How Starter 401(k) Plans Compare to Safe Harbor and Traditional Plans

April 4, 2024

The SECURE 2.0 Act of 2022 (SECURE 2.0) created a new type of automatic enrollment 401(k) plan called the “starter 401(k) deferral-only arrangement.” More commonly called a starter 401(k) plan, they are meant to be an entry-level option for small businesses who do not already offer a retirement plan. A starter plan is not subject to annual testing like a traditional 401(k) plan or mandatory employer contributions like a safe harbor 401(k) plan. The trade-off is lower contribution limits for plan participants. Small businesses can adopt a starter 401(k) plan starting January 1, 2024.

Business owners now have three basic 401(k) options to help their employees save for retirement – a starter plan, a safe harbor plan, a traditional plan. Understanding their key differences can help an owner pick the best option for their business.

Starter 401(k) Plans Compared to Safe Harbor and Traditional Plans

Starter 401(k) plans can only permit elective deferrals. Employer matching or nonelective contributions are forbidden. A starter plan must include an automatic enrollment feature and subject elective deferrals to lower contribution limits. Below are other key differences:

Feature	Starter Plan	Traditional Plan	Safe Harbor Plan
Eligible Employers	Only employers who do not currently maintain an active qualified plan (i.e., 401(k), 403(b), SEP, or SIMPLE IRA) can adopt.	Any employer can adopt.	Any employer can adopt.
Eligible Employees	Plan eligibility requirements for employees cannot exceed age 21 and one year of service in which an employee completes 1,000 hours of service. Long-term, part-time employees must be allowed to join the plan regardless of its normal eligibility requirements. A plan can exclude employee classes if coverage testing can pass.	Same requirements for elective deferrals and safe harbor contributions as starter plans. For other contributions, the service requirement can be up to two years. Stricter eligibility requirements can apply to employee and employer contributions.	Same requirements as traditional plans. However, to automatically pass the top heavy test, the eligibility requirements for safe harbor contributions cannot exceed the requirements for elective deferrals.
Contribution Limits	Total contributions for each participant cannot exceed $6,000 for 2024. Catchup eligible participants can contribute an additional $1,000.	Elective deferrals made by participants cannot exceed the 402(g) limit in effect for the year. For 2024, the 402(g) limit is $23,000. Catchup-eligible participants can defer another $7,500. Total contributions for each participant cannot exceed the 415(c) limit in effect for the year. For 2024, the 415(c) limit is the lesser of $69,000 or 100% of the participant’s gross compensation.
Automatic Enrollment	Required. the default deferral rate must start at no less than 3% (10% maximum) and increase at least 1% annually to no less than 10% (15% maximum).	Not required for plans adopted prior to December 29, 2022 (SECURE 2.0’s effective date). Generally required for plans adopted on or after December 29, 2022, if the employer normally employs more than 10 employees. The default deferral rate must start at no less than 3% (10% maximum) and increase at least 1% annually to no less than 10% (15% maximum).	QACA plans For QACA plans adopted prior to December 29, 2022, the default deferral rate must start at no less than 3% and increase at least 1% annually to no less than 6% (10% maximum). For QACA plans adopted on or after December 29, 2022, the default deferral rate must start at no less than 3% (10% maximum) and increase at least 1% annually to no less than 10% (15% maximum). Non-QACA plans For non-QACA plans adopted prior to December 29, 2022, no requirement. For non-QACA plans adopted on or after December 29, 2022, the default deferral rate must start at no less than 3% (10% maximum) and increase at least 1% annually to no less than 10% (15% maximum). No requirement for employers in existence fewer than 3 years or employ fewer than ten employees.
Roth Contributions	Optional
Employer contributions	Not permitted.	Matching and profit sharing contributions are optional. Contribution allocations may be subject to service conditions (e.g., 1,000 hours, employment on last day of plan year)	A safe harbor contribution must be allocated to participants. Options will depend upon the plan’s QACA* status. Non-QACA plans must allocate either a 3% nonelective or a 4% matching to participants. QACA plans must allocate either a 3% nonelective or a 3.5% matching to participants. Additional matching and profit sharing contributions are optional.
Vesting	N/A – employer contributions not permitted.	Up to 3-year cliff or 6-year graded vesting schedule permitted for employer contributions.	Safe harbor contributions are generally subject to 100% immediate vesting. Contributions made to a QACA*plan can be subject to a 2-year cliff vesting schedule. Other employer contributions can be subject to either a 3-year cliff or 6-year graded vesting schedule.
ADP/ACP testing	Exempt	Must pass	Exempt unless one of the following conditions applies: Elective deferrals are subject to shorter eligibility requirements than safe harbor contributions. A match that does not meet the ACP safe harbor is made. Voluntary (after-tax) contributions are made by participants.
Top heavy testing	Exempt	If failed, a 3% top heavy minimum contribution must be allocated to eligible employees.	Exempt unless one of the following conditions apply: Elective deferrals are subject to shorter eligibility requirements than safe harbor contributions. Non-safe harbor employer contributions (including a forfeiture reallocation) are made. Voluntary (after-tax) contributions are made.
Participant Loans	Optional
Participant Notices	Automatic enrollment notice is required. A Qualified Default Investment Alternative (QDIA) notice also required if the feature applies.	Not required unless an automatic enrollment feature or Qualified Default Investment Alternative (QDIA) applies.	A safe harbor notice is required. Automatic enrollment feature or Qualified Default Investment Alternative (QDIA) notice also required if the feature applies.
Small business tax credits	SECURE tax credits apply to all plans.

*A Qualified Automatic Contribution Arrangement (QACA) is a form of safe harbor plan that incorporates an automatic enrollment feature.

Will Starter 401(k) Plans Be Popular?

Starter 401(k) plans may be a tough sell due to their low contribution limits and the generous SECURE tax credits that apply to all 401(k) plans. They’re likely to be most popular with small businesses who don’t want to – or can’t afford to – make mandatory employer contributions to a safe harbor 401(k) plan or SIMPLE IRA.

That said, I’m sure a starter plan will be the best fit for some employers. They should cost less than a traditional or safe harbor 401(k) plan over the long-term, while offering most of the same benefits. Business owners should keep them in mind when evaluating their retirement plan options.