Sole proprietors, partnerships, corporations, and nonprofit entities may establish 401(k) Plans.

401(k) Plans may be established at any time up until the employer’s tax return due date (including extensions). Salary deferral contributions, however, may be made only from compensation earned prospectively after plan establishment.

Although employers may adopt less restrictive eligibility requirements, 401(k) Plans generally must include employees who

• are at least 21 years old and
• have worked for the business for at least one year.

Special rules apply in the case of employees who work less than 1000 hours per year. In addition, some arrangements may allow employers to restrict employer contributions to employees who have worked for the employer for at least two years, but only if employer contributions are immediately 100% vested.

Note: Union employees and nonresident alien employees may—under specific circumstances—be excluded from participation in a 401(k).

401(k) Plans allow for a variety of employer contributions options. The two most common types of employer 401(k) Plan contributions are profit-sharing contributions and matching contributions.

No. As a general rule, employer contributions are not required under a 401(k) Plan. Employer contributions are, however, required under certain types of “Safe Harbor” 401(k) Plan arrangements that exempt employers from various nondiscrimination testing requirements if they make certain employer contributions.

The maximum employer 401(k) Plan contribution that may be made to any one plan participant is the lesser of 25% of compensation or $69,000 (2024) or $70,000 (2025). Employees age 59½ or older who make catch-up contributions get to increase these limits by the catch-up amount ($7,500 in 2024 and 2025).

Employees can defer up to $23,000 ($30,500 if age 50 or older) for 2024 and up to $25,500 ($34,750 if age 50 or older) for 2025. Depending on the type of 401(k) Plan arrangement, deferrals by a company’s highly compensated employees (HCEs) may be further restricted based on the average deferral rate of the company’s non-HCEs.

Contributions must be made by the due date of the business tax return (including extensions) of the year for which the contributions are being made.

Employers typically can choose to have a vesting schedule for employer contributions (e.g., matching and profit-sharing contributions).But employee salary deferral contributions are always 100% vested.

Employers must provide employees who are eligible to participate in the 40(k) Plan with a copy of the Summary Plan Description (SPD) and the summary annual report—and participants must receive an annual account statement. Notice of opportunity to make/change the salary deferral election is also required. In addition, plan participants may request that additional information be provided.

While distribution restrictions can differ between 401(k) Plan arrangements, 401(k) Plan participants generally may not take distribution of salary deferral contributions until one of the following events occurs:

• The participant dies, becomes disabled, or otherwise has a severance from employment.
• The plan terminates and no successor defined contribution plan is established or maintained by the employer.
• The participant reaches age 59½ or incurs a financial hardship.

Many 401(k) Plans permit participants to borrow from the plan. The plan document must specify whether loans are permitted.

Yes, Roth contributions may be permitted under a 401(k) Plan.

Employers sponsoring a 401(k) Plan must generally file a Form 5500-series return with the federal government each year. Ongoing participant disclosures are also required.

A SIMPLE IRA Plan is a simplified, cost-effective type of plan that is funded primarily through employee salary deferral contributions with a modest employer contribution. SIMPLE IRA contributions are made to the SIMPLE IRAs of each eligible participant. Once funds are contributed to each eligible participant’s SIMPLE IRA, the funds are controlled by the plan participant, meaning that the plan sponsor does not bear the ongoing responsibility of overseeing the administration of a group trust account. This provides each plan participant with maximum control over his or her own retirement funds while simultaneously relieving you—as the plan sponsor—from the additional burdens and responsibility of ongoing plan administration of a 401(k) Plan.

In comparison, 401(k) Plans have more flexibility (e.g., distribution restrictions, vesting schedules, and plan loans) than SIMPLE IRA Plans and allow greater aggregate contributions than SIMPLE IRA Plans. 401(k) Plans are funded through employee payroll deferral contributions with an option to also be funded with employer contributions (e.g., profit-sharing and matching contributions). While 401(k) Plans often include an employer funding component, not all types of 401(k) arrangements require employer funding.

Under a 401(k) Plan, contributions are generally held in a group trust account that is administered by the plan sponsor or by a third-party administrator hired by the plan sponsor. With required government reporting, discrimination testing, and recordkeeping, the 401(k) Plan will typically be more costly and more time consuming to administer than a SIMPLE IRA Plan.

401(k) Plans are funded through employee payroll deferral contributions with an option to also be funded with employer contributions (e.g., profit-sharing and matching contributions). While 401(k) plans often include an employer funding component, not all types of 401(k) arrangements require employer funding. 401(k) Plans provide tremendous funding flexibility. Under a 401(k) Plan, the employer is eligible to contribute as little as 0% of compensation or up to as much as 25% of compensation on behalf of each participant. In addition, each employee can elect to make additional “employee deferral” contributions of up to $23,000 ($30,500 if age 50 or older) for 2024 and up to $25,500 ($34,750 if age 50 or older) for 2025. The maximum aggregate contribution that may be allocated to any one 401(k) Plan participant is $69,000 ($76,500 if age 50 or older) for 2024 and $70,000 ($81,250 if age 50 or older) for 2025. If a 401(k) Plan allows for Roth contributions, the employee salary deferral portion of the contribution can be either pre-tax or after-tax (i.e., Roth), whereas employer contributions to a 401(k) Plan are strictly pre-tax.

Unlike 401(k) Plans, Profit-Sharing Plans are funded exclusively through employer contributions. With a Profit-Sharing Plan, the plan sponsor determines the applicable funding each year , with contribution levels ranging from 0% to 25% of compensation. The maximum amount that may be allocated to any one Profit-Sharing Plan participant’s account is $69,000 for 2024 and $70,000 for 2025.

A SEP Plan is funded exclusively through employer contributions that are made to the Traditional IRAs (often referred to as “SEP IRAs") of each eligible plan participant. Once funds are contributed to each eligible participant’s IRA, the funds are controlled by the plan participant. This provides each plan participant with maximum control over his or her own retirement funds while simultaneously relieving the plan sponsor from the additional burdens and responsibility of ongoing plan administration of a 401(k) Plan. With a SEP Plan, the employer decides the plan funding level from year to year—anywhere from as low as 0% to as high as 25% of each eligible plan participant’s compensation. The maximum amount that may be allocated to any one plan participant’s account is $69,000 for 2024 and $70,000 for 2025.

In contrast, 401(k) Plans are funded through employee payroll deferral contributions—with an option to also be funded with employer contributions (e.g., profit-sharing and matching contributions). While 401(k) Plans often include an employer funding component, not all types of 401(k) arrangements require employer funding. Under a 401(k) Plan, the employer is eligible to contribute as little as 0% of compensation or up to as much as 25% of compensation on behalf of each participant. In addition, each eligible employee can elect to make “employee deferral” contributions of up to $23,000 ($30,500 if age 50 or older) for 2024 and up to $25,500 ($34,750 if age 50 or older) for 2025. The maximum aggregate contribution that may be allocated to any one 401(k) Plan participant is $69,000 ($76,500 if age 50 or older) for 2024 and $70,000 ($81,250 if age 50 or older) for 2025.

401(k) Plans also have more flexibility than SEP Plans (e.g., distribution restrictions, vesting schedules, and plan loans). While 401(k) Plans typically offer more features, they are also generally more costly and more time consuming to administer than a SEP Plan because contributions are held in a group trust account that is administered by the plan sponsor or by a third-party administrator hired by the plan sponsor. In addition, 401(k) Plans are subject to additional reporting and testing requirements that are not required for SEP Plans.