What is a 401(k) plan?
A 401(k) plan is an employer-sponsored defined contribution retirement savings plan that allows employees to save and invest a portion of their paycheck before taxes are taken out. Named after Section 401(k) of the Internal Revenue Code, it is the most common type of employer-sponsored retirement plan in the United States, covering over 70 million active participants.
What are the 401(k) contribution limits for 2026?
| Contribution Type | 2026 Limit |
|---|---|
| Employee elective deferrals | $23,500 |
| Catch-up contribution (age 50+) | $7,500 |
| Enhanced catch-up (ages 60-63, per SECURE 2.0) | $11,250 |
| Total annual additions (employer + employee) | $70,000 |
| Compensation limit for calculations | $350,000 |
What are the steps to set up a 401(k) plan?
Step 1: Choose a Plan Type
- Traditional 401(k): Offers maximum flexibility but requires annual non-discrimination testing (ADP/ACP tests) to ensure highly compensated employees don't benefit disproportionately
- Safe harbour 401(k): Employer makes mandatory contributions (matching or non-elective) in exchange for automatic passage of non-discrimination tests. Most popular choice for small to mid-size employers
- SIMPLE 401(k): Simplified plan for employers with 100 or fewer employees. Lower contribution limits but reduced administrative burden
Step 2: Select a Plan Provider
Key considerations when choosing a provider:
- Recordkeeping fees: Per-participant fees, flat fees, or asset-based fees
- Investment options: Number and quality of fund choices, index fund availability
- Fiduciary support: Whether the provider acts as a 3(16) or 3(38) fiduciary
- Payroll integration: Direct integration with your payroll system
- Employee experience: Online portal, mobile app, financial education resources
Major providers include Fidelity, Vanguard, Charles Schwab, Guideline, and Human Interest.
Step 3: Draft the Plan Document
The plan document is the legal foundation of your 401(k). It must specify:
- Eligibility requirements (age, service, hours)
- Contribution types (employee deferrals, employer match, profit-sharing)
- Vesting schedule for employer contributions
- Distribution rules (hardship withdrawals, loans, in-service distributions)
- Plan year and entry dates
Most providers offer pre-approved plan documents that have already received IRS approval.
Step 4: Set Up a Trust Fund
Plan assets must be held in a trust fund to ensure they are used solely for the benefit of participants and beneficiaries. The plan must have at least one trustee (an individual or institution) who manages the trust.
Step 5: Establish a Recordkeeping System
You need systems to track:
- Employee contributions and employer matching
- Investment elections and account balances
- Loan repayments
- Vesting schedules
- Required distributions
Step 6: Communicate the Plan to Employees
Employers must provide:
- Summary Plan Description (SPD): Within 90 days of an employee becoming a participant
- Summary Annual Report (SAR): Annually, summarising the plan's financial status
- Participant fee disclosure: Annually, detailing plan and investment fees
- Quarterly benefit statements: Showing account balances and vesting status
What are the employer's tax benefits?
- SECURE Act tax credit: Up to $5,000 per year for the first 3 years to offset plan startup costs (for employers with up to 50 employees)
- Auto-enrollment credit: Additional $500 per year for 3 years if the plan includes automatic enrollment
- Employer contribution deduction: Employer contributions are tax-deductible as a business expense
- Employer contributions are not subject to payroll taxes: No FICA or FUTA on employer 401(k) contributions
What are the ongoing compliance requirements?
- Annual Form 5500 filing with the DOL (required for plans with 100+ participants or those with certain plan features)
- Non-discrimination testing (ADP, ACP, top-heavy tests) unless using safe harbour
- Timely deposit of employee contributions (generally within 7 business days for small plans)
- Annual plan document updates for legislative changes
- Fiduciary responsibilities: Prudent investment selection, fee monitoring, participant communications
How Grove HR Helps
Grove HR integrates with major 401(k) providers to automate contribution calculations, sync employee data, and ensure timely remittance of deferrals. The system tracks eligibility waiting periods, vesting schedules, and auto-enrollment deadlines, reducing manual payroll work and helping maintain compliance.
Frequently Asked Questions
How long does it take to set up a 401(k) plan?
With a modern plan provider, you can set up a 401(k) plan in as little as 2-4 weeks. The timeline includes selecting a provider, completing the plan document, setting up payroll integration, and communicating the plan to employees. More complex plans with custom provisions may take 4-8 weeks.
Is an employer required to match 401(k) contributions?
No. Employer matching is voluntary for traditional 401(k) plans. However, safe harbour 401(k) plans require either a matching contribution (typically 100% of the first 3% plus 50% of the next 2%) or a non-elective contribution of 3% of compensation to all eligible employees.
What happens to a 401(k) when an employee leaves?
When an employee leaves, they can roll over their 401(k) balance to a new employer's plan or an IRA, leave the funds in the current plan (if the balance exceeds $7,000), or take a cash distribution (subject to income tax and a 10% early withdrawal penalty if under age 59 and a half).
What is the SECURE 2.0 Act and how does it affect 401(k) plans?
The SECURE 2.0 Act (2022) introduced several changes including mandatory auto-enrollment for new plans starting in 2025, enhanced catch-up contributions for ages 60-63, student loan matching, emergency savings accounts within 401(k) plans, and expanded startup tax credits. These changes are being phased in through 2026.
Rachel Richardson
Head of Growth & Marketing, Grove HR
Rachel leads growth and marketing at Grove HR, with over a decade of experience in UK HR technology. She writes practical guides to help small businesses navigate employment law and build better workplaces.