In today's competitive labor market, offering a 401(k) plan is a key differentiator for employers, helping small businesses attract and retain talent. While setting up a small business plan may seem overwhelming, it's actually easier and more affordable than most business owners realize—especially when working with the right partners.
This guide covers everything you need to know about setting up a small business retirement plan, including 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.
Introduction to Retirement Plans
There's a lot to think about when you're running a small business, and retirement planning doesn't always make it to the top of the list. Still, offering a retirement plan can be a smart move. 401(k) plans allow employees to significantly increase their retirement savings over time with compounded tax-deferred earnings. It also gives employers access to meaningful tax advantages at the same time.
A 401(k) is a go-to retirement option for many businesses. Employees can contribute pre-tax dollars toward retirement, and your employer contributions are generally tax-deductible for your business. Offering a traditional 401(k) or other retirement plan isn't just about attracting and keeping top talent. It's also your ticket to long-term financial security.
Legal and Compliance Requirements
Before exploring plan options, you'll need to 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.
A trust fund must be established to hold the plan's assets, ensuring they are used solely for the benefit of participants and their beneficiaries. At least one trustee must oversee plan investments, manage contributions and distributions, and ensure that the plan's assets are managed in compliance with regulations. Plan assets must be held in trust to meet compliance requirements and protect participant benefits.
Key Compliance Requirements
ERISA Fiduciary Responsibilities: As plan sponsor, you have duties to act in employees' best interests, prudently selecting plan investments, 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 opt for Safe Harbor 401(k) plans, which automatically satisfy nondiscrimination testing by adhering to specific contribution formulas. While this eliminates testing headaches, it requires mandatory employer contributions.
Reporting and Disclosure: Plans must file annual Form 5500 reports, notify employees of their rights and benefits, and provide plan participants with summary plan descriptions, annual statements, and other required disclosures.
Working with experienced providers—particularly Professional Employer Organizations (PEOs) like FrankCrum—significantly simplifies compliance management for small businesses. PEOs handle complex fiduciary responsibilities as part of their comprehensive service model, managing everything from nondiscrimination testing to Form 5500 filings, allowing you to focus on running your business while ensuring full compliance.
Types of 401(k) Plans for Small Businesses
Selecting the right small business plan depends on factors like your business size, budget, and employee demographics. These plans offer a broad range of advantages for both employers and employees, making them a popular choice among small businesses.
Traditional 401(k) Plans
A traditional 401(k) plan offers maximum flexibility for employer contributions and allows participants to make pre-tax contributions through payroll deductions, which reduces their taxable income. You control employer matching and vesting schedules. However, failed testing may require additional contributions or the return of excess contributions to highly paid employees.
Employers can also choose to offer a Roth 401(k) alongside a traditional 401(k), allowing employees to make post-tax contributions as well.
Safe Harbor 401(k) Plans
Safe Harbor 401(k) Plans avoid nondiscrimination testing by mandating specific employer contributions. Though ADP/ACP testing is not required, they are still subject to notice timing rules, contribution funding deadlines, and ERISA fiduciary standards. A safe harbor 401(k) plan requires employer contributions that are fully vested immediately when made and is not subject to complex tax rules. This helps ensure predictable costs while offering certainty and easier administration.
Businesses can choose from three Safe Harbor contribution formulas:
- 4% Dollar-for-Dollar Match: Contribute $1 for every $1 employees contribute, up to 4% of compensation for participating employees. This is the most generous matching option.
- Enhanced Tiered Match: 100% match on the first 3% of employee contributions, plus 50% match on the next 2% of contributions (for a maximum 4% employer contribution when employees defer 5% or more).
- 3% Non-Elective Contribution: Contribute 3% of compensation for all eligible employees, regardless of whether they participate in the plan.
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. The plan requires employer contributions that are fully vested immediately, similar to a safe harbor plan. A SIMPLE 401(k) plan is designed for small businesses with 100 or fewer employees and does not require annual nondiscrimination tests.
When selecting your plan type, consider your budget for employer contributions, your tolerance for administrative complexity, and your employee demographics. Then, adopt a written plan document to establish the 401(k) plan and as the foundation for day-to-day operations.
How PEOs Make 401(k) Plans More Accessible
Many small business owners find that partnering with a Professional Employer Organization (PEO) offers distinct advantages when establishing and managing a 401(k) plan. Here's how:
Economies of Scale: PEOs pool multiple small businesses together, giving you access to institutional-level 401(k) plans with lower fees than you could negotiate independently. According to industry data, PEO partnerships can reduce overall plan costs by 20-40% compared to individual small business arrangements.
