3 Mistakes to Avoid When Setting Up a 401(k) Plan in 2026
May 18th, 2026 | 6 min. read
Offering a retirement plan is a great benefit that helps employees build their future while making your company more attractive to top talent. But for business owners, what starts as a great perk can quickly turn into a compliance nightmare if it isn't managed properly.
To help you avoid these missteps in 2026, we’re breaking down the three most common mistakes employers make when setting up a retirement plan so you can avoid them.
Mistake #1: Not Understanding the Retirement Plan You Have
When setting up a group retirement plan, you will fill out a bunch of forms. It's easy to write off all this paperwork as a mundane administrative task, but it creates the framework of what you can and cannot do within your plan (this framework is called a Plan Document, which is really important).
A retirement plan is subject to the Employee Retirement Income Security Act of 1974 (ERISA), passed to protect employee benefits from being mismanaged by those in charge of the plans. Because of this, there are a few items that you need to pay special attention to when forming your plan.
Types of Contributions
When you create your retirement plan, you will elect the types of contribution sources your employees can select from. The three most common sources are traditional, Roth, and loans.
1. Traditional Contributions: the most common type of retirement funding
A traditional contribution allows your employees to defer their compensation to their retirement years. An employee will elect to have some of their pay deducted from their paycheck and invested in their retirement account. In doing so, the employee does not pay income tax on the amount withheld until they receive the funds in retirement. This is an immediate tax benefit.
However, any growth in the invested amount will also be taxed when the employee withdraws the funds. For example, if I contributed $100 to my retirement account today, I would not pay income tax on that $100 this year. Instead, I would pay income tax on that amount, plus however much my contribution grew, when I accessed these funds in retirement.
2. Roth Contributions: after-tax deductions that grow tax-free
Another common type of retirement contribution is a Roth. A Roth contribution is an after-tax deduction that grows tax-free within an employee’s retirement account. Using the same $100 contribution as above, I would pay income tax on that contribution in the current year. But when I accessed my retirement funds in the future, I would not owe any additional tax.
This is a real advantage when you consider that most of the funds available in retirement come from the growth on the contributions, not the principal itself. Because of the tax benefits of a Roth account, we recommend always allowing employees to contribute to a Roth account when setting up a plan.
For 2026, the employee contribution limit for a 401(k) is $24,500. If you're 50 or older, you can contribute up to $32,500, and a new "super catch-up" for ages 60-63 allows up to $35,750.
3. Loans: subject to specific terms
A third option that some employers will allow is loans against a retirement plan. The specifics of how loans work will be dictated by the chosen record keeper, but it is common to see loans up to 50% of an employee’s vested balance or $50,000, whichever is less.
With a retirement loan, employees receive funds from their own account that must be paid back within specific terms. Allowing loans comes with an administrative burden that must be followed precisely so you don't violate the terms outlined in the plan. For this reason, some employers choose not to allow loans at all.
Entry Dates
Once you’ve decided which contributions your plan will allow, you’ll also choose plan entry dates. These are the dates when employees can begin participating.
It may seem like employees should be able to jump into the plan at any time, but that’s only true if your plan is set up that way. Other options include monthly, quarterly, or semi-annual entry dates.
One of the benefits of setting specific plan entry dates is that you can handle enrollments on a fixed schedule instead of reacting every time a new employee decides they want to join.
Employer Contributions
This is where some of the fun begins! One of the reasons you may have considered starting a group retirement plan is to contribute to your employees’ futures, which is an awesome benefit!
A few ways you can contribute to an employee’s retirement plan will be outlined in your group’s Plan Document. The important part to consider is whatever you decide on, make sure EVERYONE on your team is aware of the rules. And whatever rules you set, you must follow them consistently. Every. Single. Time.
If you deviate from the contribution rules you originally established, you risk violating ERISA regulations, which can lead to costly fines and administrative headaches.
