How to Set Up a 401(k) Plan for Your Startup

A 401(k) plan is one of the most valuable benefits you can offer employees, and in today's competitive hiring market, it's becoming more and more expected. According to a 2025 report from Northwestern Mutual, workers believe they'll need an average of $1.26 million saved for retirement, making employer-sponsored retirement plans a powerful tool for attracting and retaining top talent.

For venture-backed startups, offering a 401(k) signals that you're building a company with staying power. And thanks to recent legislation, the cost of setting up a retirement plan has never been lower. Startups with 50 or fewer employees can now receive tax credits covering 100% of their startup costs.

Here's everything you need to know about setting up a 401(k) plan for your startup in 2026.

What You Need to Know Before Setting Up a 401(k) For Your Employees

The IRS establishes specific rules that all 401(k) plans must follow. Understanding these requirements upfront will help you choose the right plan type and avoid compliance issues down the road.

Employee Eligibility Requirements

Employers offering 401(k) plans must allow employees to participate once they meet both of the following requirements:

• They reach 21 years of age
• They complete one year of service (defined by the IRS as working 1,000 hours or more in a 12-month period)

That said, you can choose to be more generous. Many startups allow employees to participate immediately upon hire to maximize the benefit's recruiting value.

2026 Contribution Limits

The IRS adjusts contribution limits annually based on cost-of-living calculations. For 2026, the IRS announced the following limits:

The new "super catch-up" provision, introduced by SECURE 2.0, allows employees ages 60-63 to contribute up to $35,750 total in 2026, which is a meaningful boost for employees approaching retirement.

Distribution Rules

Withdrawals from a 401(k) account are only permitted under specific circumstances:

• Separation from the company
• Retirement, disability, or death
• Reaching age 59½
• Documented financial hardship

Early withdrawals generally incur income taxes plus a 10% penalty unless an exception applies. Your plan document will specify which distribution options you offer.

How to Set Up a 401(k) Plan for Your Startup: Step by Step

Setting up a 401(k) involves several decisions and compliance requirements. Here's a practical roadmap for startup founders.

Step 1: Choose What Plan Type to Offer Your Employees

Not all 401(k) plans are created equal. Understanding your options helps you select the structure that best fits your startup's size, budget, and administrative capacity.

Traditional 401(k): Employees contribute pre-tax dollars, reducing their current taxable income. Taxes are paid upon withdrawal in retirement. Employers must conduct annual nondiscrimination testing to ensure the plan doesn't disproportionately benefit highly compensated employees.

Safe Harbor 401(k): Employers make mandatory contributions (either matching or nonelective) in exchange for automatic compliance with nondiscrimination testing requirements. This is often the best choice for startups where founders and early employees may have significant compensation disparities.

Roth 401(k): Employees contribute after-tax dollars and withdraw funds tax-free in retirement. Most modern plans offer both traditional and Roth contribution options. Note: Starting January 1, 2026, employees earning over $150,000 in the prior year must make all catch-up contributions on a Roth basis, making Roth availability essential for competitive plans.

SIMPLE 401(k): Designed for businesses with 100 or fewer employees, this plan type features lower contribution limits but simpler administration and mandatory employer contributions.

Automatic Enrollment 401(k): Employees are automatically enrolled at a default contribution rate unless they opt out. Important for 2026: Under SECURE 2.0, plans established after December 29, 2022 must include automatic enrollment features. Though startups with fewer than 10 employees or less than 3 years in business are exempt.

Step 2: Select a 401(k) Provider

Your provider choice significantly impacts both cost and administrative burden. When evaluating providers, consider:

• Pricing structure: Look for transparent, per-participant pricing rather than asset-based fees that grow with your plan
• Ease of setup: Some providers handle the entire implementation process; others require significant founder involvement
• Payroll integration: Direct integration with your payroll system eliminates manual data entry and reduces errors
• Compliance support: The best providers handle nondiscrimination testing, Form 5500 filing, and regulatory updates automatically
• Investment options: Ensure employees have access to low-cost, diversified investment options
• Cybersecurity: Retirement accounts are prime targets for fraud; verify your provider's security certifications

For startups already using a modern payroll platform, choosing a 401(k) provider that integrates directly can save hours of administrative work each pay period.

