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401(k) Retirement Plans for Small Business Owners

Want to attract and retain talent with retirement benefits?

Retirement benefits aren’t a luxury reserved just for midsized and large businesses. A variety of retirement plan solutions exist today, from 401(k) to SIMPLE IRAs and SEP IRAs, that can help small business owners not only secure a nest egg for themselves, but also attract and retain talented employees.

What types of 401(k) plans are available for small business owners?

Small business owners generally have many retirement plan options to choose from, some of which may be more appropriate than others, depending on the size of their organization. Examples include:

Traditional 401(k)

Employees can contribute pretax dollars from their earned wages, which their employer may or may not choose to match, up to an annual maximum. These types of plans require a considerable degree of administrative resources because they must undergo rigorous non-discrimination testing.

Individual or solo 401(k)

A solo 401(k) is intended for sole proprietors and other small businesses who have no employees other than a spouse. Through a combination of elective salary deferrals and profit sharing, these plans allow participants to contribute more of their income than would be possible with some other types of retirement plans. There may also be greater control of investments if the plan sponsor chooses a self-directed 401(k) account for small business owners.

SIMPLE IRA

Businesses with less than 100 employees may be eligible for a SIMPLE IRA. It’s usually easy to manage because there’s no discrimination testing, but employers must contribute to it and participants are fully vested immediately. SIMPLE IRAs also cap employee contributions at a lower amount than 401(k) plans.

Safe Harbor 401(k)

Safe Harbor plans satisfy non-discrimination testing because employers are required to either match contributions from plan participants or make non-elective contributions for all eligible employees.

Roth 401(k)

Because employees contribute post-tax dollars to a Roth 401(k), it has the advantage of tax-free withdrawals at the time of retirement. Employers who sponsor this type of plan must also offer a traditional 401(k).

Infographic showing the types of 401(k)s for small businesses: Traditional 401(k), SIMPLE IRA, Roth 401(k), Individual or solo 401(k), and Safe Harbor 401(k)

Small business 401(k) plan benefits

401(k) plans for small businesses can be a powerful tool to help employers promote financial security and attract and retain talent. Additional benefits include tax-advantaged contributions and the ability for all employees, owners and managers to participate. There are advantages for employees, too. 401(k) plans offer them flexible contributions and investment options, tax-free contributions and earnings, and often portability if they leave the company.

Who is eligible for an individual or solo 401(k) plan?

Generally, only businesses that consist of an owner and a spouse, if that individual also works for the organization, may participate in a solo 401(k). Those who adopt these plans may need to set eligibility requirements, such as years of service. If the business hires non-owner employees who at some point meet those requirements, then the employer may no longer be eligible for an individual 401(k) and would have to choose a different type of plan, e.g., traditional 401(k) or SIMPLE IRA.

Can owners of an LLC contribute to a 401(k)?

Solo 401(k) plans are not limited to sole proprietorships. Businesses that are structured as limited liability corporations (LLC), as well as partnerships, may also participate in these plans if they meet all the eligibility requirements.

Can those who are self-employed contribute to a 401(k)?

There are several different types of retirement plans – Solo 401(k), SEP IRA, SIMPLE IRA and traditional 401(k) – that are available to self-employed individuals. The Solo 401(k), in particular, was designed specifically for entrepreneurs and their spouses. Those whose business is a side venture may also contribute to a 401(k) offered by an employer, but the combined contributions between both plans must not exceed the annual limits set by the IRS.

Can S-corp owners contribute to a 401(k)?

Yes, S-corp owners can contribute to a 401(k) plan. As employees of their S-corporation, they can participate in the company’s 401(k) plan, making both elective deferrals and receiving employer contributions. For 2025, the IRS has set the employee deferral limit at $23,500, with an additional catch-up contribution limit of $7,500 for those aged 50 and over.

What about single-member S-corps?

Single-member S-corporations can establish a solo 401(k) plan, also known as a one-participant 401(k) plan. This plan allows the owner to make both employee and employer contributions. For 2025, the combined limit for these contributions is $70,000, with an additional catch-up contribution of $7,500 for those aged 50 and older.

How does a solo 401(k) plan benefit the small business owner?

The primary benefit to a solo 401(k) is that it permits small business owners to contribute large portions of eligible compensation to the plan, thereby maximizing their retirement savings. Other advantages include:

  • Within certain limits, participants may be able to borrow from the plan.
  • Filing Form 5500, Annual Return/Report of Employee Benefit Plan may not be necessary, depending on the plan’s balance.
  • Since these plans usually only cover one individual, discrimination testing is moot and not required.
 