Eligibility Rules
Finally, when you set up your plan, pay special attention to who is eligible to participate. You can specify age requirements, hours worked, and employee classifications to determine eligibility. The two most common eligibility rules are:
- Minimum Age Requirement – Many plans require employees to be at least 21 years old to participate.
- Hours Worked Requirement – If you want to limit participation to full-time employees, you can set a minimum number of hours worked per year.
Setting these clear eligibility rules upfront keeps your plan focused on the right employees and prevents it from extending to those who don’t meet your requirements.
Important update: Under SECURE 2.0, any new 401(k) plan established after December 29, 2022, must automatically enroll eligible employees. The starting contribution rate must be at least 3% (but no more than 10%), and it must increase by 1% each year until it reaches at least 10% (up to 15%). Employees can always opt out, but this is no longer optional for new plans. It's required.
Mistake #2: Manually Tracking the Plan
By now, you probably realize that a retirement plan comes with a significant amount of administrative work. Luckily, like most things, this can be handled electronically. Automation makes tracking the plan much easier. It's important to understand, though, which pieces of technology need to be involved.
At a minimum, your payroll system and record keeper (investment platform) must work together so employee contributions are deducted, processed, and deposited correctly.
In some cases, your payroll and record keeper will integrate, which keeps the whole process clean and connected. If they don’t, you may need to invest in technology that bridges the gap, because manually tracking these transactions increases the risk of errors.
Because ERISA governs your retirement plan, any mistakes in funding an employee’s retirement plan must be disclosed to the government AND to the employee, which no one wants to do. Most of these errors are simple clerical mistakes, like missing an employee’s enrollment date or miscalculating contributions.
But these mistakes are easy to avoid with technology that tracks eligibility, deductions, and deposits automatically.
Mistake #3: Waiting to Fund the Plan
Whether unintentional or not, failing to funding an employee’s retirement plan within the designated timelines can turn into a serious problem for employers.
The IRS has strict deadlines for when funds must be deposited, depending on the type of contribution and the type of plan. If you miss those deadlines, you risk fines and compliance issues.
While watching cash flow is important, we recommend funding all contributions as part of your regular payroll process to avoid getting into trouble.
For example, 401(k) plans require employee contributions to be deposited within 15 business days after the end of the month in which the money was deducted.
That means:
- A January 1st paycheck deduction must be deposited by February 15th.
- A January 31st paycheck deduction must also be deposited by February 15th.
Instead of tracking these deadlines manually, we recommend keeping things simple by making deposits at the same time payroll is processed. If an employee’s paycheck is processed on January 1st, deposit their contribution on January 1st.
The benefit here (besides avoiding compliance issues) is that you can close out every task tied to that payroll at the same time you close the payroll itself. No need to let those tasks linger and risk being forgotten. As we mentioned earlier, with the automation available between a record keeper and payroll system, this should be as simple as a few clicks.
Is Your Retirement Plan Set Up the Right Way?
Retirement plans can be a benefit your employees genuinely value. In fact, according to SHRM's 2025 Employee Benefits Survey, retirement savings and planning benefits tied for the second most important benefit category, with 81% of employers rating them "extremely important" or "very important," right behind health benefits.
If you're considering offering this benefit (or if you already have a plan in place), take a minute to talk with your payroll and human resources team to see if they understand your plan. Ask them how they're tracking the rules of the plan, and look into the timeline for when your plan is funded.
Get Payroll and 401(k) on the Same Page
Small adjustments now can prevent big problems later. And if you’re unsure about something, it’s always better to get ahead of it before it turns into a compliance issue.
A 401(k) plan doesn’t run itself. Every contribution, every match, and every deposit starts with payroll. If the two aren’t working together, mistakes are bound to happen. Things like missed deductions, late deposits, and extra admin work that no one has time for.
The simplest way to avoid all of that is to integrate your 401(k) with payroll. It’s a small step that removes delays, keeps your plan compliant, and saves you a lot of time down the road.
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