An employer’s guide to 401(k) retirement plans: Types, rules, and benefits

A 401(k) isn’t just a box to tick on your benefits checklist — it’s a powerful tool for attracting talent, boosting employee loyalty, and standing out in a competitive job market.

According to the Transamerica Institute, 91% of employees view a 401(k) (or similar retirement plan) as an important benefit, with 82% stating that such plans are a “major factor” when choosing an employer. And as more US states mandate enrollment in either a state-sponsored plan or a qualified alternative, it’s also a compliance consideration too.

As a result, it’s crucial to understand what 401(k)s are, how they work — and what your responsibilities are as an employer. We’ll cover all this (and more) in this guide, so let’s jump straight in.

What is a 401(k)?

A 401(k) is a type of retirement plan that gives employees a simple, automatic way to build their savings while potentially benefiting from employer contributions. It helps employers build loyalty and satisfaction among their teams, and is one of the most popular retirement savings programs in the US.

What does a 401(k) plan generally provide its participants?

At its core, a 401(k) plan allows your employees to:

• Save money for retirement directly from their paychecks, often before taxes are taken out.

• Receive employer contributions (matching or profit-sharing), if offered.

• Grow their investments tax-deferred, meaning they don't pay taxes on gains each year.

• Choose from a range of investment options  (usually mutual funds, stocks, and bonds).

Why is it called a 401(k)?

The name refers to Section 401(k) of the Internal Revenue Code, which established the rules for this type of savings accounts in 1978.

Is a retirement plan the same as a 401(k)?

Not exactly. A 401(k) is a type of retirement plan, but not all retirement plans are 401(k)s. For example, a company might offer a traditional pension or a SEP IRA instead of a 401(k). While the terms get used interchangeably sometimes, they’re not identical.

Why should you offer a 401(k) plan?

As an employer, offering a 401(k) comes with several benefits, such as:

• A stronger employer brand. A generous 401(k) can differentiate you from competitors, especially in tech, consulting, and professional services where benefits are scrutinized closely.

• Tax benefits. Employer contributions are tax-deductible, and offering a plan could qualify you for credits like the SECURE Act’s Startup Plan Credit (up to $5,000 per year for three years).

• Compliance. In some states, employers without a plan must enroll workers in a state retirement program or face fines.

• Improved retention and performance. A 401(k) signals that you’re invested in your employees’ long-term wellbeing, resulting in a more engaged and productive workforce.

What are the different types of 401(k) plans?

There are multiple types of 401(k) that you can offer, and choosing the right one depends on your company size, structure, and goals.

Here’s a breakdown of each program:

Traditional 401(k)

Best for: Mid-sized to larger employers looking for flexibility.

As the name suggests, a Traditional 401(k) is the classic model. Your employees contribute pre-tax dollars and, as the employer, you can opt to match those contributions.

Pros:

• High contribution limits

• Employer match encourages participation

Cons:

• Requires annual non-discrimination testing

• Administration can be complex

Safe Harbor 401(k)

Best for: Small to mid-sized companies who want to avoid compliance headaches.

A Safe Harbor 401(k) works similarly to a Traditional 401(k), but with built-in employer contributions to automatically satisfy non-discrimination testing rules.

Pros:

• No non-discrimination testing required

• Predictable employer costs

Cons:

• Mandatory contributions (vesting schedules may vary)

This program may be preferable if your team skews toward highly-compensated employees who might otherwise be restricted.

SIMPLE 401(k)

Best for: Startups and small businesses.

A SIMPLE 401(k) is a streamlined, lower-cost alternative for businesses with 100 or fewer employees.

Pros:

• Easy to set up and administer

• No non-discrimination testing

Cons:

• Lower contribution limits

• Mandatory employer contributions

A SIMPLE 401(k) is often viewed as a great starter plan, but it may not scale well as your company grows.

Solo 401(k)

Best for: Freelancers, solopreneurs, owner-only businesses.

A Solo 401(k) is designed for business owners with no employees (other than a spouse), such as sole proprietors.

Pros:

• Very high contribution limits

• Maximize retirement savings

Cons:

• Only for businesses with no W-2 employees

Roth 401(k)

Best for: Younger employees or those expecting higher tax rates in retirement.

In a Roth 401(k), employee contributions are made after tax, but withdrawals in retirement are tax-free.

Pros:

• Tax-free growth

• Diversification of retirement tax strategies

Cons:

• No upfront tax deduction

Many employers offer Roth alongside Traditional options as it gives employees valuable flexibility.

How to choose the right 401(k) plan

Here’s what to think about when evaluating your options:

• Budget. Understand both the upfront and ongoing costs. Setup fees can range from a few hundred to a few thousand dollars, while annual administrative fees and investment fees vary widely depending on the provider and plan complexity.

• Complexity tolerance. Some 401(k) plans are simple, while others require more compliance management. If you want minimal testing and paperwork, a Safe Harbor 401(k) or SIMPLE 401(k) might be your best bet.

• Employee needs. Think about who your employees are and what matters most to them. A younger workforce might love the option of a Roth 401(k) for after-tax savings, while employees closer to retirement may prioritize higher employer matching or strong investment options.

