401(k) Retirement Plans for Small Business: Costs, Tax Credits, and How They Work

No business is too small to offer a 401(k) retirement plan. Businesses with 50 or fewer employees may qualify for federal tax credits of up to $5,000 per year for three years to offset plan startup costs.* Your decision comes down to which plan structure fits your team, what the plan may cost after potential tax credits, and how contributions move from payroll to your plan provider each pay period.

SurePayroll By Paychex connects directly with Sure401k, so contributions flow through your existing payroll workflow — no separate system, no manual data entry.

What Is a 401(k) retirement plan for small business?

When you offer an employer-sponsored 401(k) retirement plan, you’re setting up a system that can help your employees save for retirement directly from their paychecks. You choose the type of plan, select the plan provider, and decide whether to make employer contributions, either matching what employees contribute or adding profit sharing based on how your business performs.

Your employees set a deferral amount when they enroll. Each pay period, you deduct that amount from their gross wages and route it to their retirement account. Pretax contributions reduce the compensation subject to income tax. Roth contributions are post-tax deductions, with the funds growing tax-free.

In 2026, your employees can contribute up to $24,500 in elective deferrals. Employees who are 50 or older can make catch-up contributions of an additional $8,000, while those ages 60-63 can contribute an additional $11,250. The IRS sets these contribution limits and adjusts them annually.

Employer contributions are optional in most 401(k) retirement plan structures. Safe harbor plans are the exception — they require specific employer contribution formulas. Employer contributions are generally not subject to FICA or FUTA taxes and are typically tax-deductible business expenses.

Can businesses under 10 employees offer 401(k) retirement benefits?

Yes. Businesses with fewer than 10 employees offer 401(k) retirement plans. You’re not too small.

“Most of our clients have fewer than 10 employees, so we understand the day-to-day demands you face and the value of keeping things simple,” said Mike Albert, district sales manager, retirement, for SurePayroll® By Paychex.

The SECURE Act (Setting Every Community Up for Retirement Enhancement), a federal law enacted in late 2019 expanded incentives and opportunities for small businesses to offer 401(k) retirement plans. This was further enhanced with Secure Act 2.0 in 2022. Businesses with 50 or fewer employees may qualify for significant federal tax credits that could directly offset the cost of setting up and administering a plan.* These are tax credits, not deductions. They may reduce your tax liability dollar-for-dollar rather than lowering the income on which your taxes are calculated.

Beyond the tax credit picture, plan design options purpose-built for small operations have reduced administrative complexity. Safe harbor 401(k) retirement plans automatically pass IRS nondiscrimination testing when you follow specific employer contribution rules. Solo 401(k) retirement plans are built for owner-only businesses with no non-spouse employees.

Your team also benefits from these plans. 

“A 401(k) can help employees save for tomorrow,” Albert said. “There is serious potential for tax benefits here, for both employees and business owners. In fact, 94% of employees are interested in a 401(k) plan, second only to health insurance.”

That number reflects a practical reality at your scale. 

A 2023 SurePayroll survey of 2,000 employed Americans found that 50% of employees who haven’t started saving are waiting for their employer to offer or explain retirement savings options. 

The plan you offer, or choose not to offer, can directly affect retention and recruiting when you’re running a team of three to five people.

Understanding 401(k) costs and available tax credits

The cost of a small business 401(k) retirement plan includes three components: setup and ongoing plan administration, and employer contributions if you choose to make them. Federal tax credits available through SECURE Act apply to the first category, if you’re eligible.

Tax credits available through SECURE Act 2.0

If your business has 50 or fewer employees, you may qualify for a federal tax credit of up to $5,000 per year for three years to offset eligible plan startup costs, including legal fees, consulting, and recordkeeping expenses.* 

If your plan includes automatic enrollment, you may qualify for an additional $500 per year for three years. Combined, those credits can total up to $16,500 over three years.*

Albert said the tax credit picture can shift the math for small business owners. “The potential of up to $16,500 in tax credits over three years, as well as possible employer contribution credits, has the potential to significantly offset the expenses of adopting a 401(k) plan.*”

These are tax credits, not tax deductions. When you file your tax return, a tax credit reduces your actual tax liability dollar-for-dollar. A deduction reduces the taxable income on which your taxes are calculated. A $5,000 tax credit saves you $5,000 regardless of your tax bracket. That distinction shapes the real cost picture.

