How to Set Up a 401(k) for Your Small Business

Plan options: Small businesses can set up a traditional, Roth, safe harbor, or solo 401(k) plan. The right structure depends on your workforce and goals.

Startup costs: While there are setup and administrative costs, tax credits are also available for eligible small businesses starting a new plan.

Plan providers: Choosing the right plan provider is critical and will make your job as a plan sponsor much easier.

401(k) plans can be a powerful tool to enhance financial security in retirement for both you and your employees. They can also help attract and retain top talent while offering meaningful tax advantages for your business.

While setting up a 401(k) plan may seem complex at first, the process typically follows a clear sequence of decisions—from choosing a plan type to understanding costs and selecting a provider—making it much more manageable than many small business owners might think.

Types of 401(k) plans for small businesses to consider

There are several 401(k) plan types to choose from, each with its own rules and requirements. The type of plan you select will shape how contributions work, what testing applies, and how the plan is managed over time, so it's important to choose the option that best aligns with your business structure and goals.

Traditional 401(k): Employees contribute pre-tax dollars from their salaries.
Roth 401(k): Employees contribute post-tax dollars from their salaries. If you offer this type of 401(k), you must also offer a traditional 401(k).
Safe harbor 401(k): You as the employer must make contributions to your eligible participants. Safe harbor plans automatically satisfy nondiscrimination testing.
Solo 401(k): Under a solo 401(k), you can choose whether you want to make pre-tax contributions (traditional) or after-tax contributions (Roth). These plans are only for businesses with no employees (other than a spouse).

401(k) contribution limits

Once you’ve chosen a plan type, you’ll want to understand the contribution limits. The IRS sets annual limits on how much both employers and employees can contribute.

Because different plan types offer varying levels of contribution flexibility, many employers review these limits early to ensure the plan supports their goals for both business owners and employees.

2026 Retirement Plan Contribution Limits

	Type of Retirement Plan
	401(k) Plan	Individual(k) Plan	SIMPLE IRA	SEP IRA
Employee contribution limits	Up to $24,500	Up to $24,500	Up to $17,000	Not allowed
Employer contribution	Flexible, up to 25% of compensation¹	Flexible, up to 25% of compensation¹	Mandatory contribution: generally, a 100% match on deferrals up to 3% of compensation OR a 2% contribution to all eligible employees²	Flexible, up to 25% of compensation¹
Catch-up contributions (in addition to maximum employer + employee limits)	Up to $8,000 for those aged 50+ OR an increased catch-up of $11,250 for those aged 60-63	Up to $8,000 for those aged 50+ OR an increased catch-up of $11,250 for those aged 60-63	Up to $4,000³ for those aged 50+ OR an increased catch-up of $5,250 for those aged 60-63	Not allowed

¹ 25% of compensation for employer tax deduction.
² Employer match may be reduced to as low as 1% for any two out of five-year period.
³ Potential higher catch-up limits for participants in plans maintained by specified small employers.
Note: Employee contributions are not allowed in profit sharing plans and SEP IRAs.

Make sure to keep track of these contribution limits since contributing too much can result in costly penalties. Luckily, most 401(k) plans have built-in fail-safes to prevent excess contributions.

Costs of setting up a 401(k)

Once you’ve chosen a plan structure, the next step is understanding and budgeting for plan costs. You might think that 401(k) plans are an expensive benefit exclusively for large businesses, but 401(k) plans can be affordable for businesses of all sizes.

Some common costs when establishing a 401(k) plan are:

Setup fees: This one-time fee will generally cover the plan design and implementation phases of getting your plan up and running, including educating employees about the plan. These fees usually range from $500 to $2,000 but will vary depending on the provider you choose and the complexity of your plan.
Administrative fees: These cover the day-to-day operations of your plan. While you can manage some administrative duties on your own, many small business owners hire a plan provider like a recordkeeper or third-party administrator (TPA) to help oversee and maintain the plan. The more complicated the plan, the higher these administrative fees will be, usually ranging from $750 to $3,000 annually. You may also have to pay a “per-participant” fee, which covers the administrative cost for each participant enrolled in your plan. These usually range from $15 to $60 annually per participant.

Together, these costs shape the ongoing budget and management requirements of your plan, which is why many employers evaluate plan design and provider options in parallel. And keep in mind that there are tax credits that can help cover startup and/or administrative costs to help you offer an affordable 401(k) plan.

How to compare retirement plan providers

Once you have a plan in mind, you’ll want to start researching plan providers. The provider you select will influence not only how easy your plan is to manage today, but also how it scales as your business grows, so choosing the right 401(k) plan provider is crucial for your retirement plan’s success.

Key considerations when comparing various plan providers include:

Finding a provider that specializes in the needs of small businesses, since they’ll have the expertise and experience to help you achieve your goals.
Looking for a plan provider that offers flexible plan designs and a range of investment options so you can build a custom solution tailored to your business.
Evaluating the administrative services they offer, like recordkeeping and compliance support. As a plan sponsor, it’ll be your fiduciary duty to monitor and review your retirement plan. The right plan provider will have options to help you offload some of the day-to-day management of your plan and manage fiduciary risks.
Using a checklist to help you as you are exploring your options.

Keep in mind that the cheapest option isn’t always the best option. Low-cost providers may offer limited investment options, subpar customer service, or outdated technology that could frustrate you and your employees—and potentially cost you more down the line. A low-cost 401(k) plan might also have hidden fees that can add up over time, negating your initial savings. Investing in a proven, reputable provider often ensures a better, more well-rounded retirement benefit.

Small business 401(k) plan benefits

Setting up a 401(k) plan for your small business does require planning, but the long‑term benefits can be significant for both employers and employees. In addition to supporting retirement savings, a 401(k) plan can strengthen your overall benefits package and contribute to business growth.

Tax benefits: The SECURE 2.0 Act increased tax credits available to small businesses that establish a 401(k) plan. The start-up credit can help offset the administrative costs associated with starting a new 401(k) plan. Employers may also choose to offer matching contributions, which can serve as a valuable employee benefit while remaining tax deductible for the business. In addition, a contribution credit is available to eligible small businesses that make employer contributions, calculated as a percentage of employer contributions up to $1,000 per employee and incrementally decreased from 100% down to 25% over a period of five years.
Employee benefits: Offering a 401(k) plan can help attract top talent and remain competitive in the job market. Research also shows that employees with access to retirement benefits are less likely to leave their employer, making a 401(k) an effective tool for improving retention and workforce stability.

Ready to get started?

After you understand your plan options, costs, and providers, the next step is partnering with a solution that supports you through setup and ongoing management.

With Ascensus, you can design a plan that’ll work for your small business now, and flex with you as your business grows. To learn more about Ascensus Essentials 401(k) or similar retirement plans for your business, contact our retirement specialists at 833-893-3233.