Sarah owns a thriving 15-person construction company in Florida. Last month, she lost her best project manager to a competitor. It wasn't about salary. The competitor offered a 401(k) plan, but she did not.
"I can't compete with the big guys on benefits," she thought. But Sarah was wrong.
Thanks to new federal laws, small businesses like Sarah's can now provide great retirement benefits. They can also save thousands in taxes with SECURE 2.0 credits. What once seemed impossible for small employers has become not just achievable, but profitable.
In today's competitive job market, 88% of employees consider retirement benefits extremely important when evaluating opportunities, yet many small businesses struggle with how to set up a 401(k) for small business operations. The good news? It's easier and more affordable than most business owners realize.
This guide covers everything you need to know about setting up a 401(k) plan. It includes legal requirements, choosing a provider, and managing costs. Whether you're retaining skilled construction workers or competing for top professional talent, this roadmap will help you navigate the process with confidence.
Legal and Compliance Requirements
Before exploring plan options, understand what is required for a business to offer a 401(k). The Employee Retirement Income Security Act (ERISA) governs most employer-sponsored retirement plans, establishing fiduciary responsibilities that protect employee interests.
Key compliance requirements:
- ERISA Fiduciary Responsibilities: As plan sponsor, you have duties to act in employees' best interests prudently selecting investment options, keeping fees reasonable, and following the plan document precisely.
- Nondiscrimination Testing: Traditional 401(k) plans must pass annual tests ensuring highly compensated employees don't receive disproportionate benefits. These tests can be complex and, if failed, may require corrective action.
- Safe Harbor Provisions: Many small businesses choose Safe Harbor 401(k) plans, which automatically satisfy nondiscrimination testing by meeting specific contribution formulas. While this eliminates testing headaches, it requires mandatory employer contributions.
- Reporting and Disclosure: Plans must file annual Form 5500 reports and provide employees with summary plan descriptions, annual statements, and other required disclosures.
Working with experienced providers significantly simplifies compliance management for small businesses without dedicated HR staff.
Types of 401(k) Plans for Small Businesses
Selecting the right plan depends on your business size, budget, and employee demographics.
Traditional 401(k) Plans
Traditional 401(k) Plans provide maximum design flexibility but require annual nondiscrimination testing. You control employer matching and vesting schedules. However, failed testing may require additional contributions or returning excess contributions to highly paid employees.
Safe Harbor 401(k) Plans
Safe Harbor 401(k) Plans eliminate nondiscrimination testing by requiring specific employer contributions, either 3% of compensation for all eligible employees or structured matching (100% of contributions up to 3% of pay, plus 50% of contributions between 3% and 5%). This guarantees costs but provides certainty and simplified administration.
SIMPLE 401(k) Plans
SIMPLE 401(k) Plans combine SIMPLE IRA features with 401(k) benefits, offering higher contribution limits than SIMPLE IRAs while maintaining easier administration than traditional 401(k)s. Employers must contribute either 2% of compensation for all eligible employees or match up to 3% of pay.
Consider your budget for employer contributions, administrative complexity tolerance, and employee demographics when selecting your plan type.
Employer Contributions and Matching
Understanding 401(k) employer match options helps you design attractive, cost-effective plans. Employer contributions come in two forms: matching and non-elective contributions.
Common Matching Formulas:
- Dollar-for-dollar: $1 for every $1 employees contribute, up to a specified percentage (e.g., 100% match on first 3% of salary)
- Partial match: A percentage of employee contributions (e.g., 50% match on first 6% of salary, providing a 3% maximum match)
- Tiered match: Different rates for different levels (e.g., 100% match on first 3%, 50% match on next 2%)
Industry Benchmarks: The average employer match is approximately 4.3% of salary. Small businesses typically start with 3-4% matches and adjust based on budget and competitive needs.
Vesting Schedules: Determines when employees fully own employer contributions. You can implement immediate vesting (simpler) or graded vesting (ownership increases over time).
Remember: employer matching is optional for traditional 401(k) plans. You can start without matching and add it later as your business grows.
