Yes. Gusto offers comprehensive 401(k) plans for businesses of all sizes. According to IRS regulations on 401(k) plans, a 401(k) is a tax-advantaged retirement account that allows employees to save for retirement while receiving potential employer matching contributions.

Gusto provides multiple types of 401(k) plans, including traditional 401(k)s, Solo 401(k)s for self-employed individuals, and Safe Harbor 401(k)s, making retirement savings accessible to nearly any business structure. Over 1.3 million Americans use Gusto for payroll and benefits management, with retirement benefits representing a growing segment of their service offerings.

What you’ll learn:

• 🎯 How Gusto’s 401(k) plans work and which type fits your business
• 💰 Real-world examples showing employer and employee contributions
• ⚖️ Compliance requirements and how Gusto helps avoid penalties
• 📋 Step-by-step process for setting up and managing a plan
• ✅ Common mistakes businesses make and how to prevent them

Understanding Gusto’s 401(k) Offerings and Plan Types

Gusto partners with Guideline, an ERISA-regulated administrator, to deliver 401(k) plans that meet federal requirements. Guideline handles the complex administrative tasks like plan administration, compliance monitoring, and regulatory filings that would otherwise overwhelm small business owners. The partnership allows Gusto users to access professionally managed retirement plans without the extensive overhead typically associated with traditional 401(k) administration.

Gusto offers three primary 401(k) plan structures, each designed for different business scenarios. The traditional 401(k) works for employers with multiple employees, allowing both employer and employee contributions with tax advantages. The Solo 401(k) serves self-employed individuals and business owners with no employees, enabling higher contribution limits since both employer and employee contributions come from the same person. The Safe Harbor 401(k) provides automatic enrollment and guaranteed employer contributions, eliminating the need for annual non-discrimination testing that standard 401(k)s require.

The Legal Framework: Why 401(k) Regulations Matter

The Internal Revenue Code Section 401(k) establishes the basic rules for retirement plans and defines how employers can offer them to employees. Under this federal law, employers must follow strict guidelines about contribution limits, employee eligibility, and non-discrimination rules to maintain tax-advantaged status. Violating these rules triggers substantial penalties, including potential excise taxes of 15% or more on excess contributions and loss of the plan’s tax-qualified status.

ERISA (Employee Retirement Income Security Act) imposes fiduciary duties on employers, meaning they must act in the best interest of plan participants and follow specific procedures for plan administration. The Department of Labor enforces ERISA compliance, and non-compliance can result in civil penalties up to $1,000 per day of violation. Gusto’s partnership with Guideline transfers much of this administrative burden, but employers retain ultimate responsibility for ensuring the plan operates legally.

Contribution limits are established by the IRS annually and adjust for inflation. For 2024, employees can contribute up to $23,500 to a traditional or Roth 401(k), with an additional $7,500 catch-up contribution allowed for those 50 and older. Employers can contribute up to 25% of employee compensation, though the combined employee-employer limit is $69,000 per year (or $76,500 for those 50 and older with catch-up contributions).

How Gusto’s 401(k) Plans Actually Work

Setting up a Gusto 401(k) begins with selecting the plan type that matches your business structure and goals. Small business owners log into their Gusto account, access the retirement benefits section, and answer questions about their business size, industry, and employee count. Gusto’s platform then recommends the appropriate plan type and provides an estimated cost based on administrative fees and employer contribution levels.

Once a plan type is selected, Gusto handles the filing of Form 5500 annually, which is required by the IRS for all 401(k) plans with 100 or more participants. This form reports plan information, participant data, and financial information to the IRS and Department of Labor. Gusto automates much of this process, pulling payroll data directly to populate the required fields, reducing errors and ensuring timely filing.

Employee participation begins with enrollment, during which workers choose their contribution percentage and investment selections from available fund options. Gusto integrates with payroll, automatically deducting the chosen percentage from each paycheck and depositing contributions into employee accounts. Employers can set up automatic payroll deductions for their matching contributions, ensuring consistency and eliminating the need for manual calculations.

Real-World Scenario 1: The Startup Building a Benefits Package

Situation: Sarah owns a tech startup with eight employees earning between $40,000 and $85,000 annually. She wants to offer competitive benefits to attract and retain talent but lacks the expertise to manage a retirement plan. She chooses Gusto’s traditional 401(k) with a 3% employer match.

Action & Consequence Table

This scenario demonstrates how Gusto removes administrative complexity from Sarah’s operations while maintaining full legal compliance. Her employees benefit from tax-deferred retirement savings, and Sarah gains a recruiting advantage. The per-employee cost to Sarah is approximately $5-$8 per month through Gusto’s bundled pricing, making it affordable for a growing business.

Real-World Scenario 2: The Solo Entrepreneur Maximizing Retirement Savings

Situation: Marcus is a self-employed consultant earning $120,000 annually with no employees. Traditional 401(k)s don’t fit his situation, but a Solo 401(k) allows him to contribute significantly more than other retirement account types. He opens a Gusto Solo 401(k) to maximize tax-advantaged savings.

Action & Consequence Table

Marcus’s Solo 401(k) allows him to save significantly more than a traditional IRA, which caps contributions at $7,000 annually. This scenario shows how Gusto makes sophisticated retirement planning accessible to solo entrepreneurs who otherwise might lack the knowledge or resources to set up and manage such plans independently.

Real-World Scenario 3: The Established Company Switching to Safe Harbor

Situation: A 45-person manufacturing company previously used a traditional 401(k) but struggled with annual non-discrimination testing that repeatedly showed violations. The company switches to Gusto’s Safe Harbor 401(k), which automatically satisfies non-discrimination requirements through guaranteed contributions.

Action & Consequence Table

This scenario illustrates how switching to Safe Harbor addressing compliance problems while improving employee participation and benefits. The mandatory employer contribution increases costs but eliminates expensive testing failures and the risk of plan disqualification.

Setting Up Your Gusto 401(k): Step-by-Step Walkthrough

The Gusto setup process begins in your dashboard where you’ll select the retirement benefits option and answer basic business questions. The platform asks about your business structure (sole proprietor, LLC, C-corporation, etc.), number of employees, average employee salary, and your preferred employer contribution strategy. These answers determine which plans are available and help Gusto estimate your costs.

After selecting your plan type, you’ll establish investment options for employees by choosing from a curated list of funds offered through Gusto’s partners. Gusto typically provides 10-20 professionally managed fund options ranging from conservative to aggressive investment strategies. Employees can select from these funds when enrolling, or they can use Gusto’s automated investment advisory service that creates a portfolio based on their age and risk tolerance.

Setting your employer contribution strategy is a critical decision that affects your costs and employee benefits. You can choose no employer match, a discretionary match (contributed when profitable), a dollar-for-dollar match up to a percentage, or a non-elective contribution given to all employees. Gusto’s calculator shows how each option affects your estimated costs based on your payroll.

Once you’ve made your selections, Gusto generates enrollment materials and sends invitation emails to your employees with a unique enrollment link. Employees log in, review the plan details, select their contribution percentage and fund choices, and confirm their enrollment. Gusto then processes the setup with the IRS and Department of Labor, typically completing the entire process within 2-4 weeks.

After setup, managing the plan is straightforward within Gusto’s system. Each payroll cycle, Gusto calculates employee contributions based on their election percentages and your employer match formula. The contributions are automatically transferred to the retirement accounts held with Guideline, and Gusto generates detailed reports showing each employee’s balance and contribution history.

Do’s and Don’ts: Operating Your Gusto 401(k) Properly

Do’s:

Establish a clear, written employee eligibility policy stating when new hires can participate (typically after 30-60 days of employment).

Communicate regularly with employees about their account balances and investment options, as plan participation increases when employees understand their benefits.

Monitor your contribution strategy regularly to ensure it remains affordable and competitive for your business.

Ensure your business accurately classifies workers as employees versus contractors, as misclassification can disqualify your plan.

Use Gusto’s compliance dashboard to review plan reports annually and confirm everything is operating within IRS guidelines.

Don’ts:

Discriminate in contributions by favoring highly compensated employees, as this violates IRS non-discrimination rules and can result in plan disqualification.

Stop employer contributions mid-year or change your contribution strategy frequently, as consistency is required by IRS regulations.

Fail to deduct employee contributions from paychecks or fail to submit them timely, as this is considered an employee theft of benefits.

Allow loan provisions unless your plan document specifically permits them, as unauthorized loans can trigger penalties.

