A 401(k) for a Small Business: Deferral Limits and Basic Rules
Published November 7, 2026
Publication 560 (2025), Retirement Plans for Small Business, covers qualified plans. An employer or a self-employed person can set one up. This guide covers one of them: the 401(k) plan. It is general information. It is not advice about your case.
What a 401(k) plan is
A 401(k) is a cash or deferred arrangement. Under it, a participant can choose to defer part of their before-tax pay. That pay goes into the plan. The alternative is receiving that pay in cash. The publication calls this an elective deferral. A self-employed person in the plan can contribute part of the before-tax net earnings from the business.
A qualified plan can include this arrangement only in two cases. It can be a profit-sharing plan. Or it can be a money purchase pension plan. That plan already had a salary reduction arrangement on June 27, 1974. A partnership can have a 401(k) plan.
The 2025 limits
The publication gives these limits for 2025, with the 2026 figures for comparison:
- Elective deferrals: $23,500 for 2025, and $24,500 for 2026. The limit applies to all salary reduction contributions and elective deferrals. It applies regardless of community property laws.
- Catch-up contributions: for participants age 50 or over, $7,500 for 2025 and $8,000 for 2026. This applies to plans other than SIMPLE plans.
- Employee compensation: $350,000 of compensation can be counted for contributions other than elective deferrals in 2025, and $360,000 for 2026.
- Overall contribution limit: $70,000 for 2025, and $72,000 for 2026, for contributions other than catch-up contributions.
If a participant's deferrals exceed the limit, the excess is included in gross income. The publication says so. This includes deferrals under other plans. The publication also explains catch-up contributions. A plan can permit them. A participant's catch-up contribution for a year has a cap. It cannot be more than the smaller of two amounts. One is the catch-up limit. The other is the excess of compensation over the other elective deferrals.
Contributions from the employer
The plan can permit matching contributions. The publication's example is a plan that contributes 50 cents for each dollar an employee defers. The employer can also make nonelective contributions. Participants do not get a choice to take cash instead. Matching contributions are generally subject to the actual contribution percentage test.
Setting up a plan involves a written plan document. The publication has a chapter on adopting a written plan, and another on the minimum funding requirement. It also has a chapter on the employer deduction for contributions.
Eligibility and automatic enrollment
The publication says a 401(k) plan cannot require a long period of service. The limit is the earlier of one year of service or two consecutive 12-month periods. Each period needs at least 500 hours. This applies to plan years beginning after 2024. A plan set up on or after December 29, 2022 generally must include automatic enrollment. An exception may apply.
A smaller option: SIMPLE 401(k)
If you had 100 or fewer employees, you may be able to set up a SIMPLE 401(k) plan. Those employees must have earned $5,000 or more in the prior year. The publication says a SIMPLE 401(k) is not subject to the nondiscrimination and top-heavy rules. Those rules apply to other qualified plans. For a comparison, see our guide to SIMPLE IRA plans.
The self-employed and the limit
A self-employed person can make elective deferrals from net earnings from the business. Those deferrals count toward the same annual limit as any other elective deferrals.
Other topics in the publication
The publication also covers distributions from 401(k) plans, prohibited transactions, and reporting requirements. One reporting item it lists is Form 5500, the annual return or report of an employee benefit plan. It also lists a qualified Roth contribution program as a separate topic. Ask who will handle the filings before you adopt a plan.
Next steps
Decide whether the plan is for you. Then decide who would be eligible. Read the publication's chapter on elective deferrals. Then check the limits that apply to your plan year. Keep records of each participant's deferrals. Keep records of each employer contribution too. A plan administrator or tax professional can help. They can set up the plan and check the limits for the year.
Sources: Sources: IRS, Publication 560 (2025), Retirement Plans for Small Business (https://www.irs.gov/pub/irs-pdf/p560.pdf) This is general information, not advice about your specific return.
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