How the “Starter-K” Retirement Plan Impacts Small Businesses

How the “Starter-K” Retirement Plan Impacts Small Businesses

Saving for retirement is essential. But many small businesses find it challenging to provide retirement benefits to their employees due to high administrative costs and complex regulations. However, due to recent legislation, small business owners now have a simplified way to help their workers prepare for the future. 

In this article, you’ll be exposed to the new “Starter-K” plan that’s been rolled out under the SECURE 2.0 Act. You’ll learn what they are, how they work, and what other options you have in helping employees save for a secure future. 

What is a “Starter-K” Plan?

The Starter 401(k) plan is a provision under the SECURE Act 2.0 that seeks to help small businesses offer retirement benefits to their workforce. It’s specifically structured to lessen administrative burdens and costs on those who choose to participate. 

Eligible employers include those who do not already offer a retirement plan, and operate a qualifying small business. With a Starter 401(k) plan, qualifying small business owners will not have their retirement plan subjected to cumbersome year-end testing. Additionally, employers will not be required to match employee contributions, which can help lower costs substantially. 

Starter 401(k) Plan Rules

There are several rules business owners need to consider before setting up a Starter 401(k) plan for their business. Below, we’ve provided a list of criteria that needs to be top of mind when evaluating this retirement tool:

Eligibility Requirements: To qualify for a Starter 401(k) plan you must not have a retirement plan in place, and operate an eligible small business. What’s considered a “small business” will vary depending on variables such as employee count and annual revenue. However, you can refer to Small Business Administration (SBA) standards for guidance. 

Automatic Enrollment: Eligible employees are automatically enrolled at a default contribution rate equal to 3% of their income. 

Employers Matches Are Not Required: Employers are not required to match employee contributions, which can help lower costs. 

No Mandatory Year-End Testing: Starter 401(k) plan participants are not subject to the same annual nondiscrimination testing of regular 401(k) plans. This can help save employers time and worry.  

Contribution Limits: Annual contribution limits mirror those of an individual retirement account (IRA). For 2023, that means a limit of $6,500 with an additional $1,000 in catch-up contributions for participants age 50 or older.

Are There Alternatives to the Starter 401(k) Plan?

Small business owners that don’t have a 401(k) plan can provide their employees with the choice of a Starter 401(k) or a Safe Harbor 403(b) plan with similar advantages. That said, Safe Harbor 403(b) plans are reserved only for certain businesses, which include non-profit organizations like schools, churches, and hospitals. 

Employers may also pursue more traditional avenues to provide their employees with a way to save for retirement. These options may forfeit the perks of a Starter 401(k) plan like no year-end testing or optional employer matches. However, they may also provide greater incentives for participants like that of higher contribution limits. Below, are alternatives business owners may have at their disposal:  

SEP IRA: Simplified Employee Pension (SEP) IRA is a type of retirement plan that allows employers to make tax-deductible contributions to an individual retirement account (IRA) on behalf of their employees. 

SIMPLE IRA: Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan that allows both employers and employees to make contributions. Employers must match employee contributions up to a specified percentage or contribute a fixed percentage of the employee’s salary, up to a certain maximum. (https://bellarinova.com/)  

Regular, Non-Starter 401(k): Regular 401(k) plans come in multiple varieties like Roth, traditional, and SIMPLE, and are a retirement vehicle where both the employee and the employer can make contributions. 

How Do You Set Up a Retirement Plan For Your Business?

Determine Your Plan Type: You’ll need to decide on the retirement plan type that will work best for your business. To do this, you’ll want to think about factors such as your number of employees, budget, and retirement goals. 

Select Your Plan Administrator: You have to choose a plan administrator to handle the day-to-day operations of your retirement plan. This could be a financial institution (ex: Fidelity) or a third-party administrator.

Create Your Plan Document: You’re required to develop a plan document that outlines the details of your retirement plan. This can include eligibility requirements, contribution limits, and vesting schedules. This document should comply with relevant IRS rules and be updated regularly.

Communicate Your Plan to Employees: You must communicate the details of your retirement plan to your employees. This may be done through a meeting, email, or provision of printed materials.

Set Up Your Plan: Once you’re ready, it’s time to set up your plan with your chosen administrator, including the necessary accounts for employees, investment options, and payroll deductions for employee contributions.

Monitor Your Plan: The business owner needs to monitor the retirement plan regularly to ensure it remains in compliance with IRS regulations, evaluate the plan’s performance, and make any necessary adjustments.

How Fischer Can Help You Further

At Fischer Investment Strategies, we understand how important preparing for retirement is for employers and their employees. That’s why we’re here to help you take full advantage of the benefits provided by the SECURE Act 2.0.

If you’re interested in finding out if a Starter 401(k) plan is right for your business, please don’t hesitate to reach out to our experienced team. 

You can call us directly at our Westlake office at (805) 418-7686, or our San Clemente office at (949) 433-7768. Feel free to also schedule a complimentary consultation at a time that works best for you. 

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This commentary reflects the personal opinions, viewpoints and analyses of the Fischer Investment Strategies, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Fischer Investment Strategies, LLC or performance returns of any Fischer Investment Strategies, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Fischer Investment Strategies, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Financial Advisor at Fischer Investment Strategies | Website

Ted Fischer is a Fee-Only Certified Financial Planner® & fiduciary, and the founder of Fischer Investment Strategies.

Drawing from more than 25 years of experience in the financial services industry, Ted's expertise includes retirement planning, investment analysis, tax planning, estate planning, and insurance.

Ted has an extensive academic background. He received his Certified Financial Planning (CFP®) designation from UCLA in 2011. He became a Qualified Plan Financial Consultant (QPFC®) and an Accredited Investment Fiduciary (AIF®). Ted has a Bachelor of Science in Marketing, with a minor in Finance, from San Diego State University.

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