Step 3: Design Your Plan

Once you've selected a plan type and provider, you'll need to make several design decisions:

Eligibility requirements: Will you use the IRS default (age 21, one year of service) or allow immediate eligibility?

Employer contributions: Will you offer matching contributions, nonelective contributions, or both? Common matching formulas include:

• 100% match on the first 3-4% of salary
• 50% match on the first 6% of salary
• 3% nonelective contribution for all eligible employees (required for safe harbor)

Vesting schedule: How long must employees work before they own employer contributions? Options range from immediate vesting (required for safe harbor nonelective contributions) to six-year graded vesting.

Automatic enrollment: If you're subject to SECURE 2.0's automatic enrollment mandate (or choose to implement it voluntarily), you'll need to set:

• Initial default contribution rate (must be between 3-10%)
• Annual auto-escalation rate (at least 1% per year)
• Maximum auto-escalation cap (must reach at least 10%, can go up to 15%)

Step 4: Create Your Plan Document

Your 401(k) plan document is the legal foundation of your retirement plan. It specifies all plan rules: eligibility, contributions, vesting, and distributions. The plan document must outline and comply with IRS requirements.

Most providers use pre-approved plan documents that have already received IRS approval, significantly simplifying this step. Your plan document should cover:

• Employee eligibility requirements
• Contribution formulas (employee and employer)
• Vesting schedules
• Distribution options and timing
• Loan provisions (if offered)
• Hardship withdrawal rules

Key deadline for 2026: All plans must adopt written amendments for SECURE 2.0 provisions by December 31, 2026. If you're setting up a new plan, ensure your provider's documents already incorporate these requirements.

Step 5: Establish a Plan Trust

Federal law requires that 401(k) plan assets be held in a trust separate from your company's assets. This protects employee retirement savings and ensures funds are used solely for participants and their beneficiaries.

You'll need to designate at least one trustee, typically either a company officer or a professional trustee provided by your 401(k) administrator. The trustee has fiduciary responsibility for managing contributions, investments, and distributions.

Step 6: Set Up Recordkeeping

Accurate recordkeeping is essential for compliance and required for your annual Form 5500 filing. Your system must track:

• Employer and employee contributions
• Investment elections and earnings
• Vesting calculations
• Loans and distributions
• Participant account balances

Most startups outsource recordkeeping to their 401(k) provider, which handles tracking automatically and generates required reports.

Step 7: Communicate the Plan to Employees

Before employees can participate, you must provide them with a Summary Plan Description (SPD). This is a document explaining plan features in plain language. Required disclosures include:

• Eligibility requirements and enrollment procedures
• Contribution limits and employer matching (if any)
• Vesting schedule
• Investment options
• Distribution rules and procedures
• Fee disclosures

Consider hosting an information session where employees can ask questions. The more employees understand and value the benefit, the higher your participation rates, which can help with nondiscrimination testing.

Step 8: Maintain Ongoing Compliance

Setting up your plan is just the beginning. Ongoing compliance requirements include:

• Quarterly statements: Provide participants with account statements at least quarterly
• Annual Form 5500 filing: Due July 31 for calendar-year plans (October 15 with extension)
• Nondiscrimination testing: Annual ADP/ACP testing for non-safe harbor plans
• Plan document updates: Amend your plan when regulations change
• Fee disclosure: Provide annual fee disclosures to participants

Missing these deadlines can result in significant penalties. Some fines can be up to $250 per day for late Form 5500 filings.

2026 Changes That Affect New 401(k) Plans

Several SECURE 2.0 provisions are now fully in effect or taking effect in 2026. Here's what startup founders need to know:

Automatic Enrollment Is Now Required (With Exceptions)

Plans established after December 29, 2022 must automatically enroll eligible employees at a contribution rate between 3% and 10%, with annual 1% escalation until reaching at least 10%.

Exempt from this requirement:

• Businesses with 10 or fewer employees
• Companies less than 3 years old
• Plans established before December 29, 2022

If you're currently exempt but later exceed these thresholds, you'll need to add automatic enrollment by the start of the following plan year.

Roth Catch-Up Contributions for High Earners

Starting January 1, 2026, employees who earned more than $150,000 in FICA wages in the prior year must make all catch-up contributions on a Roth (after-tax) basis.

