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Updated: April 24, 2024

What is a Starter 401(k) and is it a good option for my business?

Article provided by: Guideline

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Did you know it’s now even easier and more affordable to open a 401(k)? The SECURE 2.0 Act, passed in December 2022, provides a lot of benefits, especially for employers that have not sponsored a retirement plan, including increased tax credits and the establishment of the Starter 401(k).

 

In this employer’s guide, we’ll cover the basics of what this retirement savings plan is, how contributions work, and help you see if a Starter 401(k) might be a good fit for your business.1

Understanding what a Starter 401(k) is

Simply put, a Starter 401(k) is a new type of retirement plan. It is a simplified 401(k) that has fewer compliance requirements but has some trade-offs, like lower contribution limits. While your Starter 401(k) plan isn’t able to start until January 1, 2024 (per the SECURE 2.0 Act), you can begin the process now by considering your options – plus it can take some time for a plan to go live after you’ve signed up.

 

Now that we better understand what a Starter 401(k) is, let’s break down some of the details employers will want to know when deciding if it’s the right fit.

Starter 401(k): Benefits and limitations

Offering a Starter 401(k) can help streamline two of the most significant barriers when it comes to a retirement benefit: cost and administration. There are limitations to consider, such as lower savings limits and no employer contributions. Let’s dive deeper into the benefits and limitations of a Starter 401(k).

 

Benefits for employers to know

Straightforward compliance

  • A Starter 401(k) is designed to be exempt from the administrative burden of IRS compliance tests, which are typically in place to ensure a plan does not unfairly favor owners and highly-compensated employees.

 

More predictable employer costs

  • Because a Starter 401(k) does not allow employer contributions, there are no additional costs to plan around, making it more predictable.

 

State mandate compliant

  • A Starter 401(k) checks all the boxes required by state-run programs and is an affordable solution for employers looking for easy-to-administer retirement benefit.¹

 

Limitations for employers to consider

Lower contribution limits

  • A Starter 401(k)’s annual employee contributions limits of $6,000 are much less than the standard 401(k) limit of $23,000.2

 

No employer contributions

  • Employer contributions are tax deductible and can help recruit and retain employees. They also increase the total amount an individual can save each year to $69,000.

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Preset plan design 

  • Starter 401(k) plans can’t include features like eligibility service requirements, vesting, or profit sharing— all of which are possible in a standard 401(k) plan.

 

Though a Starter 401(k) is designed to be a more affordable option for a company-sponsored retirement benefit, you may still have concerns about cost – that’s where tax credits can help. A Starter 401(k) is a qualified employer retirement benefit plan, so your company may qualify for up to $16,500 in tax credits for the first 3 years.3

 

Moving on, let’s touch on why business owners are taking a closer look at the flexibility that a Starter 401(k) can offer.

An alternative to state retirement programs

A Starter 401(k) is a great option for a small business that’s unable to afford the administrative complexities and heavier price tag of a regular 401(k) but still wants to offer their workers an opportunity to save for retirement. And in states that require an employer-sponsored retirement plan, businesses may want to consider a Starter 401(k). Furthermore, if your business is already comfortable with lower employee contribution limits and no employer matching of a State-IRA, a Starter 401(k) can be an affordable alternative to the state-sponsored programs.

 

While state-sponsored programs can be free for the employer, they can be more difficult to manage without integrated payroll. Additionally, the cost for employees to invest can be much higher and may limit your team’s ability to contribute to an IRA in the same tax year should they want to.

 

Meet Guideline’s Starter plan, a simplified benefit at an affordable price

Our retirement partner, Guideline, offers a Starter plan that was designed to qualify as a Starter 401(k). It integrates with your OnPay payroll, is easy to administer, and comes at a low price point: $39 a month plus $4 per month per active participant. 4

 

Then, as your business grows and becomes ready for a plan with more robust features like larger contribution limits and flexible plan design options like employer contribution, vesting, and profit sharing – you’ll be able to easily upgrade to Guideline Core or Enterprise.5

 

All of Guideline’s plans all have low monthly costs and no transaction fees, which means employers don’t have to pay extra for plan setup, plan transfers, 5500 prep,6 and more. For employees, asset fees are low starting at 0.15%, 7x lower than the industry average.7

 

Think a Starter 401(k) may be right for your business? Learn more about Guideline’s Starter plan and how they integrate with OnPay.

This article was written by Guideline, OnPay’s partner for easy, low-fee 401(k) plans. Learn more about OnPay’s payroll software integrations, or see how Guideline helps small businesses offer a great retirement plan.

Disclosures:

OnPay is not a client of Guideline. Guideline pays a fee for each 401(k) & SEP IRA client referred by OnPay as outlined in our written solicitation arrangement with OnPay. We’ll provide additional disclosures prior to opening an account with Guideline.

 

1. This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. Deadlines, fees, and other program details are subject to change by the state without notice and should be checked prior to making any decisions.

 

2. Starter 401(k) and Standard 401(k) annual limits may be adjusted annually by the IRS to account for cost-of-living adjustments. Learn more. 

 

3. You should consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.

 

4. See Guideline’s Form ADV 2A Brochure for additional information regarding their fees.

 

5. Please note, under current IRS rules Starter 401(k) plans can only be converted to full 401(k) plans (increased limits, employer contributions, and testing) effective the first day of the plan year. This would require you upgrading to the Core or Enterprise tier at the beginning of a calendar year.

 

6. Third-party auditor fees will apply to large plans where an audit is required. These fees are not charged by Guideline.

 

7. The average investment expense of plan assets for 401(k) plans with 25 participants and $250,000 in assets is 1.60% of assets, according to the 23rd Edition of the 401k Averages Book, with data updated through September 30, 2022, and is inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or any other asset based charges. Guideline’s managed portfolios have blended expense ratios ranging from 0.064% to 0.067% of assets under management. When combined with an assumed account fee of 0.15%, the estimated total AUM fees for one of Guideline’s managed portfolios can be under 0.22%. Alternative account fee pricing is available ranging from 0.15% to 0.35%.  Contact Sales at hello@guideline.com to learn more about exclusive pricing options available in Enterprise tier. Expense ratios for custom portfolios will vary. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup.