any matching contribution to the plan in the same year. If the employer makes a match, the amount of profit-sharing contribution an employer can deduct is reduced.

Read more: How a profit-sharing plan is different from a traditional 401(k)

401(k) vesting schedules

In a retirement plan, “vesting” refers to the employee’s ownership of any employer contributions made to their plan account. Employees' salary deferrals are always immediately vested, meaning they “own” these funds. However, employer contributions (i.e., match and/or profit-sharing) may not be immediately vested, depending on the plan terms. The plan may include a vesting schedule that states when an employee becomes vested (owns) the employer contributions. There are two types of vesting schedules:

• Cliff vesting: Employees earn the right to keep employer benefits after a specified period of time. For example, if a plan has a three-year cliff vesting schedule, the employee will not own any of the employer contributions in their account until they have completed three years of service with the employer. If the employee leaves before the three years are completed, the employer contributions in their account will be forfeited. 

• Graded vesting: Employees gradually earn the right to keep employer contributions over several years of service. For example, if a plan has a six-year graded vesting schedule (before two years of service, 0% vested; after two years of service, 20% vested; after three = 40%; after 4 = 60%; after five = 80%; after 5 = 100%), an employee who leaves after three years of service will own 40% of any employer contributions in their account. The remaining 60% of their account will be forfeited. 

There are special rules related to when the forfeiture of unvested balances can actually occur.

Note: “Vesting” is different from “eligibility,” which refers to who may participate in the 401(k) in the first place. Common eligibility requirements include age (must be over 18 or 21 years of age), or the number of hours or length of time worked (e.g., part-time workers).

3. Select your 401(k) plan provider

Once you determine what’s best for your business, it’s time to shop around for plan providers. We believe there are several factors employers should review when considering a 401(k) provider, including the following:  

• Transparency and fees for both plan management and investments

• Easy setup options that can decrease HR workload

• Robust technology, including integration capabilities (e.g., payroll integration)

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

• Customer service for employer administrators and employees

• Flexibility for plan design options

Let’s dig a little deeper into a few features to consider—and how to assess what fiduciary responsibilities you may want to outsource.

What small businesses should consider when selecting a 401(k) provider

• Quality: For starters, it’s worth considering the status of the provider itself. This means examining the business's health (i.e., financials or funding details), its financial structure, and the customer service they provide. It’s also important to evaluate how much support or education both your business and your team will desire, and what support systems your prospective provider supplies. 

• Technology: If you’re a small business owner, for example, you most likely have tons of work on your plate—and adding 401(k) plan administration would be no small feat. Similarly, your employees may want onboarding or education offerings at their disposal, should they need assistance setting up their plan. In these scenarios, it may be worthwhile to consider a tech-forward 401(k) provider that offers automation to help reduce the manual work of plan administration.

• Fees: It’s also worth looking at the pricing structure of 401(k) service providers. For example, some providers may advertise low costs, but there may be transaction fees that can add up over time. When comparing providers, look for affordable, transparent 401(k) plan providers.

Benefits of integrating your payroll

Administering a 401(k) is a multi-step process that hinges on payroll deductions—and there’s a lot at play behind the scenes. Employee contributions must be transferred to the 401(k) plan’s trust each payroll cycle within timeframes established by the Internal Revenue Code (IRC) Employer contributions must be deposited in the plan’s trust within timeframes established by the plan document and the IRC. Keeping up with these deadlines can be challenging. 

Combining 401(k) plan administration with an automated payroll process can help streamline everything from tracking employee eligibility, to depositing employee contributions, to reporting payroll data each pay period. Human Interest integrates with more than 300 payroll providers to help make it seamless to administer 401(k) plans.

Click here to read more about the advantages of integrating payroll with 401(k) plans.

Click here to read more about the advantages of integrating payroll with 401(k) plans.

Why should a business include 401(k) automatic enrollment?

As defined by the IRS, automatic enrollment (or an automatic contribution arrangement) is a plan design feature that automatically enables employers to “enroll” an eligible employee into the 401(k) plan at a default deferral election unless the employee elects otherwise. A 2021 study based on Vanguard recordkeeping data found that auto-enrollment tripled the participation rate of new hires (91% compared to 28% with voluntary enrollment). Moreover, the study uncovered that the vast majority of participants increased their deferral rates over time.

Auto-enrollment can be viewed as a win-win for businesses and employees alike. Because of the higher participation rates it may inspire, auto-enrollment can also help businesses pass annual nondiscrimination testing. As mentioned earlier, adding auto-enrollment to a 401(k) plan also provides an additional $500 tax credit per year for up to three years for eligible employers.

What are your fiduciary responsibilities?

As you vet plan providers, it’s also important to consider your fiduciary duties. Retirement plans must follow a complex set of laws and regulations. And to provide savings opportunities, employers must do some heavy lifting to sponsor and administer a 401(k). The Employee Retirement Income Security Act (ERISA) is a federal law that controls retirement plans and includes a set of standards (or “duties”), often referred to as “ERISA fiduciary duties.” 

