Setting Up a 401(k) Plan for Small Business Employees

Setting Up a 401(k) Plan for Small Business Employees
Setting up a 401(k) plan as a small business owner can be a great benefit to add for your employees to recruit and retain top talent. Here's how to get started.
by Meredith Galante Nov 30, 2021 — 6 min read
Setting Up a 401(k) Plan for Small Business Employees

Small businesses can struggle to recruit top talent against large corporations, especially when it comes to the large benefit packages that corporations can offer.

Following salary and health care, retirement benefits are the third-most important factor in small businesses retaining their employees, according to a MetLife study. So if you own a small business, offering retirement benefits like a 401(k) helps communicate to your potential and current employees that you’re invested in them, and their future.

Here we answer some of the most common questions about 401(k)s. As always, this is a resource and is not meant as financial advice. Make sure you talk with your accountant if you’re thinking of providing retirement benefits for your business.

What are the benefits of offering a 401(k) to employees?

A 401(k) plan is a qualified employer-established plan to which employees can make contributions from their salary on a post-tax and/or pretax basis. 401(k) stands for the subsection 401(k) in the Internal Revenue Code, which describes the account.

Offering retirement benefits can help recruit and retain top talent. To offset setup and administrative costs, small businesses can also qualify for an up-to-$500 credit annually for the first three years in which they offer a 401(k) plan.

In addition, as an owner of your business, you can also participate in the 401(k) plan. It’s easy to want to spend all your savings and cash on growing your business. But opting into the 401(k) plan yourself will guarantee you are saving for your future, too.

How to set up a 401(k) plan for your employees


Managing 401(k) plans for a small business

What are the benefits of a 401(k) plan compared to other retirement options?

Most people know about 401(k) retirement plans, but they aren’t the only options out there. Here are the different types of plans that exist:

Plan Who can establish the plan? Are contributions made on pre- or post-tax compensation? 2021 contribution limits Supported pretax feature in Square Payroll
401(k) Businesses and organizations Pretax $19,500 (plus $6,500 in catch-up contributions for those 50+) Yes
Roth 401(k) Businesses and organizations Post-tax $19,500 (plus $6,500 in catch-up contributions for those 50+) Yes
403(b) Public schools and some tax-exempt organizations Pretax $19,500 (plus $6,500 in catch-up contributions for those 50+) Yes
[Roth 403(b)]]( Public schools and some tax-exempt organizations Post-tax $19,500 (plus $6,500 in catch-up contributions for those 50+) Yes
457 deferred State or local governments or tax-exempt organizations Pretax Either 100% of the participant’s includible compensation or $19,500, whichever is less (catch-up contributions vary by state or locality) Yes
Roth 457(b) deferred State or local governments or tax-exempt organizations Post-tax Either 100% of the participant’s includible compensation or $19,500, whichever is less (catch-up contributions vary by state or locality) Yes
SIMPLE IRA Businesses with 100 employees or fewer Pretax $13,500 (plus $3,000 in catch-up contributions for those 50+) Yes

Research retirement options for your business

What’s the difference between a traditional and a Roth 401(k)?

You can offer a traditional 401(k) or a Roth 401(k) plan. A traditional 401(k) plan allows employees to make pretax contributions to their retirement savings, but it taxes any withdrawals made. A Roth 401(k) offers employees a different tax-advantaged option. Employees make contributions with after-tax dollars, but any withdrawals are fully tax-free, as long as certain conditions are met.

What is a SIMPLE IRA?

Many small business owners opt to administer SIMPLE IRAs for their employees as opposed to 401(k)s. SIMPLE stands for Savings Incentive Match PLan for Employees and as the name implies, it allows employees and employers to contribute to traditional IRAs set up for employees.

In this plan, an employer is required to either:


Because SIMPLE IRAs are easy and inexpensive to set up and operate, they are well suited for small employers who don’t have a retirement plan. But employer contributions are less flexible in this type of plan and it has lower contribution limits than other plans.

If you have more questions about retirement account options, take a look at the IRS website.

