401(k) Plan Eligibility
Generally, any business may have a 401(k) plan. In establishing a plan, the employer sets the eligibility requirements. For example, employees under the age of 21 or who have not accrued one year of service may be excluded.
Tax Advantages
As an employer, you normally can deduct contributions you make on behalf of your employees from your business expenses.
Any eligible employees may elect to defer part of their salary and direct that money into 401(k) accounts. Because these contributions are deferred before certain taxes are withheld, they actually reduce contributing employees’ taxable income. Any earnings within the account enjoy tax-deferred growth until withdrawn.
Employees can also elect to defer part of their salary into a Roth 401(k) account. Roth 401(k) account contributions do not reduce an employee’s taxable income, however qualified distributions (including earnings) are tax-free.
Solo 401(k) Spotlight
Employer contributions to a Solo 401(k) are tax-deductible, plus salary deferrals are deductible, benefiting both your business and you!
Establishment Deadlines
Employers who want to establish a 401(k) plan must do so by the last day of the plan year (usually the calendar year), which requires in-good-order paperwork to be received by October 31st.
Safe-harbor plans must be established by October 1st.
Other Key Advantages
- Allows for profit-sharing contributions
- Vesting schedule applies to employer contributions
- Certain penalty-free withdrawals
- Loans, hardship withdrawals, and Roth contributions are allowed
Contribution Flexibility
- Employee contributions – Eligible employees can elect to defer up to 100% of their compensation up to a maximum of $23,000 for 2024 and $23,500 for 2025. Employees age 50 and older can make additional catch-up contributions up to $7,500 for 2024 and 2025. Starting 2025, employees aged 60 to 63 can make enhanced catch-up contributions up to $11,250
- Employer contributions1 – Employers may contribute, on behalf of each eligible employee, up to 25% of their compensation or $69,000 (less employee contributions) for 2024, and $70,000 for 2025, whichever is less.
- Total contributions – Total (aggregate) contributions for each employee cannot exceed $69,000 (plus applicable catch-up contributions) for 2024, and $70,000 for 2025.
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| 401(k) Contribution Limits | 2024 | 2025 |
| Eligible Employee Contributions | $23,000 | $23,500 |
| Catch-up Contributions (age 50 and older) | $7,500 | $7,500 |
| Enhanced Catch-up Contributions (ages 60 to 63 only) | n/a | $11,250 |
| Employer Contributions | Varies (employee contributions affect the amount an employer can contribute) | Varies (employee contributions affect the amount an employer can contribute) |
| Total aggregate contribution limits (employee + employer) | $69,000 ($76,500 including catch-up contributions) | $70,000 ($77,500 including catch-up contributions) |
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1 Employer contributions are tax-deductible up to this level. Amounts contributed in excess, while allowed, are not tax-deductible.