The primary ERISA fiduciary duty is to run the plan in the interest of participants and beneficiaries. 401(k) plans must have a plan sponsor, a plan administrator, a Named Fiduciary, and a trustee. Below is a non-comprehensive breakdown of fiduciary responsibilities*:

• Plan sponsor: From a high level, the sponsor of a 401(k) plan establishes the retirement plan for a business and its employees—and is normally the employer itself (or selected employee of the firm). Some decisions made by a plan sponsor are considered business decisions and are not fiduciary in nature.

• Plan administrator: ERISA Section 3(16) requires all 401(k) plans to identify the plan administrator in the plan document. This plan administrator oversees the plan's operation and is responsible for both discretionary (fiduciary) and non-discretionary (day-to-day operational work that follows a set of instructions or procedures) functions. Unless another entity is identified in the plan document, the plan sponsor is the plan administrator. 

• Named Fiduciary: A qualified plan must have a “Named Fiduciary” who has authority over all fiduciary decisions. The plan’s written document must specifically identify (or outline a procedure to identify) the Named Fiduciary. It’s common for the Named Fiduciary also to be the plan administrator. The Named Fiduciary selects, evaluates, and monitors all other fiduciaries to the plan, as well as any non-fiduciary service providers. They may also delegate responsibilities to trustees or investment managers.

• Trustee: A qualified plan’s assets must be held in trust by one or more trustees. Trustees must be named in the trust agreement, in the plan’s written document, or appointed by the Named Fiduciary. Trustees have a fiduciary responsibility to ensure plan assets are managed in the best interest of the participants and in line with the plan document.

*For a more detailed overview, please refer to 401(k) plan administrator and sponsor duties.

What’s the difference between a trustee and a custodian?

It’s important not to confuse a custodian with a trustee. A custodian is often hired by the trustee to hold the plan’s assets and handle the buying and selling of investments. While the services of a custodian are documented in a custodial agreement, trustees are generally responsible for their actions. 

For more information on fiduciary responsibilities, please refer to our detailed article about 401(k) plan administrator and sponsor duties.

Adopt a written plan

Plans must have a written document as the foundation for day-to-day plan operations. Once you determine what plan is right for you—and which plan design features you want to include—it’s time to draft a plan document. The law requires that certain provisions be included in the plan document. Most service providers (e.g., Human Interest) use a pre-approved plan document that contains all the required language and will help you navigate the elections you need to make to complete and execute your plan document.

Refer to IRS guidance for more information on plan documents. 

Arrange a trust fund for plan assets

All qualified plans must hold the plan’s assets in a qualified trust. Before you set up a plan, you must determine where you’ll hold your 401(k) plan’s assets.

Hire a recordkeeper or Third Party Administrator

A third-party administrator (TPA) for a 401(k) is a service provider that specializes in day-to-day plan administration. A TPA’s tasks may include: 

• Preparing, amending, and restating plan documents

• Preparing quarterly statements for employers and employees

• Assisting with plan distributions

• Preparing annual IRS nondiscrimination testing

• Preparing loan documents

• Preparing annual reports for the IRS 

Do you need a TPA? For more information, refer to our article on Third Party Administrators (TPA) for 401(k).

Provide plan information to employees

As a final step, businesses must notify eligible participants about the specifics of a plan, including benefits and requirements. ERISA requires the plan administrator to provide eligible employees and beneficiaries a Summary Plan Description (SPD), which outlines plan design details for employees, including descriptions of the following information:

• Name and type of plan

• Eligibility details

• Match and vesting schedule details

• Plan benefit details

• How to file claims for benefits

• Rights and responsibilities under ERISA

For more information, find out more about our affordable 401(k) plans for small business.

5. Maintain your plan

Just because a 401(k) plan is up and running doesn’t mean it’s time to ignore it. Keeping a 401(k) plan running smoothly means adhering to ERISA regulations, performing annual compliance testing, meeting year-end deadlines, and more. Below are some basics on preserving your plan.

Government filings: Form 5500  

Form 5500 is a report that businesses must file annually to provide the IRS and U.S. Department of Labor (DOL) details about the business’ employee benefit plans. It includes details such as the plan's investments, operations, and conditions. Large plans (those with over 100 participants) may require an independent auditor to review them before completing this filing.

ERISA fidelity bonds

Plans subject to ERISA—including 401(k) plans—need an ERISA fidelity bond to protect plan assets from theft or wrongdoing. The bond covers anyone who "handles funds or other property" of a 401(k) plan. Bonds can be obtained from a provider ("sureties") approved by the Department of the Treasury. Learn more about ERISA fidelity bonds for 401(k) plans.

What is 401(k) nondiscrimination testing?

Also known as NDT, 401(k) compliance testing ensures that businesses comply with established federal requirements and regulations. These tests help measure participation levels of highly compensated employees (HCEs) and non-highly compensated employees (NHCEs) to ensure HCEs do not overly utilize plans. While the tests focus on participation levels, other factors can influence if a business passes or fails the nondiscrimination tests.

Click here to learn more about the basics of 401k compliance.

401(k) deadlines for employers

To get the most from your 401(k) program, you must remember deadlines for important events that affect plan administration and compliance. Refer to our list of 401(k) deadlines for employers and employees, which includes action items and links where you can find additional information.