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

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. Though a Starter 401(k) plan wasn’t available to start until January 1, 2024 (per the SECURE 2.0 Act), it’s now another option business owners are able to consider.

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.

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 $23,500.

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 $70,000.

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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.

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 its 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.