Ignore Gusto’s compliance alerts or skip annual Form 5500 filing, as missing deadlines results in substantial IRS penalties.

Pros and Cons of Gusto’s 401(k) Solution

Common Mistakes to Avoid

Failing to communicate about the 401(k) is a frequent error that results in low participation rates and missed tax savings for employees. When employees don’t understand their plan or how it works, many skip enrollment entirely, missing years of employer contributions and tax advantages. Gusto provides templates and communication tools, but employers must actively engage employees about enrollment deadlines and the value of retirement saving.

Misclassifying workers as independent contractors instead of employees to avoid offering 401(k) coverage violates labor laws and creates liability. The IRS and Department of Labor have specific tests for determining worker classification, and misclassification can trigger audits and substantial back-pay obligations. If you have workers who should be classified as employees, they must be offered the same 401(k) benefits as other employees.

Changing your contribution strategy frequently creates confusion and administrative chaos within your payroll system. An employer who commits to a 5% match but reduces it mid-year without proper notice violates ERISA communication requirements and damages employee trust. Once you establish a contribution strategy through Gusto, maintain it consistently for at least one full plan year before making changes.

Ignoring compliance deadlines, particularly the annual Form 5500 filing deadline, results in IRS penalties and potential plan disqualification. The form must be filed by the 15th of the third month after your plan year ends (typically March 15th for calendar-year plans). Gusto sends reminders and automates the filing process, but employers must ensure their payroll data is accurate and complete for the filing to be correct.

Loan defaults and unpaid hardship withdrawals create accounting complications and can trigger prohibited transaction penalties. When employees borrow from their 401(k) through Gusto’s loan feature, they must repay the loan with interest according to the plan rules. If an employee leaves without repaying, the outstanding balance becomes taxable, and failure to handle this properly creates plan compliance issues.

Gusto 401(k) Compliance: What You Must Do

Your business must file Form 5500 with the Department of Labor if your plan has 100 or more participants on the first day of the plan year. For plans with fewer than 100 participants, filing is optional but Gusto recommends it for added protection and to maintain clear records. Gusto automates this process, but you must provide accurate payroll and contribution data.

Non-discrimination testing ensures your 401(k) doesn’t disproportionately benefit higher-paid employees, a requirement under the IRS’s section 401(k) regulations. If you choose a traditional 401(k), Gusto calculates testing results annually and alerts you if corrections are needed. Safe Harbor 401(k)s automatically pass non-discrimination testing because they include guaranteed employer contributions that apply equally to all employees.

Plan documents must be updated within certain time periods when IRS regulations change, typically within 12 months of new regulation release. Gusto handles these document updates on your behalf, ensuring your plan remains current with federal law. You’ll receive notifications when updates occur, but no action is required from your business.

Employee eligibility requirements must be documented and applied consistently, with no discrimination based on age, salary, or tenure beyond what federal law permits. You can require employees to complete 1,000 hours of service during a 12-month period before eligibility, or you can use a 90-day waiting period after hire date. Once you establish your eligibility requirements in Gusto, the system applies them automatically to all employees.

Employer contributions must be fully funded by the time Form 5500 is due for each plan year, even if contributions were not made during the year. This means if you promised a 3% match for 2024, all matched contributions must be deposited into accounts by March 15, 2025. Gusto tracks your funding obligations and alerts you to any contributions that remain unpaid.

Comparing Gusto to Other 401(k) Providers

Gusto competes primarily with Fidelity’s small business 401(k), which offers similar plan types and comparable pricing. Fidelity provides a broader investment fund selection and serves larger businesses, while Gusto focuses on payroll integration and simplicity. Both providers offer solid compliance support, though Gusto’s integration with its payroll platform gives it an edge for businesses already using Gusto for HR and payroll.

Guideline, Gusto’s administrator partner, also serves businesses directly without payroll integration. Guideline typically costs slightly less than Gusto’s bundled offering but requires separate payroll management, making it better suited for businesses that don’t use Gusto for payroll. Paychex and ADP also offer 401(k) services alongside payroll, providing alternatives if your business prefers larger, more established providers.

E-LOAN and Betterment 401(k) focus on lower-cost index fund options and appeal to businesses seeking minimal fees. However, these platforms provide less personalized support and fewer plan customization options than Gusto. For businesses seeking simplicity and strong compliance support integrated with payroll, Gusto remains a top choice for small to mid-sized companies.