Contribution Rules and Limits
Understanding IRS limits helps you communicate plan benefits effectively.
2025 Contribution Limits:
- Employee deferrals: $23,500 for workers under 50
- Catch-up contributions: Additional $7,500 for employees 50+ (total $31,000)
- Enhanced catch-up: Additional $11,250 for employees 60-63 (total $34,750)
- Total annual additions: $70,000 per participant under 50 ($77,500 with standard catch-up, $81,250 with enhanced catch-up)
Highly Compensated Employee Rules: Employees earning more than $160,000 in 2025 (or $155,000 in 2024) are considered highly compensated and may face additional contribution restrictions based on nondiscrimination testing results.
Safe Harbor Requirements: Safe Harbor plans require at least 3% of compensation for all eligible employees or the required matching formula.
These limits change annually, so staying informed ensures your plan remains compliant while maximizing employee benefits.
What Is the Cost to Offer a 401(k)?
Understanding the cost of 401k for small business operations helps you budget appropriately and evaluate provider options. 401(k) costs fall into several categories:
- Setup Costs range from $0 to $5,000 depending on plan complexity and provider. Many providers, including some PEO partners, completely waive setup fees to help small businesses start without upfront barriers.
- Administrative Fees typically range from $200 to $8,000 annually for small businesses, covering plan administration, compliance testing, government filings, and participant services. Some providers have scaled pricing. This means fees go down as your employee count increases. For example, annual administration might cost $200 for small teams. But it can drop to $0 if you have 8 or more employees participating.
- Investment Management Fees are charged by mutual funds within your plan. These expense ratios can range from as low as 0.10% for self-directed options to 0.35% for managed portfolios. Look for providers offering "open architecture" fund families with no-load mutual funds purchased at net asset value (NAV).
- Participant-Level Costs may include annual administration fees (typically $28 per participant), loan setup and maintenance fees (around $75 setup plus $16 annually), and distribution processing fees ($75 per transaction). The key is finding transparent fee structures where costs are clearly disclosed rather than hidden in investment returns.
- Employer Contribution Costs depend entirely on your plan design. A 3% Safe Harbor contribution for 10 employees earning an average of $50,000 costs $15,000 annually. Matching contributions vary based on employee participation rates.
Cost-Saving Strategies:
- Compare multiple providers and fee structures
- Consider plans with lower-cost investment options
- Evaluate whether employees can share some administrative costs
- Start with basic plan features and add complexity over time
SECURE 2.0 Tax Credit Opportunity
Small businesses establishing 401(k) plans can now take advantage of unprecedented tax credits through the SECURE 2.0 Act. These credits can cover startup costs completely. They can also provide thousands in extra savings through auto-enrollment and employer contributions.
Companies with 50 or fewer employees can get up to $5,000 each year in startup credits for three years. They may also receive extra credits for auto-enrollment features and employer contributions.
Contact FrankCrum to learn how these tax credits can make your 401(k) plan cost-neutral or even profitable in the first few years.
Many small businesses see that tax benefits and keeping employees are worth the costs. This is true, especially when they work with affordable providers and use available tax incentives.
Choosing the Right Provider
Selecting a provider is crucial when learning how to set up a 401k for a small business. The right provider simplifies administration, ensures compliance, and provides excellent employee service.
Key Selection Criteria:
- Service Model: Determine whether you want full-service administration (provider handles everything) or self-directed options. Small businesses typically benefit from full-service models including compliance support and employee education.
- Technology Platform: Evaluate the provider's website and mobile app. Employees should easily check balances, change contributions, and access educational resources. Look for platforms integrating with your existing payroll system.
- Investment Options: Review available mutual funds and investment options. Look for well-diversified choices across asset classes and risk levels from reputable fund families like Vanguard, Fidelity, BlackRock, Invesco, Franklin Templeton, and T. Rowe Price. Consider expense ratios and performance history, plus whether the provider offers both self-directed options and optional managed portfolios for different investor comfort levels.