Why this matters: If your plan doesn't offer Roth contributions, affected employees cannot make catch-up contributions at all. For startups with well-compensated team members, adding a Roth option is now essential.

Enhanced Tax Credits for Small Employers

SECURE 2.0 dramatically expanded tax credits for small businesses starting retirement plans. For startups with 50 or fewer employees:

Startup cost credit: 100% of qualified startup costs, up to $5,000 per year for three years. The minimum credit is $500 per year.

Automatic enrollment credit: Additional $500 per year for three years for plans with auto-enrollment.

Employer contribution credit: Up to $1,000 per employee per year for employer contributions, available for five years with gradual phase-down:

• Years 1-2: 100% of contributions (up to $1,000/employee)
• Year 3: 75%
• Year 4: 50%
• Year 5: 25%

For a 50-employee startup, these credits can total over $190,000 across five years—potentially making your 401(k) plan cost-neutral or even profitable from a tax perspective.

Long-Term Part-Time Employee Coverage

Effective for plan years beginning in 2025, employees who work at least 500 hours per year for two consecutive years must be allowed to make elective deferrals. Previously, the threshold was three consecutive years.

Frequently Asked Questions

Do employers have to match 401(k) contributions?

No. Employer matching is optional for traditional 401(k) plans. However, Safe Harbor plans require either a matching contribution (typically 100% on the first 3% plus 50% on the next 2%) or a 3% nonelective contribution to all eligible employees.

Many startups offer matching as a competitive benefit even when not required. The good news: employer contributions are tax-deductible, and the new SECURE 2.0 employer contribution credit can offset a significant portion of matching costs for small businesses.

Are employers required to make profit-sharing contributions?

No. Profit-sharing contributions are entirely discretionary. You can decide each year whether to make them and in what amount. Like matching contributions, profit-sharing is tax-deductible for your business.

How much does it cost to set up a 401(k)?

Initial setup costs typically range from $500 to $2,000, depending on your provider and plan complexity. Ongoing administration costs range from $750 to $3,000+ annually, usually structured as a base fee plus per-participant charges.

However, the SECURE 2.0 tax credits can offset these costs entirely for eligible small businesses. A startup with 50 or fewer employees can claim up to $5,000 per year for three years. This tax credit is often more than enough in covering typical setup and administration expenses.

What's the difference between a 401(k) and a PEO retirement plan?

With a 401(k) administered through a provider like Guideline, your company remains the plan sponsor with full control over plan design and provider selection. With a PEO (Professional Employer Organization), the PEO sponsors the plan under co-employment, which means you're locked into their chosen investments, fees, and plan structure.

For startups planning to scale, maintaining your own 401(k) provides more flexibility and avoids the complexity of transitioning plans if you later leave the PEO.

401(k) Administration Made Simple with Warp

Managing a 401(k) alongside payroll, state tax compliance, and benefits administration can quickly overwhelm a lean startup team. That's why Warp offers free benefits administration with our Pro and Premium plans, so you can offer competitive benefits without adding to your workload.

Through our partnership with Guideline, the leading provider of 401(k) plans for small businesses, you get a retirement plan solution that:

• Fully integrates with your payroll: Contributions sync automatically each pay period. No manual data entry or reconciliation
• Handles compliance automatically: Nondiscrimination testing, Form 5500 filing, and plan document updates are managed for you
• Offers low-cost investment options: Guideline's plans feature institutional-class funds with no hidden revenue sharing
• Supports SECURE 2.0 requirements: Automatic enrollment, Roth contributions, and all 2026 compliance updates are built in

Warp's platform was built for founders who need to stay compliant without becoming HR experts. We handle state tax registrations, ongoing filings, and tax notices automatically, and resolve 80% of tax notices instantly on your behalf. Pair that with integrated 401(k) administration, and you can offer enterprise-grade benefits while spending less than 10 minutes per pay period on back-office tasks.

Ready to set up a 401(k) for your startup? Request a demo to see how Warp simplifies payroll, compliance, and benefits all in one platform built specifically for companies who want to focus on building, not bureaucracy.

Last updated: January 2026. This guide is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional for guidance specific to your situation.