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The Secure 2.0 Act created a new type of retirement plan called a starter 401(k) plan. Starter 401(k) plans are designed to make it easier for small businesses to offer retirement plans to their employees.
Starter 401(k) Plans Eligibility
To offer a starter 401(k) plan, an employer must not already offer a retirement plan to its employees. However, there are a few exceptions to this rule, such as employers that previously had an IRA through a mandated state-sponsored retirement program or employers that offer a retirement plan through a collective bargaining agreement.
Starter 401(k) Plans Features
Starter 401(k) plans have a number of key features, including:
- Automatic enrollment: Employees are automatically enrolled in a starter 401(k) plan, but they can opt out if they choose.
- Lower contribution limits: The annual employee contribution limit for a starter 401(k) plan is $6,000, compared to $22,500 for a regular 401(k) plan.
- No employer contributions: Employers are not allowed to make contributions to starter 401(k) plans.
- Simpler compliance requirements: Starter 401(k) plans are exempt from certain IRS non-discrimination tests, which makes them easier for small businesses to administer.
Benefits of Starter 401(k) Plans
Starter 401(k) plans offer a number of benefits for small businesses and their employees, including:
- Easy to set up and administer: Starter 401(k) plans are designed to be easy for small businesses to set up and administer.
- Affordable: Starter 401(k) plans are a relatively affordable option for small businesses.
- Tax-advantaged: Starter 401(k) plans are tax-advantaged, which means that employees can save money on taxes by contributing to a starter 401(k) plan.
Drawbacks of Starter 401(k) Plans
Starter 401(k) plans also have some drawbacks, including:
- Lower contribution limits: The annual employee contribution limit for a starter 401(k) plan is significantly lower than the limit for a regular 401(k) plan.
- No employer contributions: Employers are not allowed to make contributions to starter 401(k) plans, which can reduce employee savings.
- Simpler plan design: Starter 401(k) plans have a one-size-fits-all design, which means that employers cannot offer employees different investment options or contribution rates.
Starter 401(k) plans are a good option for small businesses that want to offer retirement plans to their employees but do not have the resources to administer a traditional 401(k) plan. They are also a good option for employees who want to start saving for retirement but do not have a lot of money to contribute.
If you are a small business owner or an employee who is considering enrolling in a starter 401(k) plan, be sure to learn more about the plan and its features before you make a decision.