Gusto 401(k) Costs Explained

Gusto charges per-employee per-month pricing that typically ranges from $5 to $12 per employee depending on your plan type and contribution strategy. A business with 20 employees might pay $100-$240 monthly, while a business with 100 employees pays $500-$1,200 monthly. These fees cover plan administration, compliance monitoring, Form 5500 filing, and investment management through Gusto’s partner fund managers.

Administrative fees are separate from investment management fees charged by the mutual funds within your plan. Most Gusto plans include funds with expense ratios of 0.10% to 0.40% annually, which is competitive with industry standards. These fund fees are deducted from account balances automatically and don’t appear as separate charges to your business.

Setup fees vary but typically range from $0 to $500 depending on the plan type and complexity, with many plans offered with no setup fee when bundled with Gusto’s payroll service. Some businesses qualify for fee waivers if they meet certain criteria, such as having fewer than 10 employees or being in specific industries. You should ask Gusto about available discounts when you’re considering a plan.

Employer contributions themselves are not “fees” but rather your mandatory business expense for offering the 401(k). If you commit to a 3% match on $600,000 in annual payroll, you’ll contribute $18,000 annually. This is separate from Gusto’s administrative fees but is part of the total cost of offering the plan.

Mistakes to Avoid During Setup

Selecting an employer contribution strategy without calculating your actual costs is a common setup error that leads to financial strain later. Before committing to a 5% match, calculate what 5% of your total payroll actually costs and confirm your business can sustain it year-round. Gusto provides a cost calculator, but you should also run your own numbers and review with your accountant.

Rushing through plan document review without understanding what you’re authorizing can result in features you don’t want or terms that don’t fit your business. The plan document is a legal contract that defines how your 401(k) operates, and you should take time to understand key provisions like eligibility rules, vesting schedules, and withdrawal restrictions. If you have questions, Gusto’s support team can explain specific provisions.

Failing to plan for growing administrative complexity as your business scales is another setup error. If you plan to grow to 100+ employees, you should understand that Form 5500 filing becomes mandatory and compliance requirements increase. Starting with a plan that scales well (like Gusto) prevents the need to switch providers mid-stream.

Not communicating your choice to employees immediately after setup wastes valuable enrollment time. The sooner employees know about the plan, the more time they have to decide and set up their contribution elections. Gusto provides enrollment templates, but you should send the first announcement within days of plan approval.

Vesting Schedules and Employee Rights

Vesting refers to the timeline for when employer contributions actually belong to the employee and become accessible if they leave the company. The IRS allows employers to choose vesting schedules under the Employee Retirement Income Security Act, with common options being immediate vesting (contributions belong to employees immediately) or cliff vesting (contributions vest after 3 years). Three-year cliff vesting means an employee receives zero vesting credit for years 1-2 and then vests 100% in year 3.

Some employers use graded vesting where employees vest incrementally over time, such as 20% per year over five years. Gusto allows you to select your vesting schedule during setup, and the system applies it automatically to all future employer contributions. Your vesting choice significantly affects employee retention, as employees are more likely to stay with an employer offering immediate vesting or rapid vesting schedules.

Employee contributions always vest immediately, meaning employees always own 100% of the salary deferrals they contribute from their own paychecks. Only employer contributions (matches and non-elective contributions) are subject to vesting schedules. This distinction is important for employee communication, as employees should understand they immediately own their own contributions.

Rollovers and Plan Transfers

If an employee leaves your company, they can typically roll over their 401(k) balance to an IRA (Individual Retirement Account) or their new employer’s 401(k) plan without triggering taxes or penalties. Gusto provides rollover forms and instructions to departing employees, making the process simple. Rollovers must occur within 60 days of receiving the distribution, or the amount becomes taxable as ordinary income.

If an employee takes a loan against their 401(k) balance through Gusto’s loan feature and then leaves the company, the outstanding loan balance typically becomes due within a short timeframe (usually 60-90 days). If not repaid, the balance is treated as a distribution and becomes taxable. Employees should understand this before taking loans, as it creates an obligation when they separate from the company.

Direct rollovers, where funds transfer directly from your Gusto plan to an IRA or new employer plan, avoid the 60-day rollover deadline requirement. This is the simplest method for departing employees and minimizes tax complications. Gusto facilitates direct rollovers on behalf of employees with minimal paperwork.

