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  • Mark Nicholas

Starter(k): A Solution in Search of a Market?

When it comes to selecting the ideal retirement plan for your employees, it's essential to explore all available options. Beginning in 2024, small businesses will have access to a new type of plan, the Starter(k), adding one more option to consider. Let's take a look at what makes the Starter(k).

Starter(k) Plan Features:

  • Designed for small businesses with fewer than 100 employees.

  • Contributions limited to employee deferrals allowing employees to contribute up to $6,000 in 2024 (plus an additional $1,000 catch-up contribution for employees aged 50 and above).

  • Does not permit employer contributions

  • Provides a range of investment options tailored to suit different risk appetites and investment goals.

  • Affords highly compensated employees the ability to make Roth 401(k) contributions where they may not be eligible to make Roth IRA contributions.

  • Simplified administration and reporting requirements, reducing the administrative burden on employers. No compliance testing needed.

Starter(k) Drawbacks

  • It's more efficient to help employees setup an automated deposit to an IRA account, which has higher contribution limits, more investment options, and fewer employer responsibilities. The contribution limit was unintentionally set below the IRA contribution limits and we hope to be corrected before the end of 2023.

  • It's a 401(k) plan, so employers lose out on the tax incentives that would otherwise be available to offset employer contribution costs in the early years of the plan since employer contributions aren't permitted. Because of this, a SIMPLE IRA offering may be a more efficient starting point, even with mandatory employer contributions.

  • There are likely to be a variety of fees charged, even with the reduced administrative duties. Expect to have a TPA, record keeper and custodian in the mix in addition to your investment adviser. While providers are not advertising their fee structures yet, we're expecting fees to be similar to what's charged for a safe harbor 401(k) plan, maybe a little less.

  • Employers will still carry fiduciary responsibilities.

Choosing the right plan for your employees ultimately depends on your company's specific requirements, financial situation, and long-term goals. In most cases, there are better options than a Starter(k) for a company looking to start a new plan, but a Starter(k) may be appropriate for a firm looking to satisfy a state mandate without any employer contribution requirements instead of joining the state-run option. Before biting on the marketing pitch for this new solution, employers attracted to the Starter(k)'s simplicity should specifically consider the benefits a SIMPLE IRA plan offers and not fall into the trap of limiting comparisons to state-run IRA programs and safe harbor 401(k) plans.

Take the first step towards securing a prosperous retirement for your employees by making an informed choice!

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