401(k) Options for Small Businesses: A Complete Guide

If you're a small business owner, you've probably thought about offering a 401(k) to your employees. It's a great benefit that helps with recruiting and retention. But navigating the options can feel overwhelming. Let me break it down for you.

Why Offer a 401(k)?

Before we dive into the types of plans, let's talk about why it matters. A competitive 401(k) plan helps you attract and retain quality employees. It shows you care about their future. Plus, there are significant tax benefits for your business—contributions are tax-deductible, and there are tax credits available for starting a new plan.

Traditional 401(k) Plan

This is the most common type. Employees can contribute through payroll deductions (up to $23,500 in 2025, or $31,000 if they're 50 or older). As the employer, you can choose whether to match contributions, but you're not required to.

Pros:

• Flexible—you decide if and how much to match

• Good for businesses with fluctuating profits

• Employees bear most of the contribution responsibility

Cons:

• Requires annual nondiscrimination testing (to ensure the plan doesn't favor highly compensated employees)

• Can be administratively complex

Safe Harbor 401(k)

This is a traditional 401(k) with a twist: you're required to make employer contributions, but in exchange, you skip the annual nondiscrimination testing. This makes administration much simpler.

There are a few Safe Harbor contribution options:

• Match 100% of employee contributions up to 3% of pay, plus 50% of the next 2%

• Match 100% of employee contributions up to 4% of pay

• Make a non-elective contribution of 3% of pay to all eligible employees (whether they contribute or not)

Pros:

• No annual nondiscrimination testing

• Simpler administration

• Helps attract and retain employees

Cons:

• Required employer contributions can be expensive

• Less flexibility if business profits are tight

SIMPLE 401(k)

The SIMPLE 401(k) is designed for businesses with 100 or fewer employees. It's easier to administer than a traditional plan but has lower contribution limits.

Employees can contribute up to $16,500 in 2025 ($20,000 if 50 or older). Employers must either match contributions dollar-for-dollar up to 3% of pay, or make a non-elective contribution of 2% for all eligible employees.

Pros:

• Easier administration

• Lower costs

• Good for very small businesses

Cons:

• Lower contribution limits

• Required employer contributions

Solo 401(k)

If you're self-employed with no employees (other than a spouse), a Solo 401(k) might be your best option. You can contribute as both the employee and the employer, allowing you to save significantly more than a traditional IRA.

Total contribution limits for 2025 are $70,000 ($77,500 if you're 50 or older).

Pros:

• Very high contribution limits

• Minimal administration

• Great for high-earning solopreneurs

Cons:

• Only works if you have no employees

What About Costs?

Plan costs vary widely depending on the provider, plan type, and number of employees. You'll typically pay setup fees ($500-$2,500), annual administration fees ($1,000-$5,000+), and investment fees on the assets.

The good news: there are tax credits available. The SECURE 2.0 Act offers a tax credit covering up to 100% of startup costs (up to $5,000 per year) for the first three years for eligible small businesses. There's also a credit for employer contributions in the early years.

Which Plan is Right for You?

The best plan depends on your business size, budget, and goals. If you want simplicity and are willing to make employer contributions, a Safe Harbor 401(k) is often a great choice. If you're solo or have a very small team, a Solo or SIMPLE 401(k) might make more sense.

Setting up a 401(k) doesn't have to be complicated. I help small businesses choose the right plan, select investments, and manage ongoing fiduciary responsibilities. Let's talk about what makes sense for your company.

Disclaimer: This article is for educational purposes only and should not be considered investment or legal advice. Please consult with a qualified financial advisor and legal professional before establishing a retirement plan.