Rehires can re-join the 401(k) plan if they return to work for your company, and their previously vested balances typically remain in the plan. Gusto tracks participation history, so rehired employees can resume contributions immediately upon rehire. You should establish a clear policy about whether rehires must re-satisfy eligibility requirements or if they can resume participation immediately.

Safe Harbor 401(k) Plans in Detail

Safe Harbor 401(k) plans eliminate the need for annual non-discrimination testing by requiring employers to make automatic contributions to all employees. Under IRS regulations for Safe Harbor plans, you must contribute either a 3% non-elective contribution (given to all employees regardless of whether they contribute) or a 100% match up to 3% of employee contributions. These automatic contributions ensure that lower-paid employees benefit proportionally, eliminating testing failures.

The tradeoff is that Safe Harbor plans require guaranteed contributions from your business, making them more expensive than traditional 401(k)s for many employers. However, the cost savings from eliminating annual testing and the compliance certainty often justify the increased contribution expense. Small businesses with high turnover or low-paid workforces often benefit most from Safe Harbor plans.

Safe Harbor plans also include automatic enrollment requirements, meaning employees are enrolled at a default contribution rate (typically 3%) unless they opt out. This increases participation rates significantly compared to traditional plans where employees must actively choose to enroll. Higher participation helps build a culture of retirement saving and can improve employee morale.

Solo 401(k) Details for Self-Employed Individuals

A Solo 401(k) is designed specifically for self-employed business owners and their spouses with no employees (though one employee can be hired under certain conditions). The solo structure allows contributions as both an employee and an employer, enabling total contributions up to $69,000 annually (or $76,500 with catch-up at age 50+). Compare this to a traditional IRA’s $7,000 annual limit, and the Solo 401(k) becomes attractive for high-earning self-employed individuals seeking maximum tax-advantaged retirement savings.

Contributions are divided into two parts: employee deferrals (up to $23,500 annually) come from business income and reduce your tax liability, while employer contributions (up to 25% of net self-employment income) also reduce your business taxes. For a self-employed person earning $150,000 annually, total Solo 401(k) contributions could reach approximately $60,000, providing substantial tax deductions.

Solo 401(k)s offer loan provisions allowing you to borrow against your balance, which can be useful if you face a cash shortage. However, loans must follow strict repayment terms, and failure to repay results in taxes and penalties. Gusto’s Solo 401(k) through Guideline handles the complex calculations and documentation automatically.

State-Specific Considerations and Variations

While 401(k)s are federally regulated, some states impose additional requirements or offer alternative retirement savings programs. California’s CalSAVE program requires employers without retirement plans to offer automatic enrollment in an IRA, though employers using Gusto’s 401(k) are exempt from this requirement. New York’s Secure Choice program similarly requires employers to offer retirement savings or participate in the state program.

Illinois, Maryland, and Connecticut have passed similar state-level retirement security laws that may apply to your business depending on where your employees work. These state programs generally accept 401(k) plans as meeting the requirement, so Gusto users are typically compliant without additional action. However, you should verify your state’s specific requirements, particularly if you have employees in multiple states.

Some states impose additional reporting or withholding requirements for 401(k) distributions, and Gusto’s system automatically handles these state-specific calculations. If you operate in a state with unique retirement security requirements, mention this during Gusto setup so they ensure your plan meets all state obligations.

Investment and Account Management Within Gusto

Gusto’s 401(k) platform typically offers 10-20 fund options including stock index funds, bond funds, target-date funds, and money market funds. Target-date funds automatically adjust from aggressive to conservative allocations as retirement approaches, making them ideal for employees who prefer a hands-off approach. Most funds have expense ratios of 0.10% to 0.40% annually, which is competitive with industry standards.

Gusto provides an automated investment advisory service that analyzes each employee’s age and risk tolerance, then recommends a personalized portfolio. Employees can accept the recommendation or manually select specific funds. This tool increases participation among employees uncertain about investment choices and improves overall plan engagement.

Employees can rebalance their portfolios and adjust their fund selections through Gusto’s online dashboard typically without restriction, though some plans limit changes to once per year. Frequent trading creates administrative complexity, so you may want to communicate expectations about appropriate rebalancing frequency. Most employees benefit from a buy-and-hold strategy rather than frequent adjustments.

