HRFinanceFormation

Employee Benefits at Formation: How to Set Up 401(k) and Retirement Options for Your New Business

ttradelicence

2026-02-04

13 min read

A practical 2026 playbook to choose, register, and run 401(k) and retirement plans for new LLCs and corporations—timelines, duties, and checklists.

Set Up retirement plans at formation — without the confusion

When you form an LLC or corporation, retirement benefits are one of the fastest ways to attract talent, save taxes, and protect long‑term business value — but the paperwork, compliance timelines, and employer obligations can feel like a second full‑time job. This guide gives you a step‑by‑step playbook to choose, register, and operate 401(k) and other retirement plans for new businesses in 2026, with practical checklists, compliance timelines, and the latest trends you need to know.

Snapshot: What new business owners must know first (inverted pyramid)

Decide plan type now — Your choice (401(k), Solo 401(k), SEP, SIMPLE, or Pooled Employer Plan) determines who participates, timing for deferrals, and annual filings.
Deadline priorities — Employee salary deferrals require the plan and payroll setup before withholding. Employer profit‑sharing contributions can often be adopted by your business tax‑filing deadline (with extension), but this varies by plan type.
ERISA & fiduciary duties — Once you sponsor a plan you’re likely a fiduciary; you’ll need plan documents, an SPD, timely deposit of participant deferrals, and ongoing monitoring (or a 3(21)/3(38) delegate).
Registration & filings — Some plans require an EIN for the plan, trust set‑up, and annual Form 5500 reporting thresholds. Know when the Form 5500 applies to avoid penalties.

2026 trends that change how you should think about retirement at formation

Payroll‑first plan activation — Major payroll providers and recordkeepers (integrated platforms) now make same‑day plan launches possible for many small employers, removing a key administrative barrier. See practical guidance on payroll integration when you link payroll and benefits.
Pooled Employer Plans (PEPs) scale up — After policy and vendor maturation since the SECURE era, PEPs are now a mainstream option for small firms that want to outsource fiduciary investment duties and reduce per‑employer administrative cost.
Auto‑enrollment & behavioral defaults — Automatic enrollment and escalation are industry norms; many platforms offer evidence‑based default funds and auto‑escalation starting at low contribution rates. Consider conversion and UX patterns from the conversion‑first playbook when designing defaults to maximize participation.
Integration with student loan and emergency savings — Following SECURE Act 2.0 rollouts (2024–2026), more plans include options to match student loan payments and add emergency savings windows inside retirement plans. Use forecasting tools to model these programs (see forecasting and cash‑flow toolkits below).
Fiduciary outsourcing — Growth in ERISA 3(38) investment manager services reduces small employer fiduciary burden and is becoming cost‑effective in 2026.

Step‑by‑step: How to set up a 401(k) or retirement plan when forming your LLC or corporation

Step 1 — Confirm entity tax classification and eligible participants

Before you choose a plan, confirm how your new business is taxed (single‑member LLC taxed as sole proprietor, multi‑member partnership, S corporation, or C corporation). Tax classification affects deductible contribution options, owner compensation rules for deferrals, and eligibility for owner‑only (solo) plans.

If you are the only employee (owner‑only business), a Solo (One‑Participant) 401(k) typically allows the highest combined contribution (employee deferral + profit‑sharing).
If you plan to hire employees within 12 months, consider a standard 401(k) or a SIMPLE IRA depending on payroll size and budget for employer contributions.
For multiple small employers wanting outsourced administration, a Pooled Employer Plan (PEP) can be efficient.