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Drawbacks to a solo 401(k)

A solo 401(k) may not be right for small businesses that plan to expand and hire employees in the near-term, since doing so would likely result in plan ineligibility. In addition, calculating profit-sharing contributions for sole proprietorships and partnerships tends to be complex because it requires modified net profits. The formula for this calculation is available in IRS Publication 560.

What else do small business owners need to know about 401(k) plans?

Small business owners who offer retirement savings plans may be able to take advantage of tax incentives. Matching employee contributions, for instance, is generally tax deductible as a business expense. For the first three years of the plan, employers may also be eligible for tax credits up to 50% of the start-up and administration costs or $5,000 (not to exceed $250 per non-highly compensated employee), as well as a $500 automatic enrollment credit per year.

How to choose 401(k) providers for small companies

To find the right 401(k) for small businesses, employers generally look for plan providers that:

  • Charge reasonable plan and investment fees and have no hidden costs
  • Provide real-time integration between the 401(k) recordkeeping and payroll systems to eliminate manual data entry and reduce errors
  • Offer a simplified compliance process
  • Make administrative fiduciary oversight available
  • Offer ERISA bond and corporate trustee services
  • Help with investment fiduciary services and plan investment responsibilities
  • Make investment advisory services available for employees

Get started with a small business 401(k) in four easy steps

There are four initial steps to establishing a 401(k) plan for a small business:

  1. Adopt a written plan document
  2. Arrange a trust fund for the plan’s assets
  3. Develop a recordkeeping system
  4. Provide plan information to eligible employees

Writing the plan document

The plan document serves as the foundation for day-to-day operations of the 401(k), and employers are bound by its terms. Some of the features outlined in the document are flexible; others are required by law. If employers hire a financial professional to help manage their 401(k), that person usually writes the plan document.

Arranging a trust fund

A plan’s assets must be held in trust to ensure they are used solely to benefit the participants and their beneficiaries. At least one trustee is required to handle contributions, plan investments and distributions. If a plan is set up through insurance contracts, the contracts do not need to be held in trust.

Recordkeeping

An accurate recordkeeping system is necessary to track and properly attribute contributions, earnings, losses, plan investments, expenses and benefit distributions. It’s also helpful when preparing the plan’s annual return/report, which must be filed with the government. If a financial institution assists in managing the plan, it typically will help keep the required records.

Notifying eligible employees

Eligible employees must be notified about certain plan benefits, rights and features. In addition, all plan participants must receive a summary plan description (SPD), which informs them about the 401(k) and how it operates. The SPD is usually created with the plan document. Employers may also want to provide employees with information on the advantages of their 401(k) plan to encourage participation.

Small business retirement plan comparison chart

This chart reflects annual limits for 2025:

Plan Type Best for Employee Contribution Employer Contribution
Traditional 401(k) Flexible growth Up to $23,500 + $7,500 if 50+ years old Match or profit-sharing, up to $70,000 (Not counting catch up contributions)
Solo 401(k) Self-employed, no employees Up to $23,500 + $7,500 if 50+ years old 25% of compensation or $70,000 combined (Not counting catch ups)
SIMPLE IRA ≤ 100 employees Up to $16,500 + $3,500 if 50+ years old Either match employee contributions dollar for dollar up to 3% of compensation or 2% of each eligible employee’s compensation
Safe Harbor 401(k) Avoiding compliance tests Up to $23,500 + $7,500 if 50+ years old Either match employee contributions up to 4% of compensation or 3% of each eligible employee’s compensation
Roth 401(k) Tax-free withdrawals Up to $23,500 + $7,500 if 50+ years old Match or profit-sharing, up to $70,000 (Not counting catch ups)

 

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Frequently asked questions about 401(k) for small business owners

Learn about retirement accounts for small business with these FAQs:

How much can a small business owner contribute to a 401(k)?

The combined limit for employee and employer contributions to a 401(k) is the lesser of 100% of an employee’s compensation or $70,000. This maximum increases to $77,500 if the employee is 50 years of age or older and participates in a plan that allows catch-up contributions.

Can I borrow from a SEP IRA, SIMPLE IRA or 401(k)?

