Should I Offer 401K for my Employees as a Small Business?
Deciding whether to offer a 401(k) is one of the bigger benefits decisions a small business owner makes. It is not required for most businesses, but it comes with real tax advantages, it can be a deciding factor for candidates weighing your offer against someone else's, and in a growing number of states, it may be the thing that keeps you out of a different mandatory program altogether. Here is what actually goes into that decision.
What is a 401K?
A 401(k) is a type of retirement savings plan offered by employers in the United States, allowing employees to contribute a portion of their pre-tax earnings to an investment account. These contributions are deducted from their paycheck before taxes are applied, potentially reducing their current taxable income.
Benefits of a 401k
Tax Advantages for Employees
Employee contributions are made pre-tax, which reduces their taxable income for the year. The money then grows tax-deferred, so employees are not taxed on investment earnings until they withdraw funds, typically in retirement when they may be in a lower tax bracket.
Recruitment and Retention
A retirement plan is a common tiebreaker for candidates comparing offers, and it signals to your current team that you are thinking about their future, not just their next paycheck.
Does Your State Require a Retirement Plan?
This is the piece that often gets missed. As of 2026, sixteen states including California, Colorado, Illinois, New York, and Oregon, require employers that do not already offer a qualifying retirement plan to enroll employees in a state-run auto-IRA program instead. Requirements and thresholds vary by state, and this list has been growing, so it is worth checking your specific state's current rule. If your state has a mandate and you are not offering your own plan, you are likely already required to be enrolled in the state program, and a 401(k) is one of the ways to opt out of it.
Tax Credits for Employers
This is the part that changed the most in recent years, and it is worth getting right. Under SECURE 2.0, small employers with 50 or fewer employees can claim a tax credit covering 100% of eligible plan startup costs, up to $5,000 per year, for each of the first three years the plan is active. That is a potential $15,000 in credits before the plan has been running for even one full year. Employers with 51 to 100 employees still qualify, but at 50% of costs, with the same $5,000 annual cap.
On top of that, adding automatic enrollment unlocks an additional $500 per year for three years. Separately, employers with 50 or fewer employees can claim up to $1,000 per employee earning $100,000 or less for making employer contributions, phasing down over five years (100% in years one and two, 75% in year three, 50% in year four, and 25% in year five).
Taken together, a small business starting a new plan with auto-enrollment and making employer contributions can realistically be looking at well into five figures in credits over the first few years, not a few hundred dollars.
Things to consider when offering a 401K
Cost
Provider costs vary based on setup fees, annual fees, per-employee fees, and investment management fees. Providers like Human Interest, Guideline, and Gusto all offer plans built for small businesses, often with lower-cost, more automated options than a traditional plan administrator. It is worth comparing at least two or three before committing, since the fee structures can differ quite a bit for a similar-looking plan.
Legal and Compliance Obligations
Offering a 401(k) comes with real compliance responsibilities under ERISA and IRS rules. That includes non-discrimination testing to confirm the plan does not disproportionately favor highly compensated employees, setting up a trust for plan assets, and providing required plan information to participants. Getting this wrong carries real penalties, so most small businesses lean on a provider or an advisor to manage the fiduciary and compliance side rather than handling it in-house.
A Quick Way to Decide
- A 401(k) probably makes sense if: you have steady payroll, you are losing candidates to competitors who offer one, or your state already requires you to facilitate some form of retirement benefit.
- It might be worth waiting if: your headcount or revenue is still unpredictable, since the administrative commitment is ongoing even in a slow year.
- Either way: run the actual numbers on the startup tax credit for your business size before deciding. For many small employers, the credit alone covers most or all of the first three years of cost.
What is People Advisory?
GrowthLab's People Advisory gives you confidence while helping navigate through tough decisions, protecting and growing your team, and managing culture in a changing environment.
How GrowthLab can support you with offering a 401K
At GrowthLab, we understand the importance of choosing the right 401k provider and payroll management solutions for your unique needs. Our
People Advisory Services Team is dedicated to guiding small businesses in making strategic decisions, continuously growing your team, and managing culture in a changing environment.
Connecting with the Right Providers
We collaborate with top-tier providers like Gusto, Human Interest, and Guideline to ensure comprehensive retirement benefits and efficient payroll management for small businesses. Our team brings expertise to facilitate a smooth transition and enrollment process in 401k plans and payroll setup.
Comprehensive Payroll Solutions
Understanding how to run payroll, how to pay employees in a small business, and how to do payroll yourself are crucial aspects of business management. Our services include guidance on how to set up payroll for small business and how to do payroll for small business, ensuring compliance and efficiency.
Offering a 401(k) plan and managing payroll effectively are strategic decisions for small businesses. They provide tax benefits, serve as recruitment tools, and demonstrate care and loyalty to your employees. While considerations such as budget and legality are important, GrowthLab is here to support you in navigating these complexities. We aim to empower your small business with the tools needed to secure a prosperous financial future for both you and your employees.
Maximize Your Team's Potential.
Our People Advisory Services Can Help.
Payroll & Benefits Management
Compensation & Staff Planning
Regular, In-depth Advisory Consultations
Hassle-Free People Operations Technology
Key Takeaways
- Small employers with 50 or fewer employees can claim up to $5,000 per year for three years in startup tax credits, plus $500 per year for auto-enrollment.
- Sixteen states now require a retirement plan or a state-run alternative, so offering a 401(k) may keep you out of a mandatory program.
- Cost and compliance obligations are real, but most small businesses lean on a provider to manage the heavy lifting.
- Run the numbers on the tax credit for your specific headcount before ruling out a plan on cost alone.
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