A 401k is one of the most powerful tools a small business owner has — both for retaining employees and for building personal wealth. But many owners put it off because it seems complicated, expensive, or only worth doing once you're "big enough."
The reality: businesses with as few as two employees can set up a competitive 401k plan, and thanks to SECURE 2.0 legislation, the startup costs are often offset entirely by federal tax credits.
Here's everything you need to know.
How a 401k Works for a Small Business
A 401k is a qualified retirement plan that allows employees — including owner-employees — to contribute pre-tax dollars from their paycheck into investment accounts. Employers can also make matching or profit-sharing contributions, which are tax-deductible.
The key mechanics:
- Employee deferrals reduce taxable income in the year contributed
- Employer contributions are fully deductible as a business expense
- Investment growth is tax-deferred — no annual capital gains or dividend taxes
- Withdrawals in retirement are taxed as ordinary income (or tax-free with Roth)
2025 Contribution Limits
| Contribution Type | 2025 Limit | Notes |
|---|---|---|
| Employee deferral | $23,500 | Pre-tax or Roth |
| Catch-up (age 50+) | +$7,500 | Employees 50 and older |
| Super catch-up (age 60–63) | +$11,250 | New under SECURE 2.0 |
| Total including employer contributions | $70,000 | Combined employee + employer max |
For business owners who also want to maximize their own retirement savings, combining a 401k with a profit-sharing plan allows the full $70,000 contribution. Pair that with a cash balance plan, and the total shelter can exceed $150,000–$200,000 per year for owners in their 50s and 60s.
The SECURE 2.0 Tax Credits — Most Owners Don't Know About These
The SECURE 2.0 Act (signed into law in 2022, expanded provisions through 2025) created substantial tax credits for small businesses starting new retirement plans:
Startup Tax Credit: Businesses with 100 or fewer employees can claim a tax credit of up to $5,000 per year for the first three years of a new plan — covering up to 100% of plan startup and administration costs for very small businesses.
Employer Match Credit: An additional credit of up to $1,000 per employee per year (for employees earning under $100,000) is available for the first five years of employer contributions. This can reduce your net cost of offering a match to near zero in the early years.
Combined, these credits can offset $50,000–$75,000 of costs over five years for qualifying businesses. If you've been putting off a 401k because of cost concerns, this is the year to reconsider.
Which Plan Type Is Right for You?
| Plan Type | Best For | Max Contribution | Admin Complexity |
|---|---|---|---|
| Safe Harbor 401k | Most small businesses | $70,000 | Low-moderate |
| Traditional 401k | Businesses wanting flexibility | $70,000 | Moderate (ADP/ACP testing) |
| SIMPLE IRA | Very small businesses, simple needs | $16,500 | Very low |
| 401k + Cash Balance | High-income owners 45+ | $150,000–$300,000+ | High (requires actuary) |
Your Fiduciary Responsibility
As a plan sponsor, you become a fiduciary — meaning you have a legal obligation to act in the best interest of plan participants. This sounds intimidating, but for most small plans it simply means:
- Choosing a qualified recordkeeper and investment platform
- Offering a diversified investment menu at reasonable cost
- Making required contributions on schedule
- Filing Form 5500 annually (for plans with 100+ participants)
- Conducting periodic plan reviews
A good plan advisor helps you document your fiduciary process and stay compliant — taking most of this burden off your plate.
What Does It Cost to Set Up and Run a 401k?
Plan costs vary by provider and plan design. Here's a realistic range for a small business plan:
| Cost Component | Typical Range |
|---|---|
| Plan setup/document fee | $500–$2,000 (one-time) |
| Annual recordkeeping | $1,000–$3,000/year or per-participant fee |
| Investment management fees | 0.05%–0.75% of plan assets annually |
| Third-party administrator (TPA) | $1,500–$5,000/year (for complex plans) |
With SECURE 2.0 startup credits, the first three years of plan administration costs can be largely or entirely offset for businesses with under 50 employees.
The bottom line: A well-designed 401k saves you more in taxes than it costs to run — often by a significant margin. If you're a profitable business owner who isn't maximizing retirement contributions, you're almost certainly leaving money on the table every year.
Find Out How Much You Could Be Sheltering
A free retirement planning review models your contribution options across different plan types and shows you the tax impact.
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