Reduced Administrative Burden: Instead of managing enrollment, payroll integration, annual testing, and regulatory filings yourself, the PEO handles these time-consuming tasks. This is particularly valuable for businesses without dedicated benefits administrators.
Fiduciary Support: Many PEOs offer 3(16) fiduciary services, assuming administrative responsibilities and reducing your personal liability exposure. Some also provide 3(38) investment fiduciary services, taking responsibility for selecting and monitoring investment options.
Expert Compliance Management: PEOs employ specialists who stay current on changing regulations, conduct required nondiscrimination testing, and ensure timely government filings—all without requiring your daily oversight.
Multiple Plan Options: Through a PEO, you can access various plan designs (traditional, Safe Harbor, SIMPLE) and adjust as your business grows, all through a single provider relationship.
Streamlined Implementation: PEOs sometimes waive setup fees entirely and offer transparent, predictable pricing structures that scale with your business—making it easier to budget and plan for retirement benefits without unexpected costs.
Setting Up a Retirement Plan
Setting up a retirement plan like a 401(k) may seem daunting, but it's a smart move for your business. Start by choosing the right plan type for your company, then select a financial institution to manage the plan's assets and investments.
Keep an eye on plan expenses and investment options to control costs. Detailed plan documents are essential—they outline eligibility, contribution limits, and vesting schedules. Provide employees with a summary plan description that clearly explains the plan's benefits and how employer contributions, including matching, work.
Staying compliant with the Internal Revenue Code is crucial for maintaining tax benefits and avoiding penalties. While this guide provides educational information, it does not constitute legal or tax advice. Be sure to consult with a qualified tax professional to ensure your plan meets all requirements. By following these steps, you'll provide a valuable financial benefit to your employees while supporting your business's long-term success.
Employer Contributions and Matching
Understanding 401(k) employer match options helps you design attractive, cost-effective plans. Both employer and employee contributions can be made to a 401(k) plan. Employer contributions are generally tax-deductible as a business expense and come in two forms: matching and non-elective.
Matching formulas are often calculated as a percentage of the employee's compensation, allowing you to tailor contributions to your business goals and budget. Company contributions to a 401(k) plan are tax-deductible from business income, providing a valuable tax advantage. Employers can also invest in their employees' futures through profit-sharing 401(k) plans, which allow contributions to vary based on business performance and can include large contributions.
Employees typically defer a portion of their paycheck into their retirement account, which can include employer matching funds or profit-sharing contributions.
Common Matching Formulas
- Dollar-for-dollar: $1 for every $1 employees contribute, up to a specified percentage (e.g., 100% match on the first 3% or 4% of salary)
- Partial match: A percentage of employee contributions (e.g., 50% match on the 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%)
Vesting Schedules: Determine when plan participants 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. Contribution limits for 401(k) plans are subject to annual cost-of-living adjustments by the IRS. The federal government updates these limits annually based on inflation indices.
2026 Contribution Limits
According to IRS Notice 2025-67, the 2026 contribution limits are:
- Employee deferrals: $24,500 for workers under 50
- Catch-up contributions: The catch-up contribution limit is an additional $8,000 for employees 50+ (total $32,500). These catch-up contributions allow older workers to accelerate their retirement savings.
- Enhanced catch-up: Additional $11,250 for employees ages 60-63 (total $35,750)
- Total annual additions: $72,000 per participant under 50 ($80,000 with standard catch-up, $83,250 with enhanced catch-up, if applicable)
Highly Compensated Employee Rules: Employees earning more than $165,000 in the prior year are considered highly compensated and may face additional contribution restrictions based on nondiscrimination testing results.
Safe Harbor Requirements: Safe Harbor plans require either a 4% match, an enhanced tiered match (3% + 50% on the next 2%), or 3% non-elective contributions for all eligible employees.
These limits change annually, so staying informed ensures your retirement savings plan remains compliant while maximizing employee benefits.
What Is the Cost to Offer a 401(k)?
Understanding the cost of offering a 401(k) for small business operations helps you budget appropriately and evaluate provider options. 401(k) costs fall into several categories:
Setup Costs: According to industry research, initial setup costs can range from $0 to $3,000, depending on plan complexity and provider. Many providers, particularly PEOs, waive setup fees completely to eliminate upfront barriers for small businesses. For example, businesses partnering with PEOs like FrankCrum often benefit from $0 setup costs, making it easier to get started without a significant initial investment.
