Starter 401(k) Plans Simplify Retirement for Small Employers

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Summary

• This article explains starter 401(k) plans, a retirement plan option created by Section 121 of the SECURE 2.0 Act for small employers without a current retirement plan.
• Starter 401(k) plans are designed to be simpler and lower-cost for employers, particularly small businesses.
• Advantages of starter 401(k) plans include their simplicity to start and maintain, their low administrative cost, and the absence of nondiscrimination testing requirements.
• Disadvantages of starter 401(k) plans include their lower contribution limits than traditional 401(k) plans, their lack of employer contributions, and the administrative considerations created by automatic enrollment requirements.

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Jump to:

• Eligibility Requirements for a Starter 401(k) Plan
• Setting Up a Starter 401(k) Plan
• Contributions to a Starter 401(k) Plan
• Maintaining a Starter 401(k) Plan
• Advantages and Disadvantages of a Starter 401(k) Plan

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Offering retirement benefits to employees can provide important advantages to employers, including aiding employee retention and allowing employers to remain competitive in the marketplace. Small business owners often do not have the resources of larger corporations but may still want to offer their employees the benefits of a retirement plan.

Section 121 of SECURE 2.0 added starter 401(k) plans, effective for plan years beginning after December 31, 2023, for employers that do not sponsor a workplace retirement plan. (26 U.S.C. § 401(k)(16)). A starter 401(k) plan:

• Provides for contributions only from employees.
• Is a cross between a 401(k) plan and an individual retirement account (IRA).

• Eliminates some of the obstacles that small employers have to starting a 401(k) plan.
  Small employers should note that other retirement plans not covered by this article may also be available to them, such as:

• Simplified employee pensions (SEPs) and salary reduction simplified employee pensions (SARSEPs).

• Payroll deduction individual retirement accounts.

• Savings incentive match plan for employees individual retirement accounts (SIMPLE IRAs).

• Defined contribution plans, including SIMPLE 401(k) plans, 401(k) plans generally, profit-sharing plans, and employee stock ownership plans.

• Defined benefit plans, including cash balance plans.

Eligibility Requirements for a Starter 401(k) Plan

All employees of the employer must be eligible to participate except those who do not meet minimum age and service requirements permitted under the Internal Revenue Code. Employees covered by a collective bargaining agreement may be excluded.

Employers Eligible for a Starter 401(k) Plan

An employer can provide a starter 401(k) plan only if the employer does not maintain any other qualified retirement plan (including a SEP, SIMPLE IRA, or other defined contribution or defined benefit plan) for any employees during the year. They are targeted at small employers, but any employer meeting this requirement may offer a starter 401(k) plan.

Setting Up a Starter 401(k) Plan

To establish a starter 401(k) plan the employer must:

• Adopt a written plan document. The plan document is generally provided by the financial institution or retirement plan professional assisting with the plan and must detail the terms of the plan (26 C.F.R. § 1.401-1(a)(2)). Certain plan document forms have been pre-approved by the IRS.
• Create a trust for the plan's assets. The plan's assets must be held in a trust (26 U.S.C. § 401(a); 26 C.F.R. § 1.401-1(a)(3). The trust must have at least one trustee to handle contributions, distributions, and investments.
• Establish a recordkeeping system. The recordkeeping system should track contributions, earnings, losses, investments, plan expenses, and distributions.
• Provide a summary plan description. The employer must furnish the summary plan description (SPD) to eligible employees within the timeframes required under the Employee Retirement Income Security Act of 1974.

Contributions to a Starter 401(k) Plan

There are no employer contributions to starter 401(k) plans. Employees may only contribute elective deferral contributions.

Employer Contributions

There are no employer contributions to starter 401(k) plans.

Employee Contributions

Employees are automatically enrolled at a uniform default contribution rate selected by the employer that must be between 3 percent and 15 percent of compensation. Unlike automatic enrollment safe harbor plans, starter 401(k) plans are not required to include automatic escalation, but escalation must remain within the 3 percent and 15 percent range.

Employees can make elective deferral contributions (including Roth contributions) of up to $6,000 for 2026 (as indexed for inflation).

