In the last issue, we covered the Solo 401(k), also called a one-participant 401(k), a 401(k) plan designed for a business owner with no full-time employees other than a spouse. This week, we will talk about the Small Business 401(k), another powerful retirement savings account for owners and employees.
What Is a Small Business 401(k)?
A small business 401(k) is a standard employer-sponsored 401(k) plan, scaled for companies with employees beyond just the owner. It gives employees a familiar payroll-deduction savings vehicle with high contribution limits. It gives owners the most design flexibility of any plan in this series – matching formulas, vesting schedules, loan provisions, and Roth options can all be customized.
The tradeoff for that flexibility is complexity: a 401(k) requires a written plan document, ongoing compliance testing (unless structured as a safe harbor plan), and typically a third-party administrator (TPA) to keep the plan compliant.
Traditional vs. Safe Harbor 401(k)
- Traditional 401(k): Subject to annual nondiscrimination testing (ADP/ACP tests) to ensure the plan doesn’t disproportionately benefit highly compensated employees. If testing fails, owners may be forced to refund some of their own contributions.
- Safe harbor 401(k): Requires the employer to make a specified contribution – typically a match or a flat 3% non-elective contribution to all eligible employees – in exchange for automatically passing nondiscrimination testing. This is the more common choice for owner-heavy small businesses that want to contribute the maximum for themselves without testing risk.
How It Works
- Employee deferral: Employees can defer up to $24,500 of salary in 2026, pre-tax or Roth.
- Catch-up contributions: $8,000 additional for age 50–59 or 64+; $11,250 for age 60–63.
- Employer contributions: Matching or profit-sharing contributions can bring the combined employee-plus-employer total up to $72,000 (or higher with catch-up), subject to the 25% of aggregate compensation deduction limit for the business.
- Vesting schedules: Employer contributions (outside safe harbor) can vest over time, which can help with employee retention.
- Loans and hardship withdrawals: Plans can be designed to allow participant loans and hardship distributions, options not available under SEP or SIMPLE IRAs.
2026 Contribution Limits
| Item | 2026 Limit |
|---|---|
| Employee deferral | $24,500 |
| Catch-up, age 50–59 or 64+ | $8,000 |
| Catch-up, age 60–63 | $11,250 |
| Combined employee + employer ceiling | $72,000 (higher with catch-up) |
| Compensation cap for calculating contributions | $360,000 |
Benefits and Drawbacks
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Who a Small Business 401(k) Fits Best
This plan fits businesses that have moved beyond the owner-only stage and want to offer a competitive, flexible benefit to attract and retain talent, while still preserving the ability for owners to save aggressively. It’s especially common among professional practices -medical, legal, and consulting firms – where owners want both employee goodwill and high personal contribution limits.
For a business with only a handful of employees and tight administrative budgets, a SIMPLE IRA may deliver most of the employee benefit at a fraction of the cost – the 401(k) tends to pay off once the owner’s desired contribution level outgrows what a SIMPLE IRA allows.
Next week, Part 6, the last part in the series, covers the defined benefit plan – the plan with the largest possible contribution ceiling, suited to established, high-income businesses.
(READING THIS SERIES: Each article that follows covers one plan in depth: how it works, exact 2026 contribution rules, a clear list of benefits and drawbacks, and the type of business it tends to fit best. Read the overview first, then jump to the plan, or plans, most relevant to your situation.)
If you have questions or would like to discuss any of these further, I would be glad to connect.
Thought for the Week:
“A big part of being confident is being brave, and you can’t be brave unless you’re scared.”
Bo Burnham
(This article is intended for general educational purposes only and reflects tax rules for the 2026 tax year. Tax laws are subject to change. The IRS sets contribution limits, deduction rules, and eligibility requirements annually, and they can change. This content does not constitute personalized investment, tax, accounting, financial, or legal advice. Please consult a qualified financial advisor, tax professional, ERISA attorney, or retirement plan provider before making retirement planning decisions for your business.)
Frederick Hogsett, Jr., is a licensed financial coach with almost 30 years of experience helping individuals, families, small businesses, and nonprofit organizations. His office is located in the Savannah, Georgia, area and can be reached at (803) 463-2773 or by website at www.livemore.net/fhogsettjrclient.