What typical plan costs look like

Setup costs and ongoing plan administration fees vary by plan design, plan complexity, and the service providers you choose. Your plan provider can walk you through specific fees before you commit.

After applying available tax credits during the first three years, your net costs may be substantially lower than initial fee estimates suggest. Your tax advisor can help you determine which credits your business qualifies for and how they apply to your specific plan costs. 

Employer contribution costs

Setup and administration costs are part of the picture. 

Beyond fees, you decide whether to make employer contributions, either matching what your employees contribute or making profit-sharing contributions based on business performance. 

With traditional 401(k) retirement plans, contributions are optional and entirely strategic. They can carry real tax advantages in addition to the retention benefit they create.  

When you make them, they’re typically tax-deductible business expenses. Your employer contributions are generally not subject to FICA or FUTA taxes. ​     ​

Your total cost depends on your plan structure, plan provider, employee headcount, and whether you make employer contributions. Work through these variables with your tax advisor before you decide.

How 401(k) retirement plans integrate with your payroll

When you adopt a 401(k) retirement plan, your payroll process changes. Here's what happens , from when you start to process payroll to when the funds reach your employee account.

What happens on payroll day

When you run payroll, you deduct each employee’s elected contribution from their paycheck. If an employee has chosen pretax contributions, those come out before federal income tax is calculated, reducing their taxable wages for that pay period.  

If they've chosen Roth contributions, those come out after taxes are withheld. If you’ve set up employer matching, you calculate the match based on each employee’s contribution and your plan formula, or your payroll software does it for you.

After payroll processes

Once you run payroll, you transfer employee contributions and any employer match to your 401(k) retirement plan provider. For many plans, the Department of Labor rules provide a seven-day safe harbor for depositing employee contributions after withholding. Depending on your plan provider, you initiate this transfer manually, or your provider may pull the funds automatically after each payroll run.

When payroll and your 401(k) plan integrate

When your 401(k) retirement plan integrates with your payroll service, your payroll system automates contribution calculations, wage adjustments, and deductions as part of the regular payroll run, in the same platform. Employee account updates, contribution amounts, and employer match calculations all flow through one process.

Sure401k connects directly with your SurePayroll account. Employee retirement plan elections sync automatically, and contribution calculations and deductions process in the same run.

401(k) plan options available through our affiliate, Fast 401K, Inc. d/b/a ePlan Services, Inc.

What you manage

After integration, your responsibilities: make sure contributions reach your plan provider within the seven-business-day window, give plan participants plan information, and maintain required plan documents. 

As plan sponsor, you carry Employee Retirement Income Security Act of 1974 (ERISA) fiduciary responsibility for selecting and monitoring service providers and the investment options available in the plan. Your 401(k) retirement plan provider may handle most compliance filings and plan administration work on your behalf.

Types of 401(k) retirement plans for small businesses

Once you’ve confirmed the cost and the scale fits, your next decision is choosing the right type of plan, the structure that aligns with your team size, your compensation setup, and how much administrative complexity you’re willing to manage. 

Here are the plan features and tradeoffs across the three types of small business 401(k) retirement plan options.

Solo 401(k)

If your only employees are you and your spouse, a Solo 401(k) retirement plan offers the highest contribution limit with minimal administrative overhead. Because you contribute in two roles, as both the employee and the employer, you can make elective deferrals of up to $24,500 plus employer contributions, with a combined contribution limit of $72,000 in 2026 (or $80,000 if you’re 50 or older and $83,250 if you’re age 60–63 with catch-up contributions). 

Solo 401(k) retirement plans aren’t subject to IRS nondiscrimination testing because there are no non-owner plan participants.

If you’re an S-corp owner, the salary you set for yourself through S-corp payroll directly affects your maximum 401(k) retirement plan contribution calculation.

"I'm very happy with my SurePayroll services. As a single-member S-Corp, I needed a simple and affordable payroll solution that I could manage, and so far, SurePayroll has worked just fine. 401k integration was a breeze, too."

— Brian K, Better Business Bureau review

The one structural constraint: Solo 401(k) retirement plans are limited to businesses without non-spouse employees. If your team grows beyond you and your spouse, you’ll need to transition to a different plan.

Traditional 401(k)

A traditional 401(k) retirement plan gives you maximum control over plan design. You can customize your matching contributions formula, set a vesting schedule that determines when employer contributions are fully owned by each employee, define eligibility requirements, choose the investment options available to plan participants, and add automatic enrollment to drive higher participation. 

These plan features give you more flexibility than other 401(k) retirement plan options.

