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Secure Act 2.0 Proposes Starter 401(k)

Are you a small business owner who has found yourself asking if you should offer a retirement plan as part of your employee benefits package? Now more than ever, it’s important to stand out from competitors to attract and retain top talent. There are various retirement plan options available, including a traditional IRA, 401(k), ROTH IRA, Simple IRA, and many more.

In recent legislation, The Secure Act 2.0 package included a proposed Starter 401(k), as well as new and expanded tax credits to small businesses offering retirement plans. The Starter 401(k) plan aims to allow small businesses to offer retirement plans while streamlining regulations and lowering costs. Under this bill, eligible employers – those that do not already offer a plan – are not required to provide matching contributions. In addition, it would also create a safe harbor for the non-discrimination and top-heavy testing requirements for defined contribution plans. Annual contributions would be limited to:

  • $6,000
  • Indexed to inflations
  • Additional catch-up contribution for those at least 50 years of age

If the bill is passed, the Starter 401(k) plan will aim to eliminate common barriers to plan sponsorship. If the bill is passed, it will be effective after 2023 and include the following provisions:

  • Small businesses with no 401(k) plan in place can offer either a Starter 401(k) plan or a Safe Harbor 403(b) plan. 
  • Eligible employees would automatically enroll at the minimum default level of 3% of their income. 
  • Employer contributions are not required, therefore lowering costs for employers. 
  • Year-end testing is not required, saving time and reducing stress. 
  • Limits on annual contributions would be the same as the current IRA contribution limit, which in 2020 is $6,000 with an additional $1,000 in catch-up contributions beginning at age 50. 

Traditional 401(k) Plan 

The most common type of retirement plans small businesses provide their employees with is a 401(k) plan. A 401(k) plan is a retirement savings plan many employers offer that has tax advantages for the employee enrolled in the plan. Employees who sign up for a 401(k) agree to have a percentage of each paycheck paid directly into an investment account.

The following are benefits for your business when you provide a 401(k) plan to your employees:

  • Lower tax liability
  • Improved work ethics
  • Business tax credits
  • Attractive benefits
  • Business tax deductions

A small business 401(k) plan is designed as a multi-purpose tool for business owners. Employers can use a 401(k) plan to lower this taxable income, grow savings for retirement, and to even manage the future of their business. Ultimately, a 401(k) plan plays a significant role in making your vision for the future a reality. From a cost standpoint, this type of plan is typically one of the more economical benefits for small business owners.

Get Started Before The New Year!

As a small business owner, you wear multiple hats at once. So, adding an additional hat to your plate may not sound too appealing to you. However, offering retirement plans is essential to recruiting and retaining quality employees. Tom Smith, GMS’ Director of Retirement Services, expresses, “Offering a retirement plan is a great benefit for business owners. A 401(k) plan gives business owners flexibility in terms of plan design options to meet the needs of your employees.” GMS offers its clients the option of a profit-sharing 401(k) plan. This gives business owners flexibility in how much they contribute to their employees’ 401(k) accounts. With this option, instead of a standard employee-match program where the employer will match the employee’s contribution up to a certain amount, the employer has more flexibility and control over the contribution. Allow your employees to enroll in a retirement plan before the new year starts. Contact GMS today.