Plans for a Business With Employees

Once the aggregation rules put real employees on your census, the calculus inverts. The question stops being “how much can I shelter” and becomes “how much do I have to give the staff to shelter what I want,” because the entire architecture of qualified plans exists to stop an owner from funding themselves and nobody else.

The tests you are buying your way out of. A traditional 401(k) runs two annual comparisons. The ADP test compares the average deferral rate of highly compensated employees (HCEs — more than $160,000 of prior-year compensation in 2026, or a 5% owner) against everyone else; the ACP test does the same for matching contributions. Fail either and the correction is a refund of the owner’s own deferrals, taxable in the year returned — typically discovered in March, after you have already filed a return assuming the deduction. Separately, a plan is top-heavy under IRC §416(i) if key employees hold more than 60% of assets, which in a small company is nearly automatic, and triggers a mandatory 3% employer contribution to every non-key participant.

Safe harbor 401(k): the standard answer. A safe harbor design buys a statutory exemption from ADP, ACP, and (if you make no other contributions) top-heavy, in exchange for an immediately vested employer contribution. Three standard formulas:

3% non-elective

3% of compensation to every eligible employee whether or not they defer. Simplest to administer, and the version that also satisfies top-heavy.

Basic match

100% of the first 3% deferred plus 50% of the next 2% — a 4% cost for an employee deferring 5%, and nothing for an employee who defers nothing.

Enhanced match

100% of the first 4%. Slightly richer than basic, occasionally simpler to explain.

The match formulas cost less when participation is low, which is exactly when the non-elective is easier to administer — so the choice turns on your workforce, not on a rule of thumb. Watch the calendar: a safe harbor match must generally be in place with notice at least 30 days before the plan year begins, while a 3% non-elective can be adopted as late as 30 days before year-end, and a 4% non-elective as late as the end of the following plan year. That last option is a genuine escape hatch — it lets you retroactively rescue a year that was heading for a failed ADP test.

New comparability, when the demographics cooperate. A cross-tested or new comparability profit-sharing allocation lets you divide employees into groups and contribute different percentages to each, then demonstrate non-discrimination on projected benefits at retirement rather than on current contributions. Because a dollar contributed for a 55-year-old buys far less retirement income than a dollar contributed for a 28-year-old, the arithmetic legitimately permits a much larger allocation to an older owner than to a young workforce. It is the single most effective design for a practice where the owners are materially older than the staff, and it does nothing at all when they are not. Ask your TPA to run an illustration on your actual census before paying for the design.

What SECURE 2.0 now requires of you. Two mandates catch new and small plans:

• Automatic enrollment ( IRC §414A). A 401(k) or 403(b) established on or after December 29, 2022 must automatically enroll eligible employees at 3% to 10% of pay, escalating one point a year to at least 10% (capped at 15%), with an opt-out. Businesses with 10 or fewer employees, businesses less than three years old, church plans, and governmental plans are exempt — and note the exemption is tested year by year, so growing past ten employees switches the mandate on.
• Long-term part-time coverage. An employee aged 21 or older who works at least 500 hours in two consecutive years must be allowed to defer, down from three years for plan years beginning after 2024. You need not make employer contributions for them, but you must let them in — which means tracking hours for people you may not think of as plan-eligible at all.

The credits that pay for the plan. Three federal credits, all claimed on Form 8881, “Credit for Small Employer Pension Plan Startup Costs”, substantially offset the cost of starting a plan and are routinely left unclaimed:

Startup costs ( IRC §45E)

An employer with 1–50 employees credits 100% of qualified startup costs, capped at $5,000 a year for three years; 51–100 employees credits 50%.

Employer contributions ( IRC §45E(f))

A further credit of up to $1,000 per employee for contributions you make on their behalf, phasing down over five years at 100%, 100%, 75%, 50%, and 25%. It excludes employees earning above $110,000 in 2026.

Auto-enrollment ( IRC §45T)

$500 a year for three years for adding an eligible automatic contribution arrangement — including to a plan you already have.

Stacked, these can cover most of a small plan’s first three years. The employer-contribution credit in particular changes the safe harbor arithmetic: for a business with a handful of modestly paid employees, the 3% non-elective can be close to free in the early years.