How to Start a 401(k) for Your Small Business

Offering retirement benefits doesn’t need to be complicated.


If you run a business you’re probably constantly thinking about its financial health—how much money it’s earning and spending. But another aspect of financial health that may be of concern is the financial health of your employees, and how to start a 401(k) for your small business.

Retirement plans can offer significant benefits to your employees and help you offer competitive benefits. But employees of small businesses are least likely to have access to one. Just over half of the small and mid-sized businesses included in a Pew Research study offer retirement plan benefits to their employees.

If you’re considering including a retirement plan on your list of benefits, a 401(k) plan might be your best bet. In this article, we’ll cover different 401(k) plan options as well as how to get started offering this benefit to your employees.

Why a Retirement Plan Is a Smart Move

A 401(k) plan can be a very powerful benefit for your company and your employees. But offering a 401(k) plan is a big commitment. How do you know if it’s right for your company?

Here are some reasons starting a 401(k) plan is a smart move.

  • Attract and retain employees: It can be difficult to find and keep the right people for your business. A 401(k) might help. According to a Glassdoor study, 401(k) plans are one of the top five benefits employees care about.
  • Deferred tax growth: A traditional 401(k) plan offers deferred tax growth to help fuel retirement. If you participate in your plan (which you should!) that means both you and your employees are reaping that benefit.
  • Tax deductions: Not only can a 401(k) plan be good for your financial health, it can be good for your business health. Any contributions that you make to your employees’ plan are tax-deductible. And your business may even be eligible for a $500 tax credit for the first three years after setting up your plan.
  • Offer solutions: 48% of people 55 and over have nothing set aside in a retirement plan. This isn’t good for anyone. Offering a retirement plan can help your employees protect their financial future and show that you care about their wellbeing.

Is a 401k Right for Your Business?

When it comes to retirement plans, there are a lot of options. You can choose from a number of different plans if you want to offer retirement benefits to your employees. Here are some of the most popular options:

Traditional 401(k): The traditional 401(k) is a retirement plan that offers flexibility. It is available to businesses of any size and allows employers to contribute to employees’ plans, match contributions, or do neither. There is annual testing that is required for these plans, to ensure that the benefits are equitably offered to all employees.

Safe Harbor 401(k): Under a safe harbor 401(k) plan, businesses will have less flexibility but won’t be subject to the annual testing requirements that they would be with a traditional 401(k) plan. A notable feature of the safe harbor plan is you are required to make employer contributions and they vest immediately when they are made.

One-participant 401(k) Plan: Also known as a 401(k) plan, a one-participant 401(k) plan is available to business owners with no employees, aside from their spouse. It comes with the same contribution limits and similar filing requirements as a traditional 401(k) plan. However, if the plan has less than $250,000 in assets, you’re likely exempt from the annual filing requirements.

SIMPLE IRA: If your business has fewer than 100 employees, you’re eligible for a SIMPLE (savings incentive match plan for employees) IRA. With a SIMPLE IRA plan, you have less administrative work. It’s set up by filling out one form and there’s no annual filing requirement. This does come with less flexibility though. As an employer, you’re required to contribute to the plan, whether or not your employee chooses to do so.



How to Start a 401(k) for My Business: 4 Steps

Once you’ve decided that a 401(k) plan is the right option for your business, it’s time to get it set up. There are a lot of details that go into starting and managing a 401(k) plan, but to get started there are four main steps you’ll need to take:

1. Find a Plan Provider

You can administer a 401(k) plan yourself, but it’s much easier to outsource this task to a plan provider. There are a lot of administrative tasks that can be handled by a plan provider who has more experience.

But you’ll want to take your time to find the right plan provider. When shopping around for a plan provider you’ll want to consider a few things:

  • Fees: What type of fees does the provider charge to both you and the employee? Reducing fees can have a substantial impact on your employees’ retirement savings. If you’re not familiar with the fees you can expect to see with a 401(k) plan, the United States Department of Labor has a resource to help you learn more.
  • Payroll integration: Finding a 401(k) plan that integrates with your payroll provider can help cut back on administrative tasks by allowing easy, automatic deductions directly from employee paychecks.
  • Minimum number of participants: Does the provider require a minimum number of participants? If so, you’ll want to know that upfront because if the number is beyond what your business can support, you may want to skip them.
  • Quality of the firm: What is the financial condition of the provider and do they have experience and qualifications to manage 401(k) plans? Is there any recent litigation against them? Do they have fiduciary liability insurance?

