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

A structural guide for small-business owners on choosing and establishing the right 401(k) plan for your payroll and tax strategy.

1. Determine plan eligibility based on headcount. If you are a solo practitioner with no employees, a Solo 401(k) offers higher contribution limits without the testing requirements of a traditional 401(k). If you have common-law employees, you must establish a traditional 401(k), which triggers fiduciary responsibilities and potential employer matching obligations.
2. Evaluate administrative and recordkeeping costs. Traditional 401(k) plans incur setup fees, monthly administrative fees, and per-participant costs. These typically range from $500 to $2,500 annually for small plans, plus asset-based fees. Compare providers based on the all-in cost per employee rather than just the setup fee.
3. Define your contribution and matching structure. Decide if you will offer a discretionary or fixed employer match. Safe Harbor 401(k) plans bypass some annual non-discrimination testing but require a mandatory employer contribution, typically 3% of eligible compensation. Factor this cost into your payroll burn rate immediately.
4. Draft the plan document and secure an EIN. You must execute a written plan document that defines eligibility, vesting schedules, and contribution rules. A Solo 401(k) typically requires an IRS determination letter and a dedicated trust account for plan assets. For traditional plans, your third-party administrator (TPA) usually handles the legal drafting.
5. Manage compliance and annual testing. Traditional plans require annual non-discrimination testing to ensure benefits are not skewed toward highly compensated employees. Failure to comply can result in plan disqualification or significant tax penalties. Ensure your payroll software integrates directly with the plan provider to automate contributions and catch errors early.