401(k) Plan

401(k) retirement plans: What small business owners need to know

A 401(k)-retirement plan is an employer-sponsored benefit that helps employees build retirement savings through tax-advantaged payroll deductions. You decide whether to offer one, which type fits your business, and how much, if anything, to contribute.

More than half of small businesses now offer a 401(k) plan to their employees, according to the Bureau of Labor Statistics, reflecting how competitive expectations around benefits have shifted.  

For some small employers, the decision isn’t just about staying competitive. Several states now mandate that businesses without a sponsored retirement plan provide employees access to one. Requirements vary by state and employee count.  

Here's how contributions move through your payroll process, what your obligations are as an employer, and what your role means.  

When you’re ready to evaluate plans for your business, see the SurePayroll By Paychex Sure401k retirement plan options for small business.

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How 401(k) retirement plans work

A 401(k) is a qualified plan that you process through your payroll system.  

Your employees authorize salary deferrals at a set percentage or flat dollar amount of their paycheck, you deduct those amounts each pay period, and send the funds to the plan provider along with any contributions you’ve chosen to make as the employer, in accordance with plan terms and timing requirements.

Employee contributions and elective deferrals

Employees choose their contribution level. You include that election when you calculate payroll deductions for each employee. Then, you deposit the designated amounts into individual employee accounts held by the plan provider.

You (as plan sponsor) are responsible for selecting investment options, often with the help of a plan provider or fiduciary advisor. Most small business 401(k) plans offer a range of mutual funds across risk profiles, so employees can choose allocations that fit their needs.  

Many small business owners consult with a plan or investment service to help manage the fund selection on behalf of your plan.

SurePayroll processes 401(k) contributions through your regular payroll run. See how payroll and benefits work together.

"Sure Payroll has made my opening of a new medical service company payroll a breeze. From inputting employee information, 401k and automated deposits, I could not have imagined payroll being so easy and quick!"  - Thomas, Trustpilot review ‍

How retirement accounts grow

Traditional 401(k) accounts grow on a tax-deferred basis: employee contributions reduce taxable income now, and account growth is not taxed until they take distributions in retirement.

Roth 401(k) accounts work differently. Employees contribute after-tax dollars, but qualified distributions in retirement are tax-free.

Your role as plan sponsor

As a plan sponsor, you manage payroll deductions, fund transfers, annual reporting (Form 5500) to the Department of Labor and IRS, and distribution of required notices to plan participants. Most small businesses work with a plan provider or third-party administrator to manage plan administration.

Run the numbers with the Roth vs. traditional 401(k) calculator or the 401(k) calculator.

Types of 401(k) retirement plans

Your business size, budget, and administrative capacity determine which type of 401(k) fits.  

Traditional 401(k) plan

The traditional 401(k) plan is the most common type of plan for small businesses. Employees contribute pre-tax dollars from their paycheck, reducing their taxable income in the year they contribute. They pay income tax on withdrawals in retirement.

You can offer matching contributions, profit-sharing contributions, both, or neither. The contribution structure is your decision.

Contribution limits, rules and business size factor into your decision between a 401(k) vs SIMPLE IRA.

Roth 401(k)

A Roth 401(k) follows the same plan design as a traditional 401(k) plan, but employees contribute after-tax dollars. There’s no immediate income tax break, but qualified distributions in retirement are tax-free.

You can offer both traditional and Roth options within the same plan, giving employees the flexibility to choose. If you make employer contributions, you do so on a pre-tax basis, and those contributions are taxable when distributed.

Safe harbor 401(k) plan

A safe harbor 401(k) plan is a plan design that includes required employer contributions and automatically satisfies certain IRS testing requirements. This makes it a common choice for small business owners who want predictable compliance without managing nondiscrimination testing each year.

Individual 401(k) for owner-only businesses

If you pay yourself through S-corporation payroll without any employees, a solo 401(k) — also called an individual 401(k) — gives you the ability to contribute as both employer and employee. That dual contribution structure can create higher potential contribution totals, making it an efficient option for self-employed individuals focused on maximizing their own retirement savings.

Paying yourself? Payroll for one employee walks you through the setup.  

