Team Management

How Do I Set up a 401(k) for My Small Business?

Jenna Lee Business finance writer 

At first glance, a 401(k) plan may look like a hodgepodge of pie charts and indecipherable rules.

But in reality, it’s an amazing tool employers have in their arsenal to help their teams save for the future. In this article, we’ll give you the lowdown on how to set up a 401(k) plan that takes superb care of your team.

First off, am I required to offer a retirement plan?

While most states don’t require you to offer a retirement plan, some do.  There are also endless other reasons why you should help your team save for whatever life has in store.

  • It shows that you care about your team’s future. With a company-sponsored retirement plan in place, your team will feel more comfortable thinking about the road ahead.
  • Most employers already provide 401(k)s to their teams. The Society for Human Resource Management (SHRM) found that 94 percent of companies provided some type of retirement plan. Furthermore, 74 percent provided a match on some or all of their employees’ contributions to those plans. Offering a retirement plan will help your small business stay competitive.
  • Offering a 401(k) saves you money on taxes: You can deduct your employer contribution to your team’s 401(k). And if you have fewer than 100 employees, there is even a $500 tax credit for the first three years to help offset the cost of administration fees.

It helps people stick around: Survey after survey reveals that 401k plans are among the most coveted benefits for employees (typically after health benefits and PTO).

Which plan should I set up? SEP-IRA vs. SIMPLE-IRA vs. 401(k)

If you want to set up a retirement plan for your employees, you have a few options. Some of the most common plans include the SEP-IRA, SIMPLE-IRA, and traditional 401(k).

If you have fewer than 100 employees, a SEP-IRA or  SIMPLE-IRA might make more sense. But as you grow to more than 100 employees, sponsoring a 401(k) will likely be your best bet.

Here’s how each of these types breaks down:


A SEP-IRA, or simplified employee pension, is for small business owners and those who are self-employed. Only employers can contribute to this kind of IRA, which is why it’s more suitable for business owners. In 2021, owners can contribute $58,000 or 25% of their income, whichever number winds up lower.


A SIMPLE (savings incentive match plan for employees) IRA is designed for companies with 100 employees or less. It was named well—setting one up is fairly simple. You fill out an IRS form, pay the fee, and that’s kind of it.

Here are the 2021 contribution limits for SIMPLE IRAs:

  • Employees younger than 50: $13,500
  • Employees 50 and older: $16,500

401(k) plan

With a 401(k), there are a few more steps involved, but employees are allowed to contribute more—up to $19,500 ($26,000 for those 50 and older). 

Not sure if a 401(k) is right for your business? The general rule of thumb is if your total payroll is at least $500,000, you’re probably a great candidate for a 401(k) plan.

Great, now how do I set a 401(k) up?

While some of the initial decisions are up to you, you don’t have to do everything yourself. Here are the steps you’ll want to take when setting up a small business 401(k):

1. Choose the type of 401(k) you want to offer.

There are a variety of 401(k) plans, which mostly vary by who can offer them, contribution limits, whether you’re required to match employee contributions, and compliance requirements.

  • Traditional 401(k) plan: Employees contribute to their account before taxes, which means they’ll be taxed when they withdraw from their account. As an employer, you must meet all compliance requirements.
  • Roth 401(k) plan: Employees contribute money they’ve already paid taxes on, so they can usually withdraw on a tax-free basis in their retirement years. As an employer, you must meet all compliance requirements.
  • Safe Harbor 401(k) plan: You’re required to contribute to employees’ accounts in order to qualify for a Safe Harbor 401(k), but in exchange, you get to skip the annual nondiscrimination testing, which is a series of tests that ensure all employees are treated equally under your plan. (You do have the fiduciary duty to make sure your plan is run in the best interest of your employees and must file a Form 5500 with the IRS/DOL each year, though.)
  • Solo 401(k) plan: You can only offer this plan if you and your spouse are the only employees. Solo 401(k)s come with all the benefits of a traditional 401(k) plan but have fewer compliance requirements (no nondiscrimination testing or fiduciary responsibilities.)
  • SIMPLE 401(k) plan: Like the SIMPLE-IRA, the SIMPLE 401(k) is designed for companies with 100 or fewer employees. While this plan has a lower contribution limit than other 401(k)s ($13,500 or $16,500 for those over 50) and requires you to contribute to employees’ accounts, it doesn’t require nondiscrimintation testing or fiduciary duties. 

2. Figure out your 401(k) policy details.

401(k)s are extremely flexible and let you determine everything from the eligibility requirements and vesting schedules to matching and profit sharing details.

To begin, it may help to think about what you want you and your employees to get out of it. Any retirement plan should be rooted in the values that make your company who you are.

As you’re going through the questions below, see how each one can help you bring the values you cherish to life.

Your team’s 401(k) contribution

How much do your employees want to invest in their 401(k)s? 

Here are the 2021 contribution limits for most 401(k) plans:

  • Employees younger than 50: $19,500
  • Employees 50 and older: $6,500 in catch-up contributions + $19,500 = $26,000

Even if your business is tiny, the higher setup fees for a full 401(k) (rather than a SIMPLE 401(k)) may be worth it if you have a lot of high earners such as lawyers, medical staff, or engineers who want to contribute as much as possible.

Your 401(k) match

How much can your business commit to giving?

Matching your employees’ 401(k) contributions is a great way to attract and retain talent and motivate your employees to save for their future. And for Safe Harbor 401(k)s and SIMPLE 401(k)s, it’s required.

The great thing about 401(k) plans is that they help lower your tax burden because you can deduct any contributions as a business expense. It also gives employees the ability to have their own contributions automatically withdrawn before taxes are taken out. Then, you can pad that amount by contributing a flat amount or matching whatever your worker added to the pot (usually up to a certain percent or amount).

Take your financial projections into account while choosing a plan. If your profits zigzag around and you’re a smaller company, a SEP-IRA allows you to adjust your yearly contribution from zero to 25 percent of a person’s income. On the flip side, a SIMPLE-IRA allows you to only add up to three percent.

Other perks

Do you want to offer more than a standard account employees can contribute to?

If so, you could consider looking into 401(k) plans that offer other perks, such as the ability for employees to borrow a portion of their 401(k) tax-free (often called a 401(k) loan) or profit sharing. Profit sharing allows you to set aside some of your business profits, divide it among your employees, and add that money to their retirement savings. This can be a great way to motivate your team to work hard and help the company succeed.

401(k) vesting schedule

Do you want an extra incentive for employees to stick around?

If you contribute to your employees’ accounts, whether via matching or profit-sharing, it’s also important to think about their vesting schedule, which determines when the employee actually owns your contribution to their account. While some companies allow employees to own the entire amount as soon as it hits their account, others require employees to hit a milestone or stay at the company for a certain period of time before they earn your contribution.

401(k) maintenance and setup fees

How much are you willing to pay to actually run your plan?

The annual cost of offering a plan can range anywhere from hundreds of dollars to tens of thousands of dollars, depending on whether or not your plan has all the bells and whistles, including more customization and advice from experts. Plans that are more actively managed tend to have higher administrative costs (which can eat into your employees’ returns). 

There are two types of fees to know about:

  • Fees your company will have to pay (which are typically based on your number of employees), and
  • Management fees that are taken out of employees’ investments

At Gusto, we partner with Guideline to offer low-cost 401(k) plans with no setup fees or transaction fees and no minimum number of participants. Learn more about 401(k)s with Gusto.

Enrollment timing

Each plan has different deadlines, so double-check that you have enough time to provide the plan you want in the year you want it to show up on your taxes.

3. Choose your 401(k) provider.

Once you decide what kind of plan(s) and features you want to offer and how much you’re willing to pay to run your plan, simply shop around and call the provider that offers the best option. If you don’t have a huge team, you may also want to make sure the provider you choose will keep you compliant, handle recordkeeping, and take care of day-to-day plan administration so you don’t have to do it all yourself or manage a bunch of different vendors.

As employees usually set up automatic contributions that come out of their paycheck, it may also help to explore options like Gusto that tie 401(k) deductions directly to payroll, which can save time, reduce errors, and save money. 

4. Choose your 401(k) trustee.

Before you start collecting contributions, you need to set up a trust account, where you’ll hold your 401(k) plan’s assets. This is to ensure these funds are only used to benefit those participating in the plan (and their beneficiaries).

By law, you must also designate a 401(k) trustee, who basically controls all the plan’s assets and is responsible for collecting contributions, investing them, and making sure the money gets to the participants.

5. Document your official 401(k) plan.

Once you’ve decided which plan(s) you want to offer and the features of each plan, the IRS says you need a written document “that serves as the foundation for day-to-day plan operations.” This document should include key details, such as:

  • Which employees are eligible to participate
  • How your employer contributions work
  • Any applicable fees employees may need to pay
  • When employees can withdraw their money
  • Who employees can contact for more details

This’ll help minimize questions on your employees’ end and demonstrate compliance if you’re ever audited. Fortunately, many 401(k) administrators will take care of this for you.

6. Onboard employees.

Finally, let eligible employees know about your plan before it goes into effect, and share a summary of the plan so they can understand the details. It may help to host an initial info session to give your team a high-level overview and answer most of their questions in one fell swoop.

Now that you know all the basics, you’re almost ready to set up your 401(k) plan. Review this guide, gather your answers to the questions above, and you’ll be ready to march into any 401(k) chat with a worthwhile plan ahead of you.

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