Small Business 401(k) Plans: What to Know About Employee Retirement Plans

What is a 401(k) plan?

A 401(k) plan is an employer-sponsored benefit that helps employees save money for retirement. According to the IRS, a 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. Employees typically have several investment options for how their money is allocated.

Many of the best employee retirement investment plans can help businesses of all sizes establish or change a 401(k) plan.

How do 401(k) plans work?

These retirement plans are straightforward. Here’s how they work:

1. A business offers a 401(k) plan to its staff.
2. Employees sign up and designate a percentage of their paycheck to be placed into their retirement investment account.
3. The money is invested and has the potential to grow — often significantly — throughout the employee’s career, helping fund their retirement.

Eliza Guilbault, vice president of workplace consulting thought leadership and commercialization at Fidelity, noted that most workers today are responsible for funding their retirement. “We are shifting from an employer-funded pension plan to a defined contribution plan landscape,” Guilbault explained. “A 401(k) is a great way to save for the future.”

Employers sponsor these plans. But, employees own the money they contribute, along with any vested employer contributions (more on vesting below).

What is 401(k) matching?

To boost participation, employers sometimes participate in 401(k) matching. They contribute to their employees’ 401(k) accounts based on each employee’s contribution. They may entirely or partially match an employee’s contribution up to a specific percentage. For example, if an employee contributes 4 percent of their paycheck, their employer might match that amount — effectively increasing the employee’s total contribution.

Employers may implement a vesting period. This designation dictates how long an employee must stay with the organization before the matching contributions fully belong to them. Implementing a vesting schedule helps incentivize employees to stay with the company.

Sarah Chen, founder and principal at Recruit Engineering, noted that 401(k) matching can be an effective employee recruitment incentive. “Offering anything over 20 percent in matching contributions is a strong perk, and anything approaching 50 percent will likely put your company at the top of the list for the best candidates,” Chen explained.

How much can employees contribute to a 401(k)?

As of 2025, an employee can contribute up to $23,500 annually. Including employer contributions, the total annual contribution limit is $70,000 per employee in 2025. Those ages 50 and older can contribute an additional $7,500.

What are the types of 401(k) plans?

There are a few types of 401(k) plans, including the following popular ones:

• Traditional 401(k): In a traditional 401(k) plan, the money an employee chooses to invest in the plan is pretax. In other words, the money they contribute comes out of their paycheck before taxes are deducted. However, they will pay taxes on the money when they withdraw it from their retirement account.
• Safe harbor 401(k): A safe harbor 401(k) is similar to a traditional 401(k), but it allows business owners to bypass certain IRS nondiscrimination tests. It does so by making mandatory employer contributions — either as a match or a fixed percentage of salary for all eligible employees.
• Roth 401(k): With a Roth 401(k) plan, money comes out of an employee’s paycheck after taxes have been deducted. Because the taxes were paid upfront, employees won’t pay taxes on qualified withdrawals in retirement — including both contributions and investment earnings.

What are the benefits of offering a 401(k) plan to employees?

While offering a 401(k) plan allows employees to save pretax dollars for retirement, it also provides significant benefits to a business, including the following:

• Increases employee loyalty: Employees feel more loyal to an employer offering a 401(k) plan, particularly one that contributes matching funds. Loyal employees fuel a workplace with increased employee retention and satisfaction.
• Boosts employee engagement: Shane McEvoy, MD, Flycast Media, emphasized that businesses offering perks like 401(k) plans enjoy improved employee engagement. “Retirement benefits like a 401(k) show employees that a company thinks beyond just paychecks,” McEvoy explained. “Many workers struggle with saving for the future, and an employer-sponsored plan makes it easier. Employees who feel secure about their financial future are more productive and engaged.”
• Helps you attract top talent: Businesses can attract and retain top talent by offering perks like 401(k) plans and a robust employee benefits package that includes health insurance. “A well-designed, company-matched 401(k) is a powerful asset for any company, and as a recruiter, I regularly witness this advantage firsthand,” Chen noted. “Companies that offer a 401(k) plan have a clear edge when it comes to attracting top talent, and the impact of this benefit extends far beyond initial recruitment.”
• Lowers company taxes due: Employer contributions to employee 401(k) plans are tax-deductible, which helps the company financially. Some businesses may even qualify for tax credits.
• Helps business owners: With a 401(k) plan, business owners can contribute significant money toward their own retirement. Plus, they can better plan their future and ensure their financial security.

How do I set up a 401(k) plan for my business?

While a 401(k) plan is a benefit traditionally offered by larger organizations, Guilbault said small businesses should strongly consider offering one, too. “Many [retirement plan] providers have solutions that are great for small businesses,” Guilbault noted. “Fidelity works with thousands of small businesses.”

To set up a 401(k) plan for your business, take the following steps:

1. Select a 401(k) plan provider.

Numerous dedicated retirement plan providers exist. Additionally, the best online payroll services and the best professional employer organizations often provide 401(k) plan management in addition to their core services.

For example, Gusto is a multifaceted platform that offers payroll, employee benefits and human resources management software. Its payroll services can easily and accurately accommodate 401(k) contributions and matches. Read our review of Gusto HR software and our Gusto payroll review to learn more.

2. Check state regulations regarding retirement plans.

States have various rules and regulations about retirement plans. Some states even require employer-sponsored retirement plans. For example, in California, businesses with one or more employees must participate in the CalSavers retirement savings program if they do not already offer a qualified plan.

Since regulations vary, small business owners should check their state’s requirements to ensure compliance.

3. Decide what 401(k) plan features you want.

401(k) plans have various features and functions, so business owners must make some decisions. Consider whether you want any of the following:

• Automatic enrollment: You may want to implement an automatic 401(k) enrollment policy. With this practice, each employee is automatically enrolled in the 401(k) plan at a specific savings percentage unless they opt out. Automated enrollment can lower the overhead costs of providing this benefit and make it easier for employees to maintain it.
• Matching contributions: You’ll need to decide whether you want to match contributions. While matching isn’t a requirement, Guilbault said it could pay off in the long run. “A well-designed 401(k) plan, with a company match and that incentive, can really help keep people and attract the right people [a business is] looking for,” Guilbault advised. Matching contributions is a significant employee perk that incentivizes employees to save more. However, it’s not a viable option for businesses that aren’t profitable or must cut business expenses.
• Professional management: When you provide professional management for your retirement plan, employees can access a financial advisor who will help them with fund selection and contribution amounts.

4. Determine your 401(k) plan costs.

For small businesses, the costs of offering a 401(k) retirement plan can vary greatly and may include the following:

• Setup and maintenance costs: Plan providers typically charge setup and maintenance fees. Setup costs can range from $500 to $2,000, while maintenance fees are usually based on the number of participating employees. Annual administration fees can range from $750 to $3,000. The plan’s assets, the employer or the participants’ accounts may cover administrative fees.
• Plan add-ons: Additional plan features — including automatic enrollment, increased fund options and professionally managed services — will add to your costs.

Providing a 401(k) plan incurs costs. But, some expenses may be offset by specific tax deductions for which small businesses with fewer than 100 employees may be eligible. For example, you may be able to deduct administrative fees from your business taxes. You may also be able to take advantage of tax credits.

5. Monitor participation and adjust as needed.

Nikita Sherbina, co-founder and CEO of AIScreen, emphasized the importance of communicating with your team so they understand the plan’s structure and benefits. “Education is key. Give employees the tools to understand the long-term benefits of the plan and encourage regular contributions,” Sherbina advised.

To ensure your plan remains attractive and effective, regularly assess employee participation rates and contribution levels. “Review the plan regularly and adjust the match to stay competitive,” Sherbina added.

What are 401(k) alternatives for small businesses?

A 401(k) is not the only option for small businesses looking to establish a retirement plan for their employees. Business owners should also consider the following potential alternatives.

• SEP IRA: A Simplified Employee Pension (SEP) IRA allows employers to save up to 25 percent of their income for retirement. Business owners can establish these funds for themselves and their employees. SEP contributions must be made by the employer on behalf of the employee; there are typically no employee contributions.
• SIMPLE IRA: A SIMPLE IRA is a retirement plan that allows employers and employees to contribute to an employee’s retirement savings. In a SIMPLE IRA, an employer must either match employee contributions up to 3 percent of their annual compensation or make a 2 percent nonelective contribution for all eligible employees. For 2025, the maximum employee contribution limit is $16,500, with an additional $3,500 catch-up contribution allowed for those ages 50 and older. The maximum compensation eligible for employer contributions is $350,000.
• Traditional IRA: A Traditional IRA is an individual retirement account funded solely by the individual, with no employer contributions. Contributions are tax-deferred. So, the account owner can deduct the entire amount of yearly contributions from that year’s individual tax return, subject to IRS income limits. As of 2025, individuals under age 50 can contribute up to $7,000 annually; those ages 50 and older can contribute up to $8,000, which includes a $1,000 catch-up contribution.
• Roth IRA: Like a traditional IRA, contributions are only made by the individual. However, a Roth IRA reverses the tax deductibility of a traditional IRA. Contributions are not tax-deductible when made. But, after retirement (or age 59.5), when the proceeds are withdrawn, they are tax-free, provided the account has been open for at least five years.