Choosing a 401(k) Plan

April 1, 2021

Are you a small employer looking for a retirement plan for your employees? A 401(k) plan allows participants to defer part of their salary into the plan and allows employers to make contributions on behalf of employees. Will a 401(k) work for your business? Let's take a look.

Key Features

  • Available to all employers
  • Elective salary deferrals aren't taxed until distributed
  • Safe-harbor 401(k) plans may avoid testing
  • Automatic enrollment can increase participation
  • Employer contributions are tax deductible
  • Tax credit for starting a new plan or adding an automatic enrollment feature
  • Employee salary deferrals may be eligible for the Saver's Credit

Eligible employee

You must generally include any employee (including yourself) in the plan who:

  • Is at least age 21, and
  • Has performed 1,000 hours of service.

You can choose to use less restrictive eligibility requirements.

Contributions to a 401(k) plan

A 401(k) plan accepts contributions from both employers and employees. Eligible employees can make salary deferral contributions up to the lesser of 100% of their compensation or $19,500 for 2021, plus another $6.500 if age 50 or over.

Employers can:

  • Match employee salary deferrals using a fixed dollar amount or a specified percentage of compensation,
  • Make a non-elective contribution of an equal percentage of eligible employee's compensation, even if they chose not to defer into the plan, or
  • Make no contribution (unless required for a safe harbor 401(k) plan or to meet top-heavy minimum contributions).

Matching or employer contributions must be made by the due date (including extensions) of your federal income tax return for the year. Employee contributions should be deposited using the Department of Labor 7-day safe harbor rule for depositing salary deferrals.

Contributions to a 401(k) plan are limited:

  • 25% of each employee's compensation, or
  • $58,000 for 2021 (subject to cost of living adjustments).

Setting up a 401(k) plan

Contact a financial institution or your tax professional for help to set up your plan. Complete and sign a financial institution's IRS pre-approved 401(k) document or an individually designed plan document. Distribute copies of the plan document or Summary Plan Description to employees.