Account statements and performance reports are available to employees through Gusto’s portal, showing current balances, investment performance, and contribution history. These statements are generated quarterly, and employees can download statements for tax or personal record-keeping purposes. Regular statements promote engagement and help employees understand their retirement savings progress.

Automatic Enrollment and Employee Participation

Gusto supports automatic enrollment features for plans that opt into this design, automatically enrolling new employees at a default contribution rate (typically 3%) unless they actively opt out. Automatic enrollment significantly increases participation rates compared to traditional opt-in plans, where employees must choose to participate. Studies show automatic enrollment increases plan participation from approximately 60% to over 85%.

Safe Harbor 401(k)s require automatic enrollment by law, while traditional 401(k)s can implement it optionally. Even if not required, automatic enrollment can be a powerful retention and engagement tool. The downside is that some employees may resent being auto-enrolled and may opt out without fully understanding the long-term costs of not saving.

Gusto sends enrollment notices and completion reminders to employees, and the system tracks enrollment status for each worker. You can view enrollment reports through Gusto’s dashboard to monitor who has participated and identify employees who may need additional encouragement or education about the plan.

Reenrollment windows typically occur annually, allowing employees to adjust their contribution percentages or investment selections. If an employee doesn’t make changes, their existing elections continue into the new plan year. Clear communication about enrollment deadlines and the ability to make changes helps maintain full participation.

Tax Implications for Employers and Employees

Employee contributions to a traditional 401(k) are made on a pre-tax basis, meaning they reduce the employee’s taxable income for the year and lower federal income taxes owed. For an employee earning $50,000 who contributes $5,000 to a 401(k), their taxable income becomes $45,000, reducing their federal income tax by approximately $1,000-$1,500 depending on their tax bracket.

Employer contributions and matching funds are tax-deductible business expenses for the employer, providing direct tax savings. A business contributing $30,000 annually toward employee matches can deduct this amount from business income, reducing the company’s federal income tax liability by approximately $7,500 (at a 25% tax rate). This tax benefit partially offsets the actual contribution cost.

Roth 401(k) options, available through some Gusto plans, use after-tax contributions but provide tax-free distributions in retirement. An employee choosing a Roth 401(k) contribution of $5,000 doesn’t receive an immediate tax deduction, but when they withdraw money in retirement, both the contributions and growth are received tax-free. For younger employees expecting higher tax rates in retirement, Roth options can provide valuable tax planning flexibility.

Distribution taxes occur when employees withdraw money from their 401(k), except in specific circumstances like qualified hardship withdrawals or substantially equal periodic payments. Early withdrawals before age 59½ typically face a 10% penalty tax plus ordinary income taxes, resulting in effective tax rates of 40% or higher. Gusto communicates these tax implications to employees to discourage unnecessary withdrawals.

Terminating Your Gusto 401(k) Plan

If your business circumstances change, you can terminate your 401(k) plan, though this involves specific procedural requirements. Gusto handles most termination procedures, including notifying participants, distributing final contributions, and filing final Form 5500-C/R with the Department of Labor. The termination process typically takes 60-90 days, and you cannot use Gusto for new contributions after termination is initiated.

When a plan is terminated, all employer contributions must be fully funded and distributed to employees or transferred to another retirement plan. Employees who leave before receiving their vested balance have the right to demand payment of their vested balance, creating a potential liability if you don’t fund the plan properly during termination. For this reason, plan termination should be carefully planned with your accountant or financial advisor.

Qualified terminations can also occur if your business closes or sells, and Gusto provides guidance on handling 401(k) obligations in business transitions. If your company is acquired, the acquiring company may assume the existing 401(k) plan or terminate it while rolling participants into a new plan, and Gusto facilitates this transition process.

FAQs

Can I offer a Gusto 401(k) part-time to only certain employees?

No. You must offer the same 401(k) plan to all eligible employees based on non-discrimination rules under IRC Section 401(k). However, you can establish different eligibility criteria, such as requiring one year of service before participation is available, but this must apply equally to all employees.

What happens to my employees’ 401(k) balances if I close my business?