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Benefits of offering a 401(k) retirement plan

A 401(k) retirement plan can benefit your business as well as your employees’ retirement accounts.

Talent attraction and retention

Small business employees enroll in 401(k) plans at higher rates than employees at larger companies: 82% at small businesses, compared to 72% at private companies and 61% at public companies, according to a SurePayroll-commissioned survey of 2,000 employed Americans.  

That means the benefit gets used, which drives retention value.

When those employees were asked which non-cash benefits most influenced their decision to stay, a 401(k) plan with a match ranked second only to health care, cited by 47% of respondents.  

Retirement benefits have moved from differentiator to expectation. Offering them can help position your small business as a serious place to build a career.  

See why most Americans say they’d switch jobs for a 401(k).  

Tax benefits for your business

Employer contributions to a 401(k) plan, including matching contributions and profit-sharing contributions, are tax-deductible as a business expense, which can reduce your taxable income.  

Employee contributions reduce their income tax burden as well, making the benefit more attractive without adding to your costs.

Small business owners who establish a new retirement plan may also qualify for startup tax credits under the SECURE 2.0 Act, which was designed to reduce the cost barrier for small businesses setting up plans.  

Your own retirement savings

If you pay yourself through payroll, as most S-corp owners do, you’re also a plan participant. That means your own salary deferrals and any employer contributions you make are deposited into your retirement account.

The annual contribution limits for a 401(k) are significantly higher than for an IRA, which makes a small business 401(k) plan an efficient way to build your own retirement savings using the same benefit you offer your team.

Interested in learning more? Check out retirement plan resources for small businesses.  

401(k) retirement plan rules and requirements

The IRS governs 401(k) retirement plans. These are the boundaries that apply to any plan you sponsor as a small business owner.

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Contribution limits and catch-up contributions

The IRS sets annual limits on how much employees can contribute through elective deferrals.

For 2026: the standard limit is $24,500, with an $8,000 catch-up contribution for employees age 50 and older, and an $11,250 super catch-up for employees age 60–63. For 2025: the standard limit was $23,500, with a $7,500 catch-up contribution for employees 50 and older, and an $11,250 super catch-up for employees age 60–63.

The elective deferral limit applies across all similar employer-sponsored plans a participant contributes to.  

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Eligibility and automatic enrollment

You’ll determine which employees are eligible to participate within IRS guidelines. Most plans require employees to meet minimum age and service thresholds before becoming eligible. IRS rules generally allow plans to require up to age 21 and one year of service, though additional eligibility rules apply for long-term part-time employees.

Automatic enrollment is also an option: the plan defaults employees in at a set contribution rate unless they actively opt out, which tends to increase participation rates.

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Vesting schedules

Employee contributions are 100% vested immediately: employees own those funds the moment they’re deposited.  

Employer contributions are different. You can choose immediate vesting or a vesting schedule under which employees earn ownership over time. IRS rules require full vesting within six years for graded vesting or three years for cliff vesting.  

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Withdrawals, distributions, and loans

Plan participants generally cannot take distributions from their 401(k) retirement account without penalty before age 59½. Early withdrawals are subject to a 10% penalty plus income tax, with limited exceptions. Participants must begin taking required minimum distributions at age 73 (increasing to age 75 for younger participants under SECURE 2.0).

Some plans permit loan provisions or hardship withdrawals.  

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Nondiscrimination testing

Traditional 401(k) plans are subject to annual IRS nondiscrimination testing to confirm the plan doesn’t disproportionately benefit highly compensated employees over rank-and-file employees. Safe harbor plans meet these requirements through their built-in contribution structure, which is why many small businesses use them to simplify plan administration.

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Plan administration and recordkeeping responsibilities

As plan sponsor, you maintain the plan document, file annual reports with the IRS, distribute required notices to plan participants, and meet fiduciary responsibilities related to investment option selection.

New to payroll tax reporting? How to fill out Form 941 breaks it down.

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Understanding employer contributions and matching

You don’t have to match employee contributions to offer a 401(k) retirement plan. That’s a common assumption that could delay your decision.  

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Matching is optional

You can offer some 401(k) retirement plans without an employer contribution. This still provides your team with valuable tax-advantaged savings.