Employees can make catch-up contributions of up to $1,100 for 2026. Effective for taxable years beginning after December 31, 2023, SECURE 2.0 requires catch-up contributions to be designated Roth contributions for participants whose FICA wages from the employer sponsoring the plan exceed $150,000 (as indexed for inflation). IRS Notice 2023-62 provided temporary relief from this requirement through December 31, 2025. Final regulations issued in 2025 confirm applicability beginning January 1, 2026, with a transitional good-faith compliance standard through 2026.

Final regulations issued in September 2025 confirm that the mandatory Roth catch-up rule for high earners generally applies beginning January 1, 2026, with a good-faith compliance standard permitted until January 1, 2027.

Contribution amounts are adjusted for cost-of-living increases after 2024.

Nondiscrimination Requirements

Nondiscrimination testing is not required. Starter 401(k) plans must meet the automatic enrollment requirements applicable to starter 401(k) plans, which serve as an alternative to nondiscrimination testing.

Contribution Deadline

Participant elective deferral contributions must be deposited in accordance with the Department of Labor (DOL) rules requiring that contributions be transmitted to the plan as soon as they can reasonably be segregated from the employer's general assets (29 C.F.R. § 2510.3-102). Plans with fewer than 100 participants are deemed to satisfy this requirement if deposits are made within seven business days of withholding.

Vesting

Employee contributions are immediately 100 percent vested.

Limits on Benefits and Contributions

The limits on benefits and contributions under Code Section 415 generally do not apply to starter 401(k) plans because employer contributions are not permitted.

Top-Heavy Requirements

The top-heavy requirements under Code Section 416 do not apply to a starter 401(k) plan.

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Maintaining a Starter 401(k) Plan

The employer must file an annual Form 5500. Small plans (generally fewer than 100 participants) may file Form 5500-SF. Plans with fewer than 100 participants may be exempt from filing if they meet the DOL small plan exemption (generally, plan assets are $250,000 or less and the plan is fully unfunded).

Distributions

Withdrawals can generally be made on:

• Termination of employment.
• Disability.
• Death.
• Retirement.
• Hardship (if permitted by the plan). Withdrawals are subject to income tax for the year that the participant receives a distribution (26 U.S.C. § 408(d)). If an employee withdraws money before age 59-1/2, an additional 10 percent early distribution tax generally applies unless an exception applies.

Starter 401(k) plan contributions and earnings may be rolled over tax-free to eligible retirement plans, including:

• A traditional IRA or Roth IRA.
• A 403(b) plan or a 457(b) plan.
• A SEP-IRA.
• A qualified plan.
• A designated Roth account in a 401(k), 403(b), or 457(b) plan.
• A SIMPLE IRA, provided the rollover:
  • is not from a designated Roth account;
  • is made after the two-year period beginning on the date the participant first participated in the SIMPLE IRA; and
  • is made after December 18, 2015.

Loans

A starter 401(k) plan may permit participants to take loans from their accounts.

Required Minimum Distributions

Participants must also take required minimum distributions (RMDs) in accordance with the RMD rules applicable to qualified plans.

Tax Treatment

Employers with 100 or fewer employees may be eligible for a tax credit for retirement plan startup costs. Under SECURE 2.0, employers with 50 or fewer employees may qualify for a credit of up to 100 percent of eligible startup costs (subject to annual caps), generally up to $5,000 per year for the first three years (26 U.S.C. § 45E).

Employees can exclude pre-tax elective deferral contributions from their gross income.

Advantages and Disadvantages of a Starter 401(k) Plan

A starter 401(k) plan is a new type of plan for plan years beginning after December 31, 2023, and is meant for small employers that have previously not offered any retirement plan to their employees. Advantages of starter 401(k) plans include:

• Simple to start and maintain.
• Low administrative cost.

• No nondiscrimination testing.
  Disadvantages include:

• Lower contribution limits than traditional 401(k) plans.

• Employer contributions are not permitted.

• Automatic enrollment requirements may create administrative considerations.
  Many states have a similar type of plan.

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