How to Set Up a 401(k) or Solo 401(k)

Step-by-step guide to establishing retirement plans for your business, including costs and contribution limits.

  1. Determine which plan fits your employee count. Solo 401(k) works only if you have no employees except a spouse. Traditional 401(k) is required if you have any W-2 employees. Solo plans cost $0-500 annually and take 2-3 weeks to establish. Traditional plans cost $1,000-5,000 annually and take 6-12 weeks with more compliance requirements.
  2. Compare provider fee structures and minimums. Solo 401(k) providers typically charge 0.25-1.0% asset fees plus $0-100 annual administration. Traditional 401(k) providers charge $1,000-3,000 base fees plus $20-100 per participant annually. Some require $50,000-250,000 minimum assets. Get quotes from at least three providers and compare total cost projections at 3-year and 5-year asset levels.
  3. Complete plan documents and adoption agreements. Solo 401(k) requires a plan document and account opening with your business EIN. Traditional 401(k) requires plan documents, adoption agreements, and summary plan descriptions that comply with ERISA. Most providers supply template documents, but complex businesses may need attorney review. Budget 2-4 hours for solo plans, 8-20 hours for traditional plans.
  4. Set contribution percentages and vesting schedules. Employee deferrals can be 1-100% of salary up to annual limits. Employer matching typically ranges 25-100% of first 3-6% deferred. Traditional plans must offer the same terms to all eligible employees. Solo plans let you maximize both employee and employer contributions for yourself.
  5. Establish payroll deductions and contribution timing. Set up payroll systems to deduct employee contributions each pay period. Employer contributions can be made quarterly or annually but must be deposited within 7 business days of withholding employee money. Solo 401(k) contributions can be made until tax filing deadline plus extensions.
  6. Handle annual testing and filing requirements. Solo 401(k) requires Form 5500-EZ if assets exceed $250,000. Traditional 401(k) requires annual Form 5500 filing and non-discrimination testing to ensure highly compensated employees don't get disproportionate benefits. Failed tests require corrective distributions and potential IRS penalties.