Starter 401(k): A fast, simple, budget-conscious solution for small employers

Deciding to make the spend on retirement benefits should be a priority in 2024 because it could help your business thrive. In a competitive job market in which workers are saying they plan to leave their roles in the next six months, almost half of small businesses can’t afford to offer a benefit that 51% of employers believe is an attractive benefit to recruit talent. If small businesses are going to win the talent retention battle in 2024, they may want to seriously consider offering a retirement benefit.

A new retirement benefit designed to make it easier for a business to give its employees a way to save for the future is the Starter 401(k), which began in 2024, as a provision in the new SECURE 2.0 regulation. If you’ve struggled with accessing retirement benefits, this retirement plan could be a solution for you.

Here are the details employers should know about a Starter 401(k).

It can be affordable and easy to use

Think of a Starter 401(k) as a simplified employer-sponsored retirement plan with lower saving limits than a standard 401(k). Since they’re exempt from most IRS testing, they don’t require the same amount of valuable administrative resources as a standard 401(k). These plans help employers offer a retirement benefit by streamlining two of the most significant barriers when it comes to offering retirement savings plans: cost and ease of administration. Lower savings limits and no employer contributions make these plans easier to administer by exempting them from compliance tests typically in place to ensure a plan does not unfairly favor owners and highly compensated employees.

The automatic enrollment of eligible employees in Starter 401(k) plans may increase employee participation since employees don’t have to do anything to get started. Employees can opt-out if they choose. Businesses can choose to offer employees the mandated state-sponsored retirement program if a mandate exists, or they can offer their own private 401(k), such as a Starter 401(k) plan. If a business is already comfortable with lower employee contribution limits and no employer matching, a Starter 401(k) plan is an affordable alternative to state-sponsored programs that can be easier to manage with integrated payroll and potentially may offer lower-cost investment options like mutual funds. A plan provider may also offer the opportunity to choose managed portfolios with an objective of providing a curated investment portfolio dependent on your goals, risk tolerance, and retirement timeline.

Who can open a Starter 401(k)?

Employers are only eligible for a Starter 401(k) if they don’t yet provide their workers with a retirement plan. But there are a few exceptions:

• Businesses that previously had an IRA program through a mandated state-sponsored retirement program can choose to convert their plan to a Starter 401(k).
• If a company previously offered a 401(k), but terminated it and has not offered any retirement plan in at least the prior 12 months, they may be eligible for a Starter 401(k).

Starter 401(k) limitations

While a Starter 401(k) plan may be a good fit for many employers, it poses several limitations and stricter requirements, including:

• Lower contribution limits: With a Starter 401(k), the annual employee contribution limit is $6,000 (for 2024), which is significantly lower than the standard 401(k) limit. That means employees have less tax-advantaged savings for retirement each year. After that, the contribution level may be adjusted each year.
• No employer contributions: Employers are not allowed to contribute to employees’ Starter 401(k) plans, even if they’d like to. 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 to upgrade to a Standard 401(k) plan at the beginning of the tax year.
• No flexible plan design options: Starter 401(k) plans have a one-size-fits-all approach to retirement benefits. They aren’t as flexible as standard 401(k)s, which offer elective benefits such as profit sharing, vesting, and expanded eligibility requirements.
• Contributing catch-up contributions: Employees over 50 can contribute an additional $1,000 in catch-up contributions for a total limit of $7,000 in 2024.
• Automatic enrollment: Employees are automatically enrolled at a contribution set by the plan sponsor of at least 3% and no more than 15% of their salary.

A great start for employers offering a retirement plan for the first time

A Starter 401(k) plan is accessible for small businesses and it checks all the boxes currently required by state-run programs and is an affordable solution for employers looking for easy-to-administer retirement benefits. The Starter 401(k) might be a good fit for employers looking for a fast, simple, budget-conscious 401(k) solution, wanting to avoid compliance testing, or who don’t plan on contributing to their employees’ retirement savings.

Related: Starter 401(k): New kid on the retirement block to help small businesses

Many employers will greatly benefit from adding a retirement plan to their benefits package because it helps attract and retain talent, incentivizes employees to improve their performance, and lowers taxes while helping employees meet their retirement goals. If these points resonate with you, then a Starter 401(k) may be the retirement plan to help your small business thrive.

Aras Kolya is the Chief Revenue Officer at Guideline.