A 401(k) for a business with employees: costs, credits and rules
A 401(k) lets you and your team save, and it gives you higher limits than a SIMPLE or SEP. Tax credits can cover much of the startup cost, and in Illinois, offering a plan may be required. Here is what to know.
Prepared by Prem Tax and Accounting Corp. Last checked against official sources on October 9, 2026.
The choices
| Type | How it works | Good for |
|---|---|---|
| Traditional 401(k) | Employees defer; the business may match or share profits. Yearly tests check that owners do not get too much of the benefit. | Teams where testing is likely to pass |
| Safe harbor 401(k) | The business makes a required match or contribution and skips the yearly tests | Owners who want to maximize their own savings with certainty |
| Plus profit sharing | The business can add a discretionary contribution, up to $72,000 per person in all | Strong years when you want a bigger deduction |
2026 limits
- Employee deferral: $24,500. Catch-up: $8,000 at 50 or older, $11,250 at ages 60 to 63.
- Total per person: $72,000, not counting catch-up. Pay that counts: $360,000.
- Highly compensated employee: pay over $160,000. Key employee: over $235,000 (top-heavy rules).
- New Roth catch-up rule: employees whose Social Security wages from you were over $150,000 in 2025 must make their 2026 catch-up contributions as Roth.
Tax credits for starting a plan
| Credit | Amount | For how long |
|---|---|---|
| Startup costs | 100% of eligible costs for 50 or fewer employees (50% for 51 to 100), up to $5,000 a year | 3 years |
| Employer contributions | Up to $1,000 per employee, at 100%, 100%, 75%, 50% and 25% over 5 years (reduced for 51 to 100 employees; not for employees paid over $100,000) | 5 years |
| Automatic enrollment | $500 a year | 3 years |
Claim them on Form 8881. We prepare it with your return and check you meet the conditions.
New automatic enrollment rule
A 401(k) plan established after December 29, 2022 generally must automatically enroll eligible employees, for plan years beginning after 2024. Exceptions include businesses with 10 or fewer employees and businesses in operation for less than 3 years. A SIMPLE IRA or SEP is not subject to this rule.
Illinois employers
Getting started
Choose the design
Traditional or safe harbor, with or without profit sharing, Roth, and auto-enrollment.
Pick a plan provider
Compare fees, features and payroll integration. We coordinate with them.
Adopt the plan and tell employees
Plan document, notices and enrollment.
Run it every payroll
Deposit deferrals on time, run the match, and file the yearly report.
We run payroll in every state and can set up the deferrals and match. Book a 20-minute call or see our payroll service.
Common questions
What is a safe harbor 401(k)?
A 401(k) where the employer makes a required contribution (generally a match of up to 4% of pay, or 3% of pay for every eligible employee), and in return the plan avoids the yearly nondiscrimination tests. It is popular with small businesses where the owner wants to maximize their own deferral.
Is there a tax credit for starting a plan?
Yes. Employers with 50 or fewer employees can claim 100% of eligible startup costs, up to $5,000 a year for 3 years. Employers with 51 to 100 employees get 50%. There is also a credit for employer contributions of up to $1,000 per employee in the first 5 years, and a $500 credit for adding automatic enrollment. Claim them on Form 8881.
Must a new 401(k) automatically enroll employees?
Generally yes. 401(k) plans established after December 29, 2022 must automatically enroll eligible employees, for plan years beginning after 2024. There are exceptions, including businesses with 10 or fewer employees and businesses that have been open less than 3 years.
Does Illinois require me to offer a plan?
Illinois employers with 5 or more employees that have been in business for 2 or more years and do not offer a qualified retirement plan must offer one or enroll their employees in Illinois Secure Choice. The Illinois Department of Revenue enforces penalties for non-compliance.
Do part-time employees have to be included?
Employees who work at least 500 hours a year for 2 consecutive years generally must be allowed to make deferrals, starting with plan years beginning in 2025.
Official sources
- IRS: Retirement plans startup costs tax credit
- IRS: Instructions for Form 8881
- IRS Notice 2025-67 (2026 limits)
- Illinois Treasurer: Secure Choice
- Illinois Department of Revenue: Secure Choice enforcement
Let's talk about your taxes, your business, your plans.
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