Many small businesses start without a match and add it later as the business grows. The plan’s core value to employees: access to salary deferrals, tax advantages, and investment options.  

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How matching contributions work when you choose to offer them

Common matching formulas include a dollar-for-dollar match up to a percentage of employee’s compensation (for example, matching 100% of the first 3% of salary deferred) or a partial match (for example, 50 cents per dollar on the first 6% of salary deferred).  

You’ll determine the formula based on your budget and retention goals.

The retention data supports the value of employer matching.  

In the SurePayroll survey 50% of small business employees with access to a matched 401(k) cited it as a reason to stay with their employer, compared to 35% of those whose employer offered a plan without a match.

Profit-sharing contributions

Profit sharing is another way you can make an employer contribution.  

A profit-sharing contribution is discretionary and variable: you decide each year whether to contribute and how much, typically based on business performance and subject to IRS contribution limits and nondiscrimination rules. It gives you flexibility to contribute more in strong years without committing to a fixed matching formula.  

You deposit profit-sharing contributions into eligible employee accounts, calculating each participant’s share according to the plan document.

Vesting schedules and retention

When you make employer contributions, whether matching or profit sharing, you decide whether employees own those contributions immediately or earn ownership over time through a vesting schedule.

Graded vesting and cliff vesting both create a retention incentive: employees who leave before full vesting forfeit unvested employer contributions.  

If you’re evaluating building out a full benefits package, see FSA, HSA, and HRA options for small businesses.

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401(k) vs. other retirement plan options

A 401(k) retirement plan usually offers small businesses more flexibility than most other retirement plan options: higher contribution limits, the ability to run everything through your existing payroll process, and a contribution structure that lets you match, profit-share, or offer the plan with no employer contribution at all.  

See how other plan types compare.  

401(k) vs. SIMPLE IRA

SIMPLE IRA plans have lower contribution limits than 401(k) plans and require employer contributions, either a matching contribution or a non-elective contribution to all eligible employees.  

They are designed for businesses with 100 or fewer employees. They’re a common starting point for very small businesses that want a structured retirement benefit with lower administrative overhead.

For a detailed comparison, see 401(k) vs. SIMPLE IRA.

401(k) vs. SEP IRA

A SEP IRA allows only employer contributions. Employees cannot make salary deferrals into the plan. Contributions go into individual accounts for each eligible employee, and you contribute the same percentage of compensation across all participants.  

SEP IRA plans are often simpler to administer and can carry high contribution limits, making them a common choice for sole proprietors and self-employed individuals with few or no employees.

401(k) vs. traditional pension

A pension is a defined-benefit plan: the employer funds and manages it entirely and promises employees a specific retirement benefit.  

A 401(k) is a defined-contribution plan: the account balance depends on contributions and investment performance, and the employee bears the investment risk.  

Pensions are rare in small businesses today because of the complexity and long-term funding commitment required.

401(k) vs. IRA

An IRA is an individual retirement account employees open on their own. It’s not employer sponsored. Annual contribution limits for IRAs are significantly lower than for 401(k) plans.  

Employees can have a personal IRA and participate in an employer-sponsored 401(k), with the IRA serving as a supplement.  

If you use SurePayroll, employee deferrals and employer contributions process through the same payroll workflow you already run. Learn more about payroll for small businesses.

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Setting up a 401(k) retirement plan for your business

You’ve seen how 401(k) plans work and what it takes to offer one. The next step is deciding whether it fits your business, and choosing how to move forward.

Choosing a plan provider

If you decide to offer a plan, you’ll need a provider that can handle plan administration, compliance, and recordkeeping for a business your size.  

Pricing, service levels, and plan design support vary, so it’s worth comparing what each provider includes, from investment options to ongoing administration.

A tax professional or financial advisor can help you evaluate which structure works best for your situation.

For a deeper look at how to evaluate your options, see 401(k) retirement plan options for small business.  

"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

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SurePayroll By Paychex and Sure401k®

When you’re ready to move forward, SurePayroll By Paychex offers Sure401k®, a 401(k) solution built for small businesses.  

Call 866-497-2028 or fill out the contact form to connect with a SurePayroll representative. To learn more, see small business retirement plans.

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

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