Step 2 — Choose the plan design you need

Key design decisions will drive administrative complexity and compliance tests:

Employee deferrals: pre‑tax 401(k), Roth 401(k), or both
Employer contributions: none, matching (dollar‑for‑dollar or safe harbor), or profit‑sharing
Auto‑enrollment and escalation: default contribution rate (e.g., 3%–6%) and default investment mapping
Participant loans and hardship withdrawals: whether to allow them
Safe Harbor Election: eliminates ADP/ACP testing for many employers but requires notice and contribution commitments

Step 3 — Pick vendors: recordkeeper, custodian, ERISA counsel, payroll

Vendor selection is a fiduciary decision. Compare total cost (recordkeeping + fund expenses + advisor fees), service level, payroll integration, and whether they act as a 3(16)/3(21)/3(38) fiduciary. Typical vendor stack:

Recordkeeper (administration, payroll integration, participant portal)
Custodian (holds the assets — often the recordkeeper has a custodian partner)
ERISA counsel or third‑party administrator (TPA) for plan documents and compliance
Investment advisor (or 3(38) investment manager) for menu selection and monitoring

Vendor selection and documentation matter. Track proposals, ask for itemized fee disclosures, and archive your vendor memos using reliable backups and offline document tooling — see offline‑first document backup tools for recommendations.

Step 4 — Adopt plan document and set up trust and plan EIN

Once you choose a provider and design, adopt the plan document (prototype or individually designed), name the plan sponsor (your entity), and establish the plan trust account with the custodian. Many recordkeepers will obtain a plan EIN for you as part of onboarding — if not, you’ll request a separate EIN for the plan from the IRS.

Step 5 — Configure payroll and enrollment

To accept employee deferrals you must connect payroll and confirm the first payroll date for withholding. If you plan to use automatic enrollment or safe harbor features, make sure payroll can withhold the default percentage and adjust for taxability of Roth versus pre‑tax contributions. For practical ways to link time and payroll systems, review guidance on integrating warehouse and workforce tracking with payroll systems (payroll integration best practices).

Step 6 — Distribute disclosures and documentation

ERISA requires you to give participants a Summary Plan Description (SPD) within 90 days of becoming covered, and provide notice documents for automatic enrollment or safe harbor elections before the start of the plan year (timing varies by election). Maintain copies of the SPD, plan document, and notices in your plan records — and back them up in an offline‑friendly format (see offline doc tooling recommendations above).

Step 7 — Start contributions and maintain deposit timing discipline

Employee contributions are plan assets and must be deposited promptly. The Department of Labor guidance treats participant salary deferrals as plan assets and expects employers to remit them as soon as reasonably practicable — generally within a few business days for small employers. Late deposits can create prohibited transactions and required corrective action.

DOL guidance: employee salary deferrals must be deposited “as soon as reasonably practicable.” Small employers should treat 2–7 business days as a practical benchmark.

Step 8 — File required forms and set an annual compliance calendar

Common recurring items:

Form 5500 annual filing (required for plans over the IRS/DOL participant threshold; small plan alternatives may exist)
Quarterly and annual participant notices (QACA or safe harbor notices, automatic enrollment notices, qualified default investment alternative [QDIA] notices)
Yearly nondiscrimination testing (unless covered by safe harbor)
Plan audit (if plan participants exceed audit threshold in a plan year)

Entity‑specific considerations: LLC vs. S Corp vs. C Corp

The mechanics of contributions and who is treated as a participant change by tax classification:

Single‑member LLC (disregarded entity): Owner treated as self‑employed; Solo 401(k) works well and allows employee deferral (as the owner) plus profit‑sharing based on net self‑employment income (after deducting the retirement contribution).
Partnership / multi‑member LLC: Partners are treated as self‑employed — allocations and contribution calculations are based on K‑1 net earnings; general partners are participants; specific partner compensation rules apply.
S corporation: Owner usually treated as employee for wages — so salary must be reasonable for deferral eligibility. S‑corp shareholder‑employees may make employee deferrals based on W‑2 wages and receive employer profit‑sharing contributions through a corporate contribution deduction.
C corporation: Traditional employer/employee treatment — deferrals from wages and corporate deduction for employer contributions subject to corporate tax rules.

Compliance timelines & critical deadlines (practical guide)

Below are action‑oriented timelines you can use during your formation year. These are practical rules of thumb — always confirm with your plan provider or ERISA counsel for your situation.

To accept deferrals for a payroll: Plan + payroll must be active before that payroll period. You cannot withhold deferrals retroactively if the plan did not exist for that payroll.
To claim employer contribution deduction for the prior tax year: For many retirement plans, employer contributions (profit‑sharing) can be adopted up to your business tax‑filing deadline (including extensions). However, a 401(k) that includes employee salary deferrals generally must be in place before deferrals occur.
Safe Harbor notice: Typically provided 30–90 days before plan year; there are limited cure options if missed but these can be complex.
SPD: Deliver within 90 days of a participant’s entry into the plan.
Participant deferral deposit: Deposit as soon as reasonably practicable — benchmark 2–7 business days for small plans; document your process.
Form 5500: File annually if your plan reaches the participant threshold. Missing this can result in large penalties.

Employer duties and fiduciary checklist

When you sponsor a retirement plan you pick up fiduciary responsibilities under ERISA. These are not optional — they are a legal duty to act in participants’ best interests.

Prudent plan selection — Document the vendor selection process, fee benchmarking, and the rationale for the investment menu.
Plan document & SPD maintenance — Keep documents current, and issue SPDs and updates on time.
Deposit and recordkeeping discipline — Timely deposit of participant deferrals and accurate recordkeeping of contributions and distributions.
Monitor costs — Track total plan cost (recordkeeping fees + fund expense ratios) and negotiate or replace vendors if fees are unreasonable. Beware of hidden fees; the hidden costs playbook is a useful reminder to look beyond headline pricing.
Policy and procedure — Adopt a written investment policy statement (IPS) and an annual governance calendar for testing and monitoring.
Consider fiduciary delegation — Use ERISA 3(21) or 3(38) agreements to outsource investment selection and monitoring when appropriate. For practical steps to reduce onboarding friction with partners and vendors, review approaches in the partner onboarding AI playbook.

Rollover and exit options for participants (what to communicate to employees)

Employees who leave your company generally have these core options (each plan can define additional specifics):

Leave funds in the plan — If allowed, this keeps consolidated balances but may be less flexible than an IRA.
Rollover to a new employer plan — If the receiving plan accepts rollovers, this preserves tax‑deferred status and consolidates retirement savings.
Rollover to an IRA — Provides broader investment choices and control; verify trustee instructions to avoid tax withholding penalties.
Distribution — Cash out (subject to taxes and possible early‑withdrawal penalty if under age 59½) — this is often the costliest option long term.
In‑plan Roth conversion — If available, taxable conversion to Roth status for future tax‑free growth; requires employee tax planning.

As the sponsor, provide clear rollover communications and a plan contact. Consider establishing an automatic rollover IRA solution for small cash‑out balances if you expect high turnover.

Common mistakes new sponsors make — and how to avoid them

Waiting until year‑end to choose a plan and expecting to accept employee deferrals for the entire year — payroll and plan setup timing matters.
Skipping the SPD and notices — Failing to distribute required disclosures creates statutory violations and potential penalties.
Allowing late deposit of deferrals — Treat deferrals as plan assets — late deposits create prohibited transactions and ERISA exposure.
Underestimating ongoing admin — Nondiscrimination testing, Form 5500, and audits can surprise employers who assumed “set and forget.”
Not documenting vendor selection — In a fee or performance dispute, a documented process protects trustees and officers.

How to choose between low‑cost DIY providers and full fiduciary outsourcing

In 2026 there are broad options along a spectrum:

DIY / low‑cost recordkeepers — Best for simple plans with low headcount, price‑sensitive owners who will manage compliance tasks.
Managed recordkeepers + payroll integration — Ideal for firms that want frictionless enrollment and automated deposits but will retain oversight duties.
PEPs and fiduciary outsourcing (3(38)) — Best for employers who want to offload investment fiduciary duties and reduce administrative complexity; costs are increasingly competitive in 2026.

Evaluate: total cost, fiduciary coverage, service level, and integration with your accounting/payroll workflow. Ask prospective vendors for an itemized fee disclosure and references from recently formed companies.

Quick checklists you can use today

Pre‑formation checklist (do this when you form your entity)

Decide desired plan type (401(k), Solo 401(k), SIMPLE, SEP, PEP)
Budget for employer contributions and recordkeeping — model scenarios with forecasting and cash‑flow tools like the 2026 forecasting toolkit.
Select an integrated payroll provider or confirm payroll capabilities
Identify an ERISA counsel or TPA for plan documents

First 60 days after formation

Sign plan adoption agreement and establish plan trust/custodial account
Configure payroll withholding and confirm first deferral date — integrate payroll early (see payroll integration guidance).
Deliver SPD or participant welcome packet
Document vendor selection and retain agreements

Ongoing compliance calendar (annual)

Quarterly payroll reconciliation and deposit audit
Annual nondiscrimination testing (if applicable)
Form 5500 preparation and filing (if required)
Annual investment and fee review
Update SPD and notices when plan changes

Real‑world example: A 2025 startup used a PEP to accelerate hiring

Case summary: A three‑founder SaaS startup formed an S corporation in late 2024. Concerned about administrative overhead and fiduciary risk, they chose a reputable PEP in mid‑2025. The PEP provider handled plan adoption, SPD delivery, payroll integration, and 3(38) investment management. Within six months the company offered auto‑enrollment, matched up to 3%, and used a managed Roth option. Hiring velocity increased and the founders reported lower internal admin time — the cost was comparable to an unmanaged low‑cost provider after negotiations.

Takeaway: PEPs and outsourced fiduciary models are now practical even for sub‑50 employee companies when fast compliance and hiring are the priority. For hiring tools and ATS options that pair well with benefits, consult a recent job board and ATS review when selecting recruiting platforms.

When to get professional help

Contact ERISA counsel or a qualified TPA if you:

Plan to adopt complex features (safe harbor, nonstandard eligibility, or top‑heavy designs)
Have related parties (family owners) with mixed tax treatments
Expect to exceed participant thresholds that trigger Form 5500 audits
Are considering a PEP and need to negotiate the MEP service agreement

Final practical tips for 2026

Use an integrated payroll + recordkeeper to reduce deposit timing risk.
Consider auto‑enrollment by default — it improves participation and retention.
Shop total cost, not just recordkeeping fees — fund expense ratios and hidden fees matter. Read about hidden costs to avoid surprises when evaluating vendors.
Document every fiduciary decision — vendor selection memos protect sponsors later. Archive copies in a secure, offline‑friendly backup (see offline docs tooling).
Lean into fiduciary delegation when growth accelerates — 3(38) managers scale better than an in‑house committee. Also consider streamlining partner and vendor onboarding using AI approaches described in the reducing‑onboarding friction playbook.

Actionable next steps (30‑day plan)

Decide whether you need employee deferrals immediately. If yes, choose a payroll‑integrated provider and get the plan live before your next payroll.
If you only need employer contributions for tax planning, confirm with counsel whether you can adopt a plan by your tax‑filing deadline for prior‑year deductions.
Request written fee disclosures and a sample plan document from 3 providers and score them on cost, service, and fiduciary coverage.
Draft an initial governance calendar and assign a named plan administrator internally (even if you outsource tasks). Use forecasting tools to model contribution scenarios and cash flow impacts (forecasting toolkit).

Closing: Make retirement benefits a competitive advantage at formation

Offering a retirement plan at formation is not just a compliance chore — it’s a strategic investment in hiring, tax efficiency, and organizational value. In 2026, technology and pooled solutions make it easier and less risky than ever for small businesses to offer modern plans. Use the checklists above, document decisions, and pick the level of fiduciary support that matches your appetite for administrative work.

Ready to set up a 401(k) for your new LLC or corporation? Start with a 15‑minute readiness checklist call with our formation advisors — we’ll map the right plan options, timelines, and vendor match for your new business so you can launch confidently and compliantly.

tradelicence

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