Vested balances belong to employees. Your employees can roll over their 401(k) balances to IRAs or new employers’ plans without penalty. Unvested balances are forfeited to the employer, though Safe Harbor plans eliminate unvested balances since contributions are immediately vested. Gusto assists with plan termination and distribution processing.

Can an employee take a loan from their Gusto 401(k)?

Yes. Gusto allows 401(k) loans up to 50% of the employee’s vested balance or $50,000, whichever is less. Employees must repay the loan with interest (typically 2-3% above prime rate) within five years or when they leave employment. Unpaid loans become taxable distributions triggering 10% penalties plus income tax for employees under 59½.

Does Gusto handle payroll tax withholding for 401(k) contributions?

Yes. Gusto integrates 401(k) contributions directly into payroll, automatically withholding pre-tax contributions from employee paychecks and calculating correct tax withholding. Your employees’ W-2 forms reflect the reduced taxable wages from 401(k) contributions, ensuring tax withholding matches actual income subject to tax.

What’s the difference between a Solo 401(k) and a SEP-IRA?

Solo 401(k)s allow higher contributions ($69,000 vs. $69,000 in 2024 for both), but have more paperwork. A SEP-IRA allows contributions up to 25% of business income, which is often lower than Solo 401(k) limits for high earners. Gusto recommends a Solo 401(k) for self-employed individuals earning over $50,000 annually seeking to maximize retirement savings.

How much does a Gusto 401(k) cost compared to setting one up independently?

Gusto’s bundled pricing is typically $5-$12 per employee per month plus administrative fees. Setting up independently through a financial advisor or bank costs $1,500-$5,000+ upfront plus $1,000-$3,000+ annually in administration. Gusto’s integration with payroll and automation typically saves time and reduces errors, justifying the per-employee cost.

Can I change my employer contribution strategy mid-year?

No, not typically. IRS rules require consistency in contribution strategies during a plan year. You can change your strategy for the next plan year, but mid-year changes create compliance complications and can trigger non-discrimination testing failures. Always consult your tax professional before adjusting contributions.

What happens if my 401(k) plan fails an IRS audit?

Non-compliant plans lose tax-qualified status, and all participants owe immediate taxes on accumulated balances. The IRS also assesses penalties of up to 15% on excess contributions and potential sanctions. Gusto’s compliance monitoring and automatic Form 5500 filing significantly reduce audit risk, and compliance failures are extremely rare for Gusto users.

Can I contribute to both a Solo 401(k) and an IRA?

Yes, but total contributions cannot exceed annual limits. You can contribute to a Solo 401(k) ($69,000 in 2024) and a traditional IRA ($7,000 in 2024) in the same year, but if your Solo 401(k) contributions already max out, you’ve used your $69,000 limit. Roth IRA contributions have income limits that may apply to your situation.

Does Gusto 401(k) integrate with my accounting software?

Partially. Gusto integrates with most accounting platforms for payroll and general ledger updates but not directly for 401(k) contribution data. You should track 401(k) payable balances separately and reconcile them monthly with Gusto’s reports to ensure accurate accounting. Your accountant can set up the proper GL accounts for employer contributions and payroll withholding.

What if I hire my first employee—do I need to offer a 401(k)?

No legal requirement exists federally, but state programs may apply. Some states require 401(k) or IRA access once you have eligible employees. Many small employers offer 401(k)s to compete for talent, making it an optional but powerful recruiting tool. Gusto allows you to add the plan anytime as your business grows.

Can an employee cash out their 401(k) when they leave?

Generally no; early distributions face a 10% penalty plus income taxes. Exceptions include substantially equal periodic payments, qualified hardship withdrawals, or age 55 separation, where penalties may not apply. Gusto explains withdrawal options to departing employees, but most should roll balances to new plans or IRAs to preserve tax-deferral benefits.

Does Gusto provide financial advisory services for 401(k) investment choices?

Limited advice is available through automated investment tools. Gusto does not provide personal financial advice (which would require securities licenses), but the platform includes target-date fund recommendations and rebalancing tools. For employees wanting personalized advice, Gusto can connect them to third-party advisors, though that’s a separate engagement.

What compliance documents do I need to keep on file?

Maintain the plan document, annual Form 5500-series filings, trust documents, amendment records, and enrollment/distribution paperwork for every participant. The Department of Labor requires retention for at least six years. Gusto maintains electronic copies of most documents, but you should also maintain hard copies as backup.