Administrative Fees: These fees cover plan administration, compliance testing, government filings, participant services, and efforts to inform participants about their benefits. Competitive providers offer scaled pricing that becomes more affordable as your business grows. For instance, some PEO-administered plans charge as little as $200 annually for the company (often waived when you have 8 or more participating employees) plus approximately $28 per participant annually. This transparent, predictable pricing structure helps you budget accurately.
Participant-Level Costs: Individual employee administrative costs typically include annual fees, loan setup and maintenance fees, and distribution processing fees. Look for providers who disclose these costs transparently rather than embedding them in investment returns.
Investment Fees: Investment fees are charged by mutual funds within your plan. Research from Human Interest indicates that fund expense ratios have declined significantly over the past two decades, with the average (asset-weighted) annual fund fee dropping from 0.87% to 0.45% between 1999 and 2019. Modern plans offer self-directed investment options with expense ratios as low as 0.10% and optional managed portfolios at approximately 0.35%. Look for providers offering "open architecture" fund families with no-load mutual funds purchased at net asset value (NAV).
Employer Contribution Costs: These depend entirely on your plan design. For example, a 3% Safe Harbor contribution for 10 employees earning an average of $50,000 costs $15,000 annually. A 4% match would cost up to $20,000 if all employees participate at maximum levels. Matching contributions vary depending on employee participation rates.
PEO Cost Advantages: Businesses working with PEOs often benefit from negotiated institutional pricing on both administrative fees and investment expenses. The PEO's purchasing power—representing many small businesses collectively—can result in fee structures 20-40% lower than what a single small business could obtain independently. Additionally, many PEOs eliminate setup fees entirely and offer predictable, transparent pricing that scales as your business grows.
SECURE 2.0 Tax Credit Opportunity
Eligible small businesses can receive tax credits for the start-up and administration costs of establishing a 401(k) plan through the SECURE 2.0 Act. According to the IRS, small businesses with 100 or fewer employees can claim a tax credit covering up to 50% of startup costs (up to $5,000 per year) for the first three years. Companies with 50 or fewer employees can receive up to 100% credit on startup costs.
Additional credits are available for auto-enrollment features ($500 per year for up to three years) and, for businesses with 50 or fewer employees, employer contribution credits that can provide significant savings.
Contact FrankCrum to learn how these tax credits can make your 401(k) plan cost-neutral or even profitable in the first few years. Note that while we can provide plan information, specific questions about your tax situation should be directed to a qualified professional who can provide personalized tax advice.
New for small business owners: Starter 401(k) plans, introduced under SECURE 2.0, offer a simplified way for very small businesses to begin offering retirement benefits with reduced administrative requirements.
Choosing the Right Provider
Selecting a provider is crucial when learning how to set up a 401(k) for your 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 often benefit from full-service models, which include compliance support and employee education.
Technology Platform: Evaluate the provider's website and mobile app. Employees should be able to 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, such as Vanguard, Fidelity, BlackRock, Invesco, Franklin Templeton, and T. Rowe Price. Ensure funds are purchased at NAV (no-load) with no hidden fees.
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 and Advisory Support: Test the provider's responsiveness and expertise. Your employees will interact with their service team, so quality customer support directly impacts employee satisfaction. Look for providers offering direct access to investment advisory services, allowing employees to speak with advisors about their retirement planning questions.
Fee Transparency: Ensure the provider offers complete fee transparency where all costs are disclosed as line items on participant statements rather than embedded in investment returns. The best providers credit back 12b-1 fees to participants, ensuring completely objective fund recommendations.
Consider PEO Partnership: If your business uses or is considering a PEO for payroll and HR services, bundling 401(k) administration through the same provider offers significant advantages: streamlined integration with payroll, simplified vendor management, and often substantial cost savings through enterprise pricing. This approach eliminates coordination challenges between separate payroll and retirement systems while providing access to multiple employer plan structures that can reduce costs and administrative complexity. PEOs also often provide tools and support to boost plan participation rates among employees.
Managing a 401(k) Plan
Managing your 401(k) plan is crucial to maximizing value and staying compliant. As a business owner and plan sponsor, you should regularly review plan expenses, monitor investments, and keep participant data updated.
