How to set up a 401(k) for your small business: A 5-step guide

Offering a retirement plan used to feel like something only big companies could afford. That's no longer true. If you're wondering how to set up a 401(k) for your small business, the process is more straightforward and more affordable than most owners expect, thanks in part to new tax credits designed to cover much of the cost.

A 401(k) isn't just a nice-to-have, either. Betterment's 2025 Retirement Readiness Report found that 57% of employees would leave for a role with stronger benefits, and 65% of Gen Z workers would switch jobs for better financial benefits. For a small business competing for talent, a retirement plan can be the difference between keeping a great hire and losing one.

This guide breaks down how to start a 401(k) plan in five clear steps, from choosing the right plan type to staying compliant after launch, so you can offer your team a meaningful benefit without the guesswork.

Plan costs, and misperceptions about high plan costs, have been a major reason why many small businesses skip a 401(k) plan. The SECURE 2.0 Act changed that by expanding tax credits that can offset most, or in some cases all, of what it costs to launch a plan.

Three credits are especially relevant for new small business plans:

For more details on 401(k) tax credits: How tax credits can make offering a 401(k) affordable.

A few caveats keep this fair and balanced:

• The credits are nonrefundable, meaning they can only lower your business tax liability.
• If the credits exceed what your business owes, you do not receive a refund or cash payout.
• Also, your plan generally must cover at least one employee who isn't a highly compensated owner, so owner-only businesses usually won't qualify for the startup credit. Even so, for many small employers these incentives can offset most of the first few years of plan costs.

Always confirm the details with a tax professional.

Here's the start-to-finish process for setting up your 401(k) plan. Most of the work happens once, up front. After that, a good 401(k) plan provider handles the ongoing administration.

1. Choose the right type of 401(k) plan. Common options include a traditional 401(k), a safe harbor 401(k), and a solo (owner-only) 401(k). Safe harbor plans are popular with small businesses because they automatically satisfy most IRS nondiscrimination testing in exchange for a required employer contribution, which simplifies compliance as you grow.
2. Select a 401(k) provider. Behind every plan sits a recordkeeper, a third-party administrator (TPA), and an investment adviser. Some providers bundle all three. Compare setup and per-participant fees, the investment lineup, payroll integrations, and the level of fiduciary support. Choosing a provider that acts as a 3(38) investment fiduciary can shift investment-selection liability off your plate.
3. Design your plan. Decide who's eligible, whether you'll offer an employer match (and the formula), your vesting schedule, and your automatic-enrollment and auto-escalation settings. These choices are written into your plan document. Keep in mind that most newly established 401(k) plans are required to automatically enroll eligible employees at a starting rate between 3% and 10%. For more details on plan design: Understanding your 401(k) Plan Document.
4. Connect payroll and set up the plan's trust. Integrate the plan with your payroll system and open the trust account that will hold plan assets. This is the infrastructure that lets contributions flow automatically once employees are enrolled. Tight payroll integration is one of the biggest factors in reducing errors and administrative headaches down the road.
5. Roll it out to employees and start contributions. Send the required notices, hold enrollment, and explain how the plan works, especially the value of any match. Once employees are enrolled (automatically or by their own election), their deferrals and any employer contributions begin flowing into the plan each pay period. On an ongoing basis, you'll file Form 5500 each year and, for non-safe-harbor plans, complete annual nondiscrimination testing. A strong provider automates most of this for you.

Betterment at Work guides you through each step and streamlines the entire setup process, from plan design to payroll integration, so you can launch your small business 401(k) with confidence.

Plan costs typically fall into a few buckets: A one-time or annual administrative fee paid by the employer, per-participant fees, and investment fees tied to the funds in the plan. Total 401(k) plan fees will depend on the size of your business and the provider you select.

Here's the encouraging part: Between the startup and auto-enrollment credits, an eligible business with 50 or fewer employees can claim up to $16,500 in tax credits over three years, which can offset a large share of what it costs to get a plan off the ground. To estimate your own numbers, try Betterment's 401(k) cost calculator. When you weigh the cost against the retention and tax benefits, the math often works in a small employer's favor.

Setting up a 401(k) is far simpler with a partner that handles the heavy lifting. Betterment at Work offers a modern, low-cost 401(k) built for small and growing businesses, with clear pricing, payroll integrations, and automated day-to-day administration.

As a 3(38) investment fiduciary, Betterment manages the investment lineup so you take on less liability, and your employees get access to personalized, technology-driven guidance to help them save with confidence.

With Betterment at Work, employers can offer:

• Streamlined 401(k) plan setup and recordkeeping
• Payroll integrations that reduce manual work and errors
• A professionally managed investment lineup (3(38) fiduciary)
• Personalized financial guidance and tools for employees
• Support for understanding and claiming SECURE 2.0 tax credits

As a full-service provider, Betterment aims to make life easy for you. We'll draft your plan document based on your preferences and our industry expertise of best practices. We will work with you to keep your plan in compliance and can prepare amendments based on your changing needs.

Ready to offer your workforce an award-winning retirement plan? Check out Betterment at Work today.

How much does it cost to set up a 401(k) for a small business?

Costs vary by provider and plan design, but typically include an administrative fee, per-participant fees, and investment fees. For eligible businesses with 50 or fewer employees, SECURE 2.0 tax credits can cover up to 100% of qualified startup costs, up to $5,000 a year for three years, which often offsets much of the early expense.

How long does it take to start a 401(k) plan?

Many small business 401(k) plans can be set up in a few weeks, depending on how quickly you finalize plan design and connect payroll. Working with a provider that offers digital onboarding and built-in payroll integrations can shorten the timeline considerably.

Is a small business required to offer a 401(k)?

There's no federal mandate to offer a 401(k), but a growing number of states require employers to provide a retirement plan or enroll workers in a state-sponsored program. Even where it isn't required, offering a plan is a proven way to attract and retain employees.

What is a safe harbor 401(k), and is it right for my business?

A safe harbor 401(k) automatically satisfies most IRS nondiscrimination tests in exchange for a required employer contribution, either a match or a non-elective contribution. It's a popular choice for small businesses that want to simplify compliance and let owners and higher earners contribute the maximum without testing limits.

Can I get a tax credit for starting a 401(k)?

Yes. Under SECURE 2.0, eligible small businesses can claim a startup credit for qualified plan costs, an auto-enrollment credit of $500 a year for three years, and, in some cases, a credit for employer contributions. Confirm your eligibility and the current limits with a tax professional, since the credits generally require at least one non-highly compensated employee to benefit.