Loans are permitted with 401(k), but not a SEP IRA or SIMPLE IRA. Although these types of loans are enticing because of the low interest rate environment, they can have long-term consequences on retirement savings. Individuals may want to consult a financial advisor before borrowing against their 401(k).

What is the best type of retirement plan for small business owners?

SEP IRAs and SIMPLE IRAs are generally good starting points to consider for small businesses, but 401(k) plans may offer greater choices in plan design. The right choice ultimately depends on the specific needs of the organization and its workforce.

If I offer a 401(k) to my employees, are there compliance regulations I must follow or can the retirement plan provider help with these?

Certain employers who offer 401(k) and other retirement plans must abide by the Employee Retirement Income Security Act (ERISA) of 1974, as amended, which helps ensure that plans are operated correctly and participants’ rights are protected. In addition, a 401(k) plan must pass non-discrimination tests to prevent the plan from disproportionately favoring highly compensated employees over others. The plan fiduciary is usually responsible for helping comply with these measures.

What types of businesses can set up small business 401(k) plans?

Businesses of any size may sponsor a traditional 401(k), safe harbor 401(k) or Roth 401(k). SIMPLE IRAs are designed for businesses with less than 100 employees, and Solo 401(k)s are limited to sole proprietors and their spouses.

What are the potential tax benefits of a 401(k)?

Employer contributions to company 401(k) plans are tax deductible. These plans are also advantageous to employees because taxation on their contributions and earnings is deferred until distribution.

How much can employers contribute annually to a 401(k)?

For 2025, employee contributions plus employer-matching and/or profit-sharing contributions cannot exceed the lesser of 100% of the employee’s compensation or $70,000.

How much can employees contribute annually to a 401(k)?

For 2025, the amount employees can contribute under a 401(k) retirement plan is limited to $23,500.

Does my business have to contribute to employee 401(k) accounts?

Employers who sponsor Safe Harbor 401(k) plans must make either matching or non-elective contributions to employee accounts. Traditional 401(k) plans do not have this requirement, though employers may want to consider contributing regardless. Doing so can help increase plan participation and attract and retain talent.

When are contributions fully vested?

Salary deferrals are immediately 100% vested. When employees leave the company, they’re entitled to those deferrals, plus any investment gains (or minus losses). Vesting of employer contributions may be handled differently, depending on the plan. For instance, all required employer contributions to a safe harbor 401(k) are always 100% vested, whereas employer contributions to a traditional 401(k) can be vested over time if specified in the plan’s design.

What investment choices are offered?

Contributions to a 401(k) may be invested in stocks, bonds, mutual funds, money market funds, savings accounts and other investment vehicles. Employers commonly hire financial professionals to help them determine which investment options are right for their plan.

Can participants withdraw funds or take loans from their 401(k)s?

Generally, employees who withdraw their 401(k) savings before age 59 ½ are assessed a 10% penalty. Loans may be an option with some plans, though these also typically incur an early withdrawal penalty, among other drawbacks. For instance, the plan sponsor might charge loan fees and the distribution may be subject to income taxes.

What is the plan establishment deadline?

Employers may establish a 401(k) plan as late as the due date, including extensions, of their business’s income tax return for the year in which they want to establish the plan. For example, if a company’s taxes are due April 15, 2025, it can establish a 401(k) effective for 2024 up until that date.

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M-729426-2025-04-25. All figures stated within this article are sourced from the IRS.

This information is intended to be used as a starting point in analyzing employer-sponsored 401(k) plans and is not a comprehensive resource of all requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services. For specific details about any 401(k) they may be considering, employers should consult a financial advisor or tax consultant.

Unless otherwise agreed in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. All ADP companies identified are affiliated companies.

ADP, Inc. is affiliated with ADP Broker-Dealer, Inc. (“ADP BD”), a limited purpose broker dealer registered with the Financial Industry Regulatory Authority (“FINRA”), and operating pursuant to Securities and Exchange Commission (“SEC”) Rule 15c3-3(k)(2)(i), approved by FINRA to offer 401(k) and SEP/ SIMPLE IRAs, and related retirement plans (the “Retirement Products”) on a payroll deduction basis.

Chris Magno

Chris Magno Senior Vice President, General Manager, ADP Retirement Services Chris Magno is responsible for the strategic direction of the business, which provides recordkeeping services for a wide range of retirement plan types to meet the needs of small, midsized and enterprise sized companies.

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