401(k) Basics for Employers: Plan Setup and Matching Choices

A 401(k) plan lets employees save for retirement from their paychecks, and lets you add money too. The Department of Labor (DOL) and IRS booklet 401(k) Plans for Small Businesses says a 401(k) "helps attract and keep talented employees." This guide covers how setup works, the main plan designs, matching choices, and tax credits that can lower your startup cost.

How common are retirement plans? (2026 data)

The Bureau of Labor Statistics (BLS) found that in March 2026:

• Overall: 72% of private industry workers had access to a retirement plan.
• Small employers: the figure was 55% at establishments with 1 to 49 workers.
• Large employers: it was 87% at establishments with 100 or more workers.

The four basic setup steps

The DOL/IRS booklet lists four first steps:

1. Adopt a written plan document. It is the plan's rulebook.
2. Arrange a trust for the plan's assets. Plan money must be held in trust for employees.
3. Develop a recordkeeping system. You need to track contributions, earnings, and payouts.
4. Give plan information to eligible employees. This includes the summary plan description (SPD).

The booklet notes you can set the plan up yourself or get help from a financial institution or retirement plan professional.

Three common plan designs

The booklet describes three types of 401(k) plans:

• Traditional 401(k): The most flexible design. Employer contributions are optional, and you can set a vesting schedule. The plan must pass yearly nondiscrimination tests, which check that it doesn't favor highly compensated employees.
• Safe harbor 401(k): You must make a set contribution, and it is fully vested right away. In return, the plan skips some of the yearly testing. The booklet lists two safe harbor options:
• Match: 100% of the first 3% of pay an employee defers, plus 50% of the next 2%.
• Nonelective: 3% of pay for every eligible employee, whether they save or not.
• Employees must get a notice about the plan before each plan year.
• Automatic enrollment 401(k): Employees are signed up at a set rate unless they choose otherwise.

The DOL also lists other small-business retirement options: profit-sharing plans, SIMPLE IRAs, SEP plans, and payroll deduction IRAs.

New plans and automatic enrollment

The IRS says that, under the SECURE 2.0 Act, 401(k) and 403(b) plans established after December 29, 2022 generally must automatically enroll eligible employees, starting with the 2025 plan year:

• Starting rate: at least 3% of pay.
• Yearly increase: 1 percentage point a year, until it reaches at least 10%.
• Exceptions: new businesses, small businesses, church plans, and governmental plans.

In January 2025, the IRS issued proposed regulations on this rule (IR-2025-09). Until final rules apply, the IRS says plan administrators must use a reasonable, good-faith reading of the law. Check with your plan provider for the current status before you set up a new plan.

Choosing a match

A match means you add money when employees save. A nonelective contribution means you add money for everyone who is eligible, whether they save or not. The booklet's example matches 50 cents for each dollar an employee defers, up to a limit.

This example is made up to show the idea. It is not advice.

Things to weigh: what you can afford every year, even in slow years; whether you want a vesting schedule (traditional plans) or immediate vesting (safe harbor); and how easy the formula is to explain.

2026 contribution limits

From the IRS (2026):

• Employee deferrals: up to $24,500.
• Catch-up: an extra $8,000 at age 50 or older, or $11,250 at ages 60 to 63 if the plan allows.
• Total additions: employer plus employee contributions are capped at $72,000.
• Compensation: pay counted for contributions is capped at $360,000.

As of Nov 2026, the IRS had not yet announced 2027 limits.

Ongoing duties

The booklet explains that people who run the plan or control its money are fiduciaries. Fiduciaries must:

• Act only in the interest of participants
• Act prudently
• Diversify investments
• Follow the plan document
• Pay only reasonable plan expenses

Other ongoing tasks from the booklet:

• Deposit employee deferrals on time. Do it as soon as you reasonably can, and no later than the 15th business day of the month after the payday. For plans with fewer than 100 participants, deposits made within 7 business days after withholding are treated as on time.
• Have a fidelity bond for people who handle plan money.
• File Form 5500 each year. It is filed electronically, and smaller plans may use a shorter version.
• Give employees the SPD, any summary of material modifications, and benefit statements.

Tax credits that can help (from the IRS)

The IRS "Retirement plans startup costs tax credit" page (updated May 2026) describes these credits.

Startup cost credit

• Who qualifies: employers with 100 or fewer employees who earned at least $5,000 in the prior year, with at least one participating non-highly compensated employee (NHCE), plus a few other conditions.
• How much: up to $5,000 a year for 3 years. The exact cap depends on how many NHCEs are eligible.
• For employers with 50 or fewer such employees, the credit is 100% of eligible startup costs.
• For employers with 51 to 100, it is 50%.
• What it covers: costs to set up and run the plan and to educate employees about it.
• How to claim: use Form 8881. You can't both deduct the same costs and take the credit.

Employer contribution credit

• How much: for employers with 1 to 50 employees, up to $1,000 per participant in each of the first five plan years. It is 100% of contributions in years 1 and 2, then 75%, 50%, and 25%.
• Larger employers: for employers with 51 to 100 employees, the credit is reduced.
• Pay limit: it isn't available for contributions to employees earning more than $100,000. The IRS page lists that figure for 2023.

Automatic enrollment credit

• How much: $500 a year for 3 years for adding an automatic enrollment feature, for new or existing plans.

Ask your tax adviser how these apply to you.