What is a 401(k) plan?
A 401(k) plan is an employer-sponsored retirement savings program that allows employees to contribute a portion of their wages to a tax-advantaged retirement account. Named after the section of the Internal Revenue Code that created it, a 401(k) plan helps employees save for retirement while providing tax benefits to both the employee and the employer.
For small business owners, offering a 401(k) plan can strengthen your benefits package, attract and retain great employees, and help you comply with new state mandates that require businesses to offer access to retirement savings. With tools like Homebase, employers can integrate 401(k) contributions into their payroll process and stay on top of compliance requirements automatically.
How a 401(k) plan works
A 401(k) plan allows employees to:
- Elect to contribute a percentage of their paycheck to their retirement account
- Choose between traditional (pre-tax) or Roth (post-tax) contributions, depending on plan options
- Receive employer-matching contributions, if offered
- Invest contributions in mutual funds, ETFs, or other retirement assets
- Defer taxes on earnings until retirement (traditional), or grow tax-free (Roth)
Contributions are automatically deducted from the employee’s wages and deposited into their 401(k) account, often each pay period.
Traditional vs. Roth 401(k)
Many plans offer both options and allow employees to split contributions between them.
401(k) contribution limits (2025)
The IRS sets annual limits on how much employees and employers can contribute to a 401(k):
- Employee contribution limit: $23,500
- Catch-up contribution (age 50+): Additional $7,500
- Total annual contribution limit (employee + employer): $69,000
These limits are adjusted periodically for inflation. Employers must monitor contributions to prevent overages and avoid compliance issues.
Employer options with 401(k) plans
As a small business owner, you can choose how involved your company is with funding employee retirement:
- Employee contributions only – You offer the plan, but employees fund it entirely.
- Employer match – You match a portion of employee contributions (e.g., 50% of up to 6% of salary).
- Profit-sharing – You contribute discretionary amounts based on company performance.
- Automatic enrollment – Employees are enrolled by default unless they opt out.
Even without matching, offering a 401(k) plan gives employees valuable access to retirement savings tools.
Benefits of offering a 401(k) plan
For employers:
- Attract top talent with competitive benefits
- Boost retention and morale
- Receive tax deductions on matching contributions
- Potential eligibility for the Small Business Retirement Plan Startup Credit
- Stay compliant with state retirement mandates
For employees:
- Save for retirement directly from their paycheck
- Take advantage of employer matching
- Grow savings with tax-deferred or tax-free earnings
- Make catch-up contributions after age 50
Providing a 401(k) helps your team invest in their future—and shows that you’re invested in them.
Compliance responsibilities for employers
401(k) plans are regulated by the IRS and the Department of Labor under ERISA (Employee Retirement Income Security Act). As a plan sponsor, your responsibilities include:
- Timely deposit of employee contributions (typically within 7 business days for small businesses)
- Accurate payroll deductions and tax reporting
- Providing plan disclosures and summary plan descriptions (SPDs)
- Annual filings, such as IRS Form 5500
- Conducting nondiscrimination testing, unless you use a safe harbor plan
Choosing the right plan provider and payroll system is key to staying compliant.
401(k) vs. state-mandated retirement plans
Some states—including California, Oregon, Illinois, and Colorado—require employers to either:
- Offer a qualified retirement plan like a 401(k), or
- Enroll employees in the state-run program
Offering your own 401(k) plan may exempt you from mandatory state programs—and give you more control over the plan features.
How Homebase helps with 401(k) payroll deductions
While Homebase doesn’t provide 401(k) plans directly, it makes managing contributions simple by integrating with your retirement plan provider. With Homebase, you can:
- Track and automate 401(k) payroll deductions
- Support traditional and Roth contributions
- Separate pre- and post-tax deductions properly
- Sync employee elections with payroll
- Ensure deductions stay within IRS limits
- Keep accurate records for year-end reporting and audits
Explore Homebase Payroll to simplify 401(k) contribution tracking, automate tax calculations, and stay compliant while helping your team plan for the future.