- Compliance Support: Ensure comprehensive compliance services, including nondiscrimination testing, government filings, and audit support. This is especially important for small businesses without dedicated HR staff.
- Customer Service: Test the provider's responsiveness and expertise. Your employees will interact with their service team, so quality customer support directly impacts employee satisfaction.
- Fee Transparency: Ensure the provider offers complete fee transparency where all costs are disclosed as line items rather than embedded in investment returns. Look for providers who credit back 12b-1 fees to participants and offer absolute objectivity in fund recommendations.
Questions to Ask Potential Providers:
- What is your total fee structure, including all potential charges?
- Do you offer scaled pricing based on employee count?
- How do you handle nondiscrimination testing and compliance?
- What payroll systems do you integrate with?
- Do you provide daily valuation and online access for participants?
- What employee education and ongoing support do you provide?
- How quickly can you implement our plan?
- What happens if we need to make plan changes?
Launching and Communicating the Plan
Successfully implementing your 401(k) requires careful planning and clear communication to ensure employees understand and appreciate this valuable benefit.
Policy Creation: Develop a comprehensive plan document outlining eligibility requirements, contribution rules, vesting schedules, and distribution options. Your provider typically helps create this document based on your plan design decisions.
Employee Eligibility: Determine eligibility requirements—minimum age (typically 21), service requirements (often 1,000 hours or one year), and waiting periods for new hires. Balance inclusivity with administrative simplicity.
Onboarding Process: Create a systematic approach for enrolling employees, explaining how to offer 401k to employees effectively through enrollment meetings, one-on-one sessions, or online enrollment platforms.
Communication Strategy:
- Announcement: Introduce the plan enthusiastically, emphasizing your investment in employees' financial futures
- Education Sessions: Conduct group meetings explaining plan features, investment basics, and enrollment procedures
- Written Materials: Provide easy-to-understand summaries of plan benefits, contribution limits, and investment options
- Ongoing Support: Establish regular communication about plan updates, investment performance, and retirement planning resources
Employee Education Topics:
- Benefits of starting retirement savings early
- How employer matching works (if applicable)
- Basic investment principles and risk tolerance
- How to enroll and manage accounts
- Tax advantages of 401(k) contributions
Implementation Timeline: Allow 60-90 days for complete setup, including provider selection, document preparation, employee communication, and system integration. Plan your launch when you can dedicate attention to addressing employee questions.
FAQs Section
How much does it cost to start a 401(k) plan for a small business?
Setup costs typically range from $0 to $3,000, with ongoing administrative fees of $200 to $8,000 annually. Total cost depends on plan design, provider choice, and employee count. Many providers offer competitive pricing packages specifically for small businesses.
Can I offer a 401(k) if I only have 2-3 employees?
Yes, you can establish a 401(k) with just a few employees. However, with very small teams, consider SIMPLE IRAs or SEP-IRAs, which offer easier administration and lower costs. The best choice depends on desired contribution levels and budget for employer contributions.
Do I have to match employee contributions as an employer?
No, employer matching is completely optional for traditional 401(k) plans. You can start without matching and add it later as your business grows. However, Safe Harbor plans require either matching contributions or non-elective contributions.
How long does it take to set up a 401(k) plan for a small business?
Complete setup typically takes 60-90 days from initial planning to employee enrollment, including provider selection, plan design, document preparation, payroll integration, and employee communication. Some providers offer expedited setup for additional fees.
What's the difference between a traditional 401(k) and a Safe Harbor 401(k)?
Traditional 401(k) plans offer maximum flexibility but require annual nondiscrimination testing. Safe Harbor plans automatically pass these tests by requiring specific employer contributions (either 3% non-elective or structured matching). Safe Harbor plans cost more but eliminate testing complexity and potential compliance issues.
Ready to offer your employees a competitive 401(k) plan? FrankCrum offers full benefits administration. This includes complete management of your 401(k) plan.
See how FrankCrum can help your business grow.
Contact us today at 1.800.277.1620 to learn more about our complete PEO services and how we can help you attract and retain top talent with comprehensive, cost-effective employee benefits.