That flexibility requires annual IRS nondiscrimination testing, where the IRS requires you to prove the plan doesn't disproportionately favor highly compensated employees over other participants. Testing adds plan administration complexity, but for businesses that want to tailor plan benefits and employer contributions to their specific team and budget, the traditional 401(k) retirement plan delivers the most control.

Safe harbor 401(k)

With a safe harbor 401(k) retirement plan, you choose one of three contribution structures.  

You can make a non-elective contribution of at least 3% of each eligible employee's compensation, regardless of whether they contribute. You can use the basic match formula — 100% of the first 3% of compensation an employee defers, plus 50% of the next 2%, for a total match of up to 4%. Or you can use an enhanced match, which must be at least as generous as the basic formula at each tier and cannot be based on more than 6% of compensation; a common enhanced formula is 100% on the first 4%.

In most safe harbor plans, those employer contributions vest immediately. If you structure the plan as a Qualified Automatic Contribution Arrangement (QACA), a two-year cliff vesting schedule is permitted.

“[A safe harbor plan] can be small business-friendly,” Albert said. “We see many companies with 50 or fewer employees choose this type of plan because it provides a meaningful benefit for employees and the small business owner.”

When you meet contribution requirements, safe harbor plans automatically pass IRS nondiscrimination testing. You and other highly compensated plan participants can contribute the full annual limit without risk of refunds or plan corrections. This removes a layer of administrative complexity for small teams running lean. Employer contributions are mandatory and must be specified in the plan document before the plan year begins. 

Which structure fits your business

The Solo 401(k) retirement plan may fit if your only employees are you and your spouse. 

The safe harbor 401(k) retirement plan may work best for teams under 10 where you want to maximize personal contributions, avoid nondiscrimination testing, and offer plan participants a meaningful employer contribution. 

The traditional 401(k) retirement plan gives you the most design flexibility in matching formulas and vesting schedules, with annual testing as the administrative tradeoff.

One more factor: employee response at your scale. Small business employees enroll in 401(k) retirement plans at higher rates than employees at larger companies: 82% compared to 72% at private companies and 61% at public companies (SurePayroll 2023 survey, 2,000 employed Americans). The benefit you offer gets used. 

And when 47% of employees rank a 401(k) with employer match as a top retention benefit, second only to health care, the plan becomes a recruiting and retention tool. 

State retirement mandates

If you operate in a state with a retirement savings mandate, adopting a 401(k) satisfies that requirement.

Rather than defaulting to a state-facilitated IRA program, you retain control over plan design, investment options, and employer contribution decisions. Check your state’s current requirements to confirm what applies to your business.

How to get started with a 401(k) retirement plan

The setup process

You select a plan type, choose a plan provider, and complete the required plan document, which is the formal documentation that defines your plan’s structure, eligibility rules, contribution formulas, vesting schedule, and investment options.  

If your 401(k) retirement plan integrates with your payroll system, your provider connects to your payroll account and syncs employee elections before your first payroll run with contributions active. Setup typically takes four to six weeks.

As plan sponsor, you carry ERISA fiduciary responsibility for the plan’s operation, including selecting and monitoring service providers and the investment options available to plan participants. A financial advisor and qualified tax professional can help you fulfill those obligations, confirm which tax credits your business may qualify for, and ensure the plan document is structured correctly.

Safe harbor deadline

Businesses considering a new safe harbor 401(k) for the 2027 calendar year need to establish the plan by October 1, 2026, depending on plan design and implementation requirements.  

This 90-day rule typically requires the plan to be established by October 1 to cover the full calendar year. Starting the setup process several weeks before that deadline gives you time for plan documentation and employee onboarding.

Consult your provider about specific deadlines.

Sure401k through SurePayroll

Sure401k integrates directly with your SurePayroll account. When you run payroll, employee contribution deductions and match employer match calculations in the same workflow — no manual data entry.  

To discuss plan options, timeline, and costs, contact the Sure401k team at 866-497-2028 or explore Sure401k.

Running payroll and ready to see everything SurePayroll offers? See plans and pricing.

401(k) plan options available through our affiliate, Fast 401K, Inc. d/b/a ePlan Services, Inc.

* Eligible businesses may qualify for a federal tax credit of up to $5,000 annually for three years for administrative and certain other qualifying costs for establishing a workplace retirement plan. An additional $500 credit annually for three years is available to qualifying businesses if the plan offers automatic enrollment.