What Are Starter 401(k) Plans?

Americans’ lack of retirement savings has become a bipartisan political issue. According to a National Institute on Retirement Security (NIRS) study, three out of four Americans have yet to save enough for retirement, while more than one in five haven’t saved anything at all.

In December 2022, Congress took action and passed the SECURE 2.0 Act with the hope of providing Americans more opportunities for retirement savings. One reform introduced in the legislation is the starter 401(k) plan, giving more than 19 million Americans access to a brand new type of retirement savings program.

What Are Starter 401(k) Plans?

A starter 401(k) is an employer-sponsored retirement plan that only allows employee contributions. It automatically enrolls employees with a contribution level of at least 3% of their salary. They can boost this contribution level to as much as 15% if they wish.

Employees can opt out of the program, but they can’t contribute more than $6,000 per year in 2024, the first year these plans will be available. After 2024, the contribution limit will be adjusted for inflation in multiples of $500, rounded down. If the inflation-adjusted limit for 2025 was calculated as $6,499, the limit would still be $6,000.

Employees who are 50 or older can make up to $1,000 in additional catch-up contributions, for a total limit of $7,000 in 2024.

How Congress Created Starter 401(k) Plans

Only one in three small employers offered any type of retirement savings plan as of March 2023, according to Fidelity’s 2023 Small Business Retirement Index.

Cost is by far the most common reason small employers gave for not offering a plan. Not knowing how or being too busy running the company are other major barriers. The hope is that the new starter 401(k) plans will lower these barriers.

Back in 2013, Sen. Orrin Hatch (R-UT) sponsored S. 1270, a bill that included a provision to create a starter 401(k) plan. It was part of a larger effort to fix a brewing retirement savings crisis caused by underfunded public pensions and the shrinking availability of private pensions. Employees would have been able to save up to $8,000 per year in these plans.

Nearly 10 years later, a modified version that doesn’t let workers save as much finally became law. It got a boost from the American Society of Pension Professionals and Actuaries (ASPPA), which pushed Congress to allow the starter 401(k) plan to increase Americans’ access to workplace-based retirement plans.

The society estimates that more than 19 million American workers will gain access to an employer-sponsored retirement plan as a result of this legislation—plus a new tax credit that encourages employers to offer these plans.

How Are Starter 401(k) Plans Different From Regular 401(k) Plans?

For employees, there are four key differences between a starter 401(k) plan and a regular 401(k) plan:

1. 1. The annual contribution limit is $6,000 instead of $22,500.
2. 2. Catch-up contribution limits are $1,000 instead of $7,500.
3. 3. Enrollment is always automatic.
4. 4. You won’t get any employer contributions because they’re not allowed.

And these are the key differences for employers:

1. 1. Starter 401(k)s are easier to offer without running afoul of IRS rules.
2. 2. There’s no expense or recordkeeping associated with employer contributions because they aren’t allowed.

Who Can Open a Starter 401(k) Plan?

Employers who do not already offer a 401(k) plan are eligible to open a starter 401(k) plan for their employees.

Who Can Contribute to a Starter 401(k) Plan?

If you work for a company that offers a starter 401(k) plan, you may be eligible to contribute if you aren’t covered by a collective bargaining agreement that included a good faith attempt to negotiate retirement benefits.

You may also need to meet your company’s age and service requirements, if any. For example, you may need to be at least 21 and have at least one year of full-time employment, defined as at least 1,000 hours of work.

Benefits: How Starter 401(k) Plans Could Help More Americans Save for Retirement

Starter 401(k) plans may increase American workers’ access to workplace retirement savings plans in two key ways.

Cheaper and Easier for Employers

The legal requirements for offering a regular 401(k) plan take up administrative resources that many small employers feel they can’t spare.

Starter 401(k) plans eliminate burdens on employers that may disincentivize them from offering regular 401(k) plans. Employers won’t have to worry about complying with certain participation and nondiscrimination standards that typically apply to 401(k) plans, nor will they have to file reports showing whether they’re meeting those standards.

SECURE 2.0 eases these burdens further by offering a tax credit of up to 75% of administrative costs to employers who begin offering a 401(k) plan in 2024, the first year starter 401(k) plans become legal.

Automatic Enrollment for Employees

401(k) auto enrollment makes employees more likely to contribute to a workplace retirement savings plan. Nine in 10 workers who are auto-enrolled do not opt out, according to a Vanguard study. When workers have to opt in, only one in four do. What’s more, once workers are enrolled, almost all of them increase the percentage of their earnings that they contribute over time (often because the plan increases the percentage automatically).

Drawbacks of Starter 401(k) Plans

While better than nothing, starter 401(k) plans don’t offer employees as much opportunity to accumulate retirement savings as regular 401(k) plans do, and they still won’t give all workers access to a workplace retirement plan. Here’s why.

Lower Contribution Limits

Besides not being able to save nearly as much as you can in a regular 401(k) plan (the 2023 contribution limit is $22,500), the $6,000 annual contribution limit for the starter 401(k) is a mistake. SECURE 2.0 was supposed to say that the annual contribution limit for starter 401(k) plans would match the annual contribution limit for IRAs.

Instead, the law used the dollar amount of the IRA contribution limit in effect when the law passed in 2022. By 2024, when starter 401(k) plans become available, the IRA contribution limit will be at least $6,500 because that’s already the 2023 limit. The ASPPA says it is working on getting Congress to fix this error.

No Employer Match

From an employee perspective, another drawback is that there’s no chance you’ll get an employer matching contribution or profit-sharing (nonelective) contribution. Starter 401(k) plans don’t allow them.

If your income is low enough, you may be able to get a boost by claiming the saver’s credit on your tax return. But that doesn’t make up for not getting employer contributions, especially if your income is too high for the credit.

Excluded Workers

Even if employers offer these plans, they can still exclude certain categories of workers from participating:

• Employees younger than 21
• Employees who have been with the company for less than one year
• Employees covered by a collective bargaining agreement (i.e., union workers)

Still Optional

Small employers have no obligation to offer starter 401(k) plans. If you work for a small employer and hope they will start offering this benefit, you might need to advocate for it.