An Employer’s Guide to Starter 401(k) Plans
An Employer’s Guide to Starter 401(k) Plans
Most employees see workplace retirement plans as a “must-have” benefit, and businesses are seeking a simple and cost-effective way to meet these expectations. One solution: offer a Starter 401(k) plan.
In this article, we’ll explore how Starter 401(k) plans provide a streamlined solution for businesses seeking to support their employees' financial futures while minimizing costs and administrative efforts. Let’s dive in.
What Is a Starter 401(k) Plan?
The Starter 401(k) plan is a new retirement option introduced under the SECURE Act 2.0—legislation aimed at increasing workplace retirement plan coverage for Americans. Over 19 million workers may gain access to workplace retirement savings through Starter 401(k) plans. With American workers 12 to 15 times more likely to save for retirement if offered a workplace retirement savings plan, the Starter 401(k) plan is a game-changer.
Starter 401(k) plans became available on January 1, 2024, and are designed specifically for businesses and employers that have yet to offer a retirement plan.
How Does a Starter 401(k) Plan Work?
Starter 401(k)s come with a simplified plan design that streamlines the setup and launch process for employers. Once workers become eligible for the plan, they will be automatically enrolled at a set savings rate, unless they choose to opt out. Once enrolled, employees make contributions through automatic payroll deductions.
Who Can Open a Starter 401(k) Plan?
According to the SECURE Act 2.0, employers may offer a Starter 401(k) if they do not currently provide a company-sponsored retirement plan for their employees.
Automatic Enrollment and Contribution Limits
Employees are automatically enrolled in the plan with a savings rate chosen by the employer between 3% and 15% unless the employee opts out.
Once enrolled, there are limits on how much employees can contribute to their account each year. However, the Starter 401(k) plan has lower contribution limits. Here’s a quick look at the difference in employee contribution limits between a Starter 401(k) and a traditional 401(k):
| 2024 Contribution Limits | 2024 Catch-Up Contribution Limits (For Employees Over Age 50) | 2024 Total Limit | |
|---|---|---|---|
| Starter 401(k) | $6,000 | $1,000 | $7,000 |
| Traditional 401(k) | $23,000 | $7,500 | $30,500 |
Simplified Administration
Starter 401(k) plans are not subject to annual non-discrimination and top heavy testing that may apply to traditional 401(k) plans.
Starter 401(k) vs. Traditional 401(k): What Are the Key Differences?
While both Starter 401(k) and traditional 401(k) plans help employees save for retirement, they differ in several key areas:
| Starter 401(k) | Traditional 401(k) | |
|---|---|---|
| Eligible Businesses | Only eligible for businesses not currently providing a retirement plan for employees. | Eligible for all businesses. |
| Contribution Limits | 2024 Limit: $6,000 2024 Catch-Up Limit: $1,000 Total 2024 Limit: $7,000 | 2024 Limit: $23,000 2024 Catch-Up Limit: $7,000 Total 2024 Limit: $30,500 |
| Employer Contributions | Employer contributions are not permitted. | Employer contributions are optional and common. |
| Vesting | All contributions, since they are solely made by the employee, are immediately vested. | Employee contributions are immediately vested. Employer contributions may be subject to a vesting schedule. |
| Roth Contributions Allowed | Yes | Yes |
| Automatic Enrollment | Employers are required to automatically enroll eligible employees at a rate between 3% and 15%. | Starting 1/1/2025, plans that started after 12/29/2022 must automatically enroll eligible employees at a rate between 3% and 10%. |
| Nondiscrimination Testing | Exempt from testing. | Employers may face certain nondiscrimination tests. |
| Tax Credits | Up to $16,500 in tax credits are available. | Up to $16,500 in tax credits are available, plus more if the employer makes contributions to employee accounts. |
| Loans | Optional | Optional |
Benefits and Limitations of Starter 401(k) Plans
When considering a Starter 401(k) plan for your business, you should weigh its advantages and potential drawbacks to determine if it's right for your company and employees.
Benefits
- Simplicity: One of the primary benefits of a Starter 401(k) plan is its simplicity. With fewer administrative requirements, these plans are easier for businesses to manage.
- Cost-Effective: Since employers are not required to make contributions and there is no need for nondiscrimination testing, Starter 401(k) plans are a cost-effective option for businesses.
- Encourages Saving: A Starter 401(k) provides an easy and accessible way for employees to begin saving for retirement. Automatic enrollment encourages more employees to start contributing without having to take proactive steps, which can boost participation rates.
- Scalable Growth: As businesses grow and their retirement needs evolve, Starter 401(k) plans can be amended to a traditional 401(k) plan for more features and flexibility.
Limitations
- Lower Contribution Limits: The reduced contribution limits of a Starter 401(k) may not be sufficient for employees looking to save more for retirement, e.g. those starting their retirement savings later in their career or those simply wanting to maximize their retirement plan contributions.
- No Employer Contributions: Since employers aren’t allowed to contribute, they can’t leverage a matching program or vesting schedule to recruit and retain talent, which is a common reason businesses offer a plan.
Conclusion
Starter 401(k) plans present a valuable opportunity for a wider range of businesses to offer retirement savings options to their employees. A Starter 401(k) plan's simplicity and cost-effectiveness make it an appealing option for employers. If you're a business owner considering a retirement plan, exploring a Starter 401(k) plan could be the right move to attract and retain talent while promoting financial security among your employees.
For more information on retirement plans or other workplace savings solutions, get in touch with us. We're here to help make the process seamless and straightforward so that you can confidently support your team's financial goals.