Adjusting employer contributions or implementing a matching plan can boost benefits for both your business and employees. Keep your team informed about plan changes and performance to help them make smart retirement decisions.
Partnering with a trusted financial institution, financial advisors, or a PEO simplifies ongoing management. PEOs particularly excel at the day-to-day administrative tasks—monitoring contributions, updating participant data, coordinating with your payroll system, processing loans and distributions, conducting annual compliance testing, and providing ongoing employee education—freeing you to focus on strategic business decisions while ensuring full compliance.
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 comprehensive plan documents outlining eligibility requirements, contribution rules, vesting schedules, and distribution options. Your provider typically helps create these documents based on your plan design decisions.
Employee Eligibility
Determine eligibility requirements, including the minimum age (typically 21), service requirements (often 1,000 hours or one year), and waiting periods for new hires. Balance inclusivity with administrative simplicity. Common requirements include 18 years of age with 3 months of service, though requirements can be set as high as 21 years of age with 1 year of service.
Under the SECURE Act, part-time employees may also be eligible through Long-Term Part-Time (LTPT) requirements, which include being at least 21 years of age, working at least 500 hours in the 12-month eligibility period, meeting the consecutive years’ rules, and not being excluded by another non-service-based exclusion, such as a union/CBA.
Communication Strategy
- Announcement: Introduce the plan enthusiastically, emphasizing your investment in employees' financial futures
- Education Sessions: Conduct group meetings to explain 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 to share plan information, including updates about investment performance and retirement planning resources. Many providers offer online or mobile access to account balances.
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.
Conclusion
Establishing and managing a 401(k) plan is a strategic advantage for small business owners committed to empowering their team's retirement success while securing their own financial future. By understanding the available retirement plan options, selecting the right 401(k) tailored to your business needs, and managing it effectively, you can maximize benefits for both your company and employees.
Ready to offer your employees a competitive 401(k) plan? FrankCrum offers full benefits administration, including complete management of your 401(k) plan through our partnership with Slavic401k. With $0 setup fees, transparent pricing, institutional-quality investment options from leading fund families, and comprehensive compliance support, we make it easy and affordable for small businesses to offer competitive retirement benefits.
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 talent with comprehensive, cost-effective employee benefits.
Frequently Asked Questions
How much does it cost to start a 401(k) plan for a small business?
Setup costs range from $0 to $3,000, depending on your provider and plan design. Many PEOs, including FrankCrum, waive setup fees entirely, making it easy to get started without upfront costs. Total ongoing costs depend on administrative fees, investment expenses, and your chosen employer contribution structure.
Can I offer a 401(k) if I only have 2-3 employees?
Yes, you can establish a small business plan with just a few employees. However, with very small teams, consider a SEP IRA or SIMPLE IRA as alternatives to a 401(k) plan. A SEP IRA offers easier administration and lower costs, while a SIMPLE IRA is also designed for small businesses. The best choice depends on desired contribution levels and the 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 (4% dollar-for-dollar, or the enhanced 3% + 50% tiered structure) or 3% non-elective contributions to all eligible employees. Safe Harbor contributions are fully vested immediately, meaning employees own 100% of these contributions as soon as they're made.
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. Plans with monthly entry dates allow newly eligible employees or those wanting to begin participation to start contributing quickly.
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 to ensure compliance. Safe Harbor plans automatically pass these tests by requiring specific employer contributions—either a 4% dollar-for-dollar match, an enhanced tiered match (100% on the first 3%, plus 50% on the next 2%), or 3% non-elective contributions. Safe Harbor plans cost more in mandatory contributions but eliminate annual testing complexity, potential refunds to highly compensated employees, and compliance issues. This allows business owners and highly compensated employees to maximize their own contributions without restrictions.
Can I roll over funds from another retirement plan into my new 401(k)?
Yes, you can roll over funds from another qualified retirement account, such as an IRA or another 401(k) account, into your new 401(k) plan, subject to plan rules and IRS guidelines. Employees can generally take their vested balances with them when they change jobs, rolling them over into an IRA or a new employer's plan.
Disclaimer: While this guide provides educational information, it does not constitute legal, tax, or financial advice. Retirement plan rules and contribution limits are subject to change. Please consult with qualified legal, tax, and financial professionals regarding your specific situation before establishing a 401(k) plan. For more information about FrankCrum's services, call 1.800.277.1620.