• Growth plans. Aim to look ahead in the short and medium term. If you expect rapid hiring, you’ll want a 401(k) that scales easily, with flexible eligibility rules, straightforward enrollment, and strong provider support.

Remember: Choosing a 401(k) is about finding the right balance between cost, complexity, compliance, and employee experience. The better the fit, the more your team — and your business — will benefit.

Understanding 401(k) rules

Whatever you choose, there are some rules you need to follow when setting up and managing a 401(k). Here's what you need to know to stay compliant and avoid penalties:

Contribution limits

401(k)s have annual contribution limits which cannot be exceeded. For employees, this is currently $23,000 (although those aged 50 and above can contribute an additional $7,500). The combined limit for employee and employer contributions is currently $69,000 per year (or $76,500 for those over 50).

If you allow contributions over the IRS limit (deliberately or by mistake), you'll have to take corrective actions, which can get messy — and expensive.

Vesting schedules

In the context of a 401(k), vesting simply means how much of your employer contributions an employee actually owns at any given time.

You can set a vesting schedule to encourage employee loyalty, such as:

• Immediate vesting: Employees own 100% of your contributions right away.

• Graded vesting: Employees earn ownership over time (e.g., 20% per year over five years).

• Cliff vesting: Employees become fully vested all at once after a set period (e.g., 100% after three years).

Vesting schedules can incentivize retention, helping you hold onto top performers longer. However, if your vesting schedule is too long or strict, it might discourage employee participation in the plan.

Non-discrimination testing

Most 401(k) plans must pass annual fairness tests to ensure they don’t favor highly-paid employees over everyone else.

These tests include:

• The ADP test: This compares the percentage of pay deferred by highly compensated employees (HCEs) versus non-HCEs. What are highly compensated employees?

• The ACP test: This looks at employer matching and after-tax contributions for fairness.

• The top-heavy test: This ensures that key employees don’t hold more than 60% of the plan’s total assets.

Failing these tests can mean refunding contributions to highly paid employees, as well as potential penalties. As mentioned, offering a Safe Harbor 401(k) can exempt you from most non-discrimination testing.

Annual reporting

Once your plan is up and running, the government expects regular updates. The two key documents you must provide are:

• Form 5500. This is an annual report filed with the Department of Labor that outlines your plan’s financial condition, investments, and operations. If your plan has over 100 participants, you’ll need a full Form 5500, while those under 100 may qualify for the simpler Form 5500-SF.

• Summary plan description (SPD). This is a clear, plain-language document that you must provide to your employees, explaining how the plan works, who’s eligible, how contributions work, when employees vest, and what happens if they leave.

If you miss filings or don’t distribute the required documents, you can trigger seriously hefty fines.

What about state-specific laws?

As mentioned, more and more states are beginning to require employers to offer either a qualified retirement plan, or enrollment in a state-run retirement program.

If you have employees in a state that has (or is planning to have) such a mandate, you must adhere to it, regardless of where your company is based.

Offering your own 401(k) plan usually exempts you from these mandates — and gives you far more control over the employee experience.

To see a full breakdown of which states require a retirement plan, check out our detailed guide:

Global Payroll —

8 min

State-mandated retirement plans: What US employers need to know

Discover which US states have mandatory retirement plans, and what you — as an employer — need to do about it.

How do you set up a 401(k)?

If you’re ready to set up your own 401(k), there are a few steps you’ll need to follow:

1. Find a provider. Compare features, costs, and service levels to find the right provider.

2. Create a plan document. This is your official blueprint.

3. Set up enrollment. Communicate the plan clearly and simply to your employees.

4. Stay compliant. Conduct annual compliance checks, make contribution deposits on time, and regularly review your plan.

To learn more about setting up a 401(k), check out our detailed, step-by-step guide:

Benefits & Leave —

7 min

How to set up a 401(k) for your startup: A step-by-step guide

Learn how to set up a 401k for your startup, including the benefits of doing so, the types of 401k plans, and the steps you'll need to follow.

How can Remote help?

As you can see, offering a 401(k) isn’t just about following rules or checking boxes. It’s about building the kind of company where people want to build their futures.

But for small businesses especially, setting up and managing a 401(k) can be confusing and time-consuming.

If you hire team members through Remote’s employer of record (EOR) service, we handle all benefits — including 401(k)s — for you. Based on your budget and your preferences, we’ll help you select the right plan, and ensure that it is set up and managed on your behalf. This saves you significant amounts of time, as we handle all the administrative lifting.

We’ll also ensure that the right contributions are made through payroll, and that you are fully compliant in all US states. There are no compliance headaches; everything is taken care of.

Retirement plans are a tangible way to show your team you care about their futures — and they can make all the difference in building a loyal, engaged workforce. To see how your business can benefit, speak to one of our friendly experts today.

Download your 
Global Benefits Guide and attract top global talent

Remote's global HR experts share practical advice for building a locally relevant and globally compliant benefits program to help you attract and keep the world's best talent.

Get the guide