This year marks the second year of Starter 401(k) plans — simplified employer-sponsored retirement plans — giving millions of employees access to a brand new type of retirement savings program.
Because standard 401(k) plans are often too expensive or confusing for many small employers, only one in three businesses offer this type of retirement savings plan, according to the most recent data from Fidelity’s 2024 Small Business Retirement Index. Starter 401(k) plans increase access to workplace-based plans for both the employer and employee.
But what is a Starter 401(k), how does it work and how is it different from a traditional 401(k)?
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What is a Starter 401(k)
A Starter 401(k) is an employer-sponsored retirement plan that only allows employees to contribute. Employees are automatically enrolled with a contribution of at least 3% of their salary. However, if they want to, employees can boost their contributions to as much as 15%. Employees can opt out of the program, but they can’t contribute more than $6,000 (per employee) and $1,000 in catch-up contributions in 2025. Because employers can't contribute, there is also no chance of getting an employer-matching contribution.
Starter 401(k) plans help small employers offer retirement benefits to employees that eliminate two significant barriers: cost and ease of administration.
How the SECURE Act and SECURE 2.0 changed things
The fear of not having enough money to last throughout retirement is real. The SECURE Act, officially enacted on Jan. 1, 2020, was drafted to address this problem by changing a variety of retirement account rules. Fast forward to 2022, when Congress went one step further with the SECURE 2.0 Act of 2022 and the creation of Starter 401(k)s.
In 2020, about 75% of non-retired adults had at least some savings set aside for retirement. About 25% did not have any, according to the Federal Reserve. Today, of the non-retirees who have some type of retirement account, only 40% believe their retirement savings are on track.
How do Starter 401(k) plans work?
Beginning in 2024, employers that did not already sponsor a retirement plan could offer their employees a “Starter 401(k) deferral-only” plan. Employees are automatically enrolled (but they can opt out of the program if they wish) with contribution levels of at least 3% of their salary. They can also choose to contribute at a different level, up to as much as 15%.
Starter 401(k)s have lower saving limits than standard 401(k)s, and employers cannot contribute to the account. Employees can also tap into their 401(k) plans early without paying penalties (they are still subject to taxation). They can withdraw up to $1,000 per year and avoid the 10% penalty (for people who have experienced a family or personal financial emergency). This rule also permits certain penalty-free early withdrawals in the case of domestic abuse.
The Starter 401(k) Act of 2022 was introduced by Senators John Barrasso (R-WY) and Tom Carper (D-DE), both of whom sit on the tax-writing Senate Finance Committee.
“Small businesses are the biggest employers in so many communities nationwide. They deserve the opportunity to provide their employees with better options to save more for retirement,” Senator John Barrasso (R-WY) said in a statement as reported by the ASPPA.
“Our bipartisan bill ensures that small businesses can access streamlined plans without complex regulations. This will help more hard-working Americans save money and achieve a more secure financial future.”
How are starter 401(k) plans different from standard 401(k) plans?
For employees:
- Enrollment is automatic, but employees can opt out of the program if they wish.
- In 2025, the annual contribution limit for a Starter 401(k) is $6,000 instead of $24,500 with a standard 401(k).
- The catch-up contribution limit for individuals aged 50 and older in a Starter 401(k) plan is $1,000, but this is only for those under 60. Thanks to SECURE 2.0, starting in 2025, individuals aged 60–63 are eligible for an increased catch-up contribution limit of $10,000 (or 150% of the standard catch-up limit, whichever is greater).
- Employers cannot contribute to Starter 410(k) plans.
For employers:
- Starter 401(k)s are simplified and easier to administer than many standard 401(k)s.
- They streamline regulations and lower costs for small businesses and start-ups.
- Employers are exempt from the administrative burden of IRS compliance tests.
- Because employer contributions aren’t allowed, record-keeping is less of an issue.
Which companies offer starter 401(k) plans?
Any employer that does not already offer a 401(k) plan for its employees can offer a Starter 401(k) plan. More specifically, if neither the current employer nor the past employer has another qualified retirement plan for the year in which the starter plan is offered, the company can offer a Starter 401(k) plan. There is an exception for an employer with a retirement plan where the only participants are those covered by a collective bargaining agreement (CBA).
Who can participate in a Starter 401(k) plan?
If the company you work for offers a Starter 401(k) plan, you may be eligible to contribute, provided you aren’t covered by a collective bargaining agreement that included a good faith attempt to negotiate retirement benefits. You may also be required to meet your company’s age and service requirements.
Final word
Starter 401(k) plans offer small businesses and startups a simplified, cost-effective way to provide a retirement savings option to their employees. With no IRS nondiscrimination testing, these plans reduce administrative headaches. Employees can contribute up to $6,000 annually ($7,000 for ages 50–59, $16,000 for ages 60–63) with tax-deferred growth, making retirement plans accessible where none existed. However, the lower contribution limits compared to standard 401(k)s restrict savings potential, and the absence of employer contributions eliminates matching benefits, a key feature of traditional plans.
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