Choose a plan for your employees

Once you choose your plan, now it’s time to set it up. Here are some common steps:

How to set up a 401k for a small business:

  1. Create a 401(k) plan document
  2. Set up a trust to hold the plan assets
  3. Maintain records of 401(k) employee contributions and values
  4. Provide information to plan participants

Common questions plan participants may ask employers about a new 401(k) plan:


Now that you’ve put all the hard work into selecting a fund, you want your employees to take advantage of it.

It’s not required, but many employers choose to match employees’ 401(k) contributions up to a certain percentage. You can offer to match anywhere from 1 to 100 percent of what employees contribute. You also get a tax benefit from matching your employees’ contributions.

You can also require a vesting schedule for employees to earn their 401(k) match, meaning employees must work for the company for a preset period of time before they are eligible to utilize the match.

(As a friendly reminder, if you’re also making contributions into the 401(k) plan for yourself, you can match your own contributions.)

How much should employees contribute?

While it’s great to save, there are contribution limits, determined by the IRS. Employees may contribute up to $19,500 to their 401(k) in 2021 and $20,500 in 2022. Employees who are 50 and older also can make additional “catch-up” contributions up to $6,500.

There are specific reasons or life events that allow employees to make withdrawals from the account, such as the employee’s retirement, death, disability, or separation from employment. Other reasons include if an employee reaches the age of 59.5, or experiences a hardship as defined and permitted by the plan.

How much does it cost to set up a 401(k) for a small business?

401(k) fees are categorized into three sections by the Labor Department, including plan administration fees, investment fees, and individual service fees.


Fees differ by plan, but they are required by law to be “reasonable,” and usually vary from 0.5 percent to 1.4 percent of the total managed assets.

Keep in mind, any plan with more than 100 participants undergoes an annual audit, which can add to the cost. If you have 100 employees or fewer, you can receive a credit for the first three years you have the plan.

It’s important to do your research in this area to keep costs low.

What are the maintenance costs for setting up a 401(k)?

Costs vary based on company size, but business owners can expect to pay an initial start up fee (ranging from a few hundred dollars to a few thousands dollars), charges per participant (that can add up to around $100 per year) and an annual maintenance fee (approximately $500-$1,000).

How long does it take for a small business to set up a 401(k)?

With the help of an integrated payroll and benefits service — such as Square Payroll and 401(k) partner guideline — a small business can be up and running in just a few business days.

What role does the employer play in 401(k) plans?

An employer selects the 401(k) — or options for 401(k) plans — and ensures the plan is compliance with relevant laws and regulations. The employer is also responsible for tracking employee contributions, employer matches, reporting of plan contributions in W-2 forms — all of which can be done with a benefits partner.

How do you choose the best funds to offer to your employees?

The contributions you make to your 401(k) are invested in a portfolio made up of mutual funds, stocks, bonds, money market funds, savings accounts, and other investment options, as permitted by the plan.

Beneficial funds allow your employees to choose the types of investments they make. The fund choices are transparent, have a low fee, and follow well-researched investment approaches. Again, speak with a finance professional while you are researching options.

Ready to offer benefits?

Square Payroll partners with leading benefits providers so you and your team can access 401(k) as well as health insurance, workers’ comp, and more — all in one place.

If you already use Square Payroll, you can enroll in benefits directly from the Square Payroll dashboard. You can choose the benefits that best suit your needs and budget, and we’ll take care of everything else, from employee enrollment to calculating deductions and contributions for each pay run. Square Payroll also determines the taxability and reporting requirements for each benefit to make sure your taxes and tax forms are accurate.

Create an account with Square Payroll to learn more about signing up for benefits. Or, if you already have benefits that you want to sync with Square Payroll, learn about adding your benefits to Payroll in our Support Center.

Meredith Galante
Meredith Galante is a freelancer writer based in New York City. She's been writing for Square since 2017 where she's covered everything from the best software for restaurants to use to maximize profit, minimum wage laws across the country, and tips for entrepreneurs to maximize their impact.


Keep Reading

Tell us a little more about yourself to gain access to the resource.

i Enter your first name.
i Enter your last name.
i Enter a valid email.
i Enter a valid phone number.
i Enter your company name.
i Select estimated annual revenue.
i This field is required.

Thank you!
Check your email for your resource.

Results for

Based on your region, we recommend viewing our website in:

Continue to ->