Once you’ve picked a plan provider, you’ll need to spend time documenting your decision. You have a fiduciary responsibility to your employees to select and maintain the best provider on their behalf.

Even after you’ve hired the provider, you’ll need to monitor your selection to make sure it’s still the best choice. You should:

  • Regularly review their performance
  • Read plan reports
  • Check actual fees charged
  • Review updates to their contract and policies and procedures
  • Follow up on participant complaints

2. Decide on Your Employer Contribution

One way you can entice employees to save in the 401(k) plan you set up is to offer employer contributions. With an employer contribution, you’re depositing money into your employees’ retirement accounts. Employer contributions are a valuable benefit for employees.

With a traditional 401(k) plan, you have options for offering your contribution.

  • Non-elective contribution: You contribute a percentage of an employee’s compensation to their retirement account, regardless of whether they contribute.
  • Matching contribution: You match the amount your employee contributes to their account. You don’t need to match their contribution 100%, you can choose a matching rate that works for you.

If you select a non-elective contribution, you’d make a retirement contribution for each plan participant, whether or not they contribute anything to their retirement account. For example, you may decide that you’ll make a 1% non-elective contribution and contribute 1% of their salary to their retirement account. They’ll get that money whether or not they decide to contribute to their own retirement account.

If you select a matching contribution, you’ll match a certain amount of the employee’s contribution. Say, for every $1 that they contribute to their 401(k), you’ll match it with an additional $0.50 contribution. You can also set a limit as to how much you’ll match. You might decide to make contributions up to a certain percentage of your employees salary.

According to Vanguard, the most typical employer match formula is $0.50 per dollar on the first 6% of pay. That means as an employer, you match part of the employees contribution (50%) up to a maximum amount of 6%. So if you pay your employee $100,000, the IRS caps your matching contribution at $6,000.

The IRS limits how much each individual can contribute to a 401(k) plan per year. For 2020, the maximum contribution by both the employee and employer is $57,000 for employees under 50 and $63,500 for employees over 50.

3. Create Your Vesting Schedule

If you choose to make contributions to your employees’ 401(k) plan, you’ll want to decide on a vesting schedule. Any contributions that an employee makes to their plan is fully vested immediately. If they decide to leave the company, they can take that money with them at any time.

With a traditional 401(k) plan, any contributions that you make to their plans on their behalf can vest over time, according to your vesting schedule.

You might choose to have your employees fully vested when they reach a certain tenure with your company. For example, they are 0% vested until they’ve been with your company for four years at which point they are 100% vested.

Another option is to vest your contribution over time. For example, after one year with your company, they may be 25% vested and then vest an additional 25% per year until they are 100% vested.

One note here is that if you decide to offer a safe harbor 401(k) plan, your contributions to employee plans are vested immediately.

4. Disclose Information About the Plan

Once you’ve picked a plan provider, you’ll want to communicate this information to your employees. A summary plan description can help you do that. This explains to your employees their rights and responsibilities under the plan and what to expect from the plan.

In the summary plan description you’ll need to include:

  • When and how employees become eligible to participate
  • Employer and employee contributions to the plan
  • Vesting schedules
  • When employees can receive their benefits
  • How to file a claim for benefits
  • Rights and responsibilities under the Employee Retirement Income Security Act (ERISA)

You want to encourage employees to participate in the plan, so make sure that you’ve written the description in plain English and addressed any questions they may have.

Get Started

While deciding on and setting up a 401(k) plan comes with a lot of details, it comes with even more benefits. Creating a plan to help you and your employees create a financially secure future is good business. Take the time to work through these four steps and you’ll have a retirement plan established for your business in no time.



about the author

Freelance Contributor Erica Gellerman is a CPA, MBA, content marketing writer, and founder of The Worth Project. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, and more. She currently lives in Hawaii.