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The SECURE 2.0 Act introduced the Starter 401(k) for small businesses and startups.
Built to make workplace retirement plans more affordable and straightforward to launch, the Starter 401(k) enables small employers to establish a basic deferral-only plan quickly, with automatic enrollment and fewer employer obligations compared to a full 401(k).
That accessibility explains why founders and early-stage HR leads are suddenly asking whether a Starter 401(k) is “good enough,” especially for teams where founders are highly compensated and have more complex wealth-building needs.
For high-compensated employees (HCEs) and founders who need to maximize tax-advantaged savings, reduce nondiscrimination risk, and signal competitive benefits to recruits, a Starter 401(k)’s deferral-only design can be limiting.
Traditional and Safe Harbor 401(k) plans allow employer matches or nonelective contributions, offer stronger protection from ADP/ACP testing headaches, and open pathways to advanced designs (profit sharing, Cash Balance) that boost founder retirement outcomes.
In this article, we will explain what a Starter 401(k) is, compare it side-by-side with traditional and Safe Harbor 401(k) plans, highlight SECURE 2.0 updates, and help founders, finance leads, and seed–Series B operators decide whether to start simple or upgrade sooner.
What Is a Starter 401(k)?
The Starter 401(k) (also known as a “starter 401(k) deferral-only arrangement”) was introduced by the SECURE 2.0 Act (enacted December 2022) as a lean, entry-level 401(k) option.
It allows eligible employers that do not already maintain a qualified retirement plan to adopt a simplified 401(k) structure starting with plan years beginning after December 31, 2023.
The eligibility requirements of a Starter 401(k) include the following:
Only employers that do not currently offer another qualified retirement plan may adopt a starter 401(k) (except for certain collective bargaining plan exceptions).
Employers may impose standard eligibility criteria (e.g., age 21, one year of service, 1,000 hours) consistent with other 401(k) plans.
Since SECURE 2.0 mandates automatic enrollment for new 401(k) plans (for plan years starting in 2025 and beyond) unless exempt, this requirement is included in starter plan rules.
Features
No Employer Contributions Required (or Allowed)
Starter 401(k)s are strictly deferral-only plans; employers are not permitted to offer matching or nonelective contributions.
Lower Contribution Limits (vs. Traditional 401(k))
Participants in a starter 401(k) are subject to lower elective deferral limits compared to full 401(k) plans. For example, early guidance pegged the starter plan deferral limit around $6,000 (indexed) and a modest catch-up for those age 50+. Since there's no employer contribution, the total contribution ceiling is lower.
Automatic Enrollment Mandate
As stated earlier, SECURE 2.0 requires that newly established 401(k) plans (including starter versions) adopt automatic enrollment beginning in 2025 (unless they qualify for small-employer or startup exemptions).
The default deferral rate must fall between 3% and 10% of compensation initially, with optional escalations of 1% annually up to at least 10% (and as high as 15%).
What is a Traditional/Safe Harbor 401(k)?
A traditional 401(k) allows employees to defer a portion of their salary (pre-tax or Roth) via payroll deductions; employers may optionally contribute via matching or profit-sharing.
But traditional plans must pass annual nondiscrimination tests (ADP/ACP) to ensure that Highly Compensated Employees (HCEs) do not disproportionately benefit relative to non-HCEs. If those tests fail, the employer may have to refund excess contributions (or make corrective contributions) to maintain IRS compliance.
On the other hand, a Safe Harbor 401(k) is a specific subtype of 401(k) designed to automatically satisfy nondiscrimination rules if certain contribution and notice requirements are met. That means no need for costly, unpredictable ADP/ACP testing.
Features
Higher Contribution Flexibility and Limits
Traditional and Safe Harbor plans share the same IRS caps on elective deferrals, catch-up contributions, and total contributions. However, Safe Harbor plans allow employers to contribute more aggressively (match or nonelective) without the downside risk of failing tests.
Employer Match or Nonelective Contributions
For the safe harbor match model, the employer matches employee deferrals under a defined formula (e.g. 100% up to 3% of compensation, then 50% of the next 2%). For a non-elective safe harbor, the employer contributes a fixed percentage (say 3%) to all eligible employees, regardless of whether they defer.
Since these contributions must be 100% vested immediately, employees own them at the moment they’re deposited.
Safe Harbor Rules and Relief for HCEs
By meeting Safe Harbor requirements (mandatory employer contributions and timely notices), the plan is exempt from ADP/ACP nondiscrimination testing and certain top-heavy rules. Employers must provide notices to participants 30 to 90 days before the plan year explaining their rights and the Safe Harbor design.
If you're exploring providers, check this guide on Human Interest vs. Guideline to see Chore’s comparisons of 401(k) platforms and ensure your plan integrates with payroll and compliance workflows.
Why SECURE 2.0 is Important for Founders
Catch-Up Contributions
Under SECURE 2.0, catch-up limits are being enhanced, especially for those aged 60 to 63. In 2025, the IRS allows a “super catch-up” contribution of up to the greater of $10,000 or 150 % of the standard catch-up amount (currently up to $11,250 for many plans).
The final regulations issued in 2025 confirm that plans must be ready for this change, though there’s a “good faith” transition window through 2025.
For founders and HCEs earning above the threshold, this means you’ll lose the tax deduction on those extra contributions, but you’ll gain tax-free (qualified) distributions later.
Tax Credits for Starting Plans
SECURE 2.0 enhances incentives for startups to adopt retirement plans. New or existing plans may qualify for startup cost credits up to $5,000 per year for three years.
There’s also a credit tied to automatic enrollment; if you design the plan to include auto-enrollment, you can claim $500 per year (for three years).
Starter 401(k) vs. Traditional 401(k): Main Comparison
The comparison table below summarizes how a Starter 401(k) and a Traditional (or non-safe harbor) 401(k) stack up across the different areas founders care about:
Feature / Metric
Starter 401(k)
Traditional / Non-Safe Harbor 401(k)
Contribution limits (employee and employer)
Employee elective deferrals only; for 2025, up to ~$6,000 (indexed),
and $1,000 catch-up for