How much does a 401(k) cost a small business? This is one of the most common questions we get from business owners facing state retirement mandates. The honest answer: less than you think — especially when SECURE 2.0 federal tax credits are factored in. Here’s the complete 2026 cost breakdown.
401(k) Cost Components for Small Businesses
1. One-Time Setup Cost: $500–$2,000
Setting up a 401(k) plan involves one-time establishment fees paid to the Third Party Administrator (TPA) and plan custodian. Most small businesses pay $500–$2,000 for plan setup. Flat-fee TPAs are becoming the norm for small businesses and typically offer the most transparent pricing.
2. Annual Administration Fee: $1,000–$3,000/year
Annual admin costs include:
- IRS Form 5500 preparation and filing
- Annual non-discrimination testing (ADP/ACP)
- Plan document maintenance and updates
- Employee communication and enrollment materials
For businesses with 10–50 employees, flat-fee annual admin typically runs $1,000–$3,000 per year.
3. Per-Participant Fee: $20–$60/year per employee
Some plans charge a per-participant fee on top of the base admin fee. This covers individual account maintenance, statements, and recordkeeping. For a 20-person business at $40/participant, that’s $800/year.
4. Employer Match: Optional, Tax-Deductible
Employer matching is optional but can be a powerful recruiting tool. A common match structure is 50% of employee contributions up to 6% of salary. For a $50,000/year employee contributing 6%, that’s a $1,500/year employer cost. This is 100% tax-deductible as a business expense.
Real Total Cost Example: 20-Person Business
| Cost Item | Annual Cost |
|---|---|
| Annual TPA admin fee | $1,500 |
| Per-participant fee (20 × $40) | $800 |
| Employer match (optional, 50% up to 6%) | $15,000–$30,000 |
| Total Admin Cost (no match) | $2,300/year |
SECURE 2.0 Tax Credits: Dramatically Reduce Your Net Cost
The SECURE 2.0 Act provides generous federal tax credits for businesses setting up new 401(k) plans:
- Startup cost credit: 100% of setup and admin costs, up to $5,000/year for 3 years = up to $15,000 total
- Auto-enrollment credit: $500/year for 3 years if automatic enrollment is used
- Employer match credit: For businesses with 50 or fewer employees, up to $1,000/employee/year for 5 years
For a 20-person business, the SECURE 2.0 credits alone can cover all administrative costs for the first 3+ years.
401(k) Cost vs. State Mandate Penalty: The ROI
For a 20-person California business not in compliance with CalSavers:
- State mandate penalty Year 1: $5,000 ($250 × 20)
- State mandate penalty Year 2+: $10,000/year ($500 × 20)
- 401(k) annual admin cost after SECURE 2.0 credits Year 1–3: ~$0
A private 401(k) essentially pays for itself in penalty avoidance alone — while providing dramatically better retirement benefits for you and your employees.
🔗 Calculate your penalty exposure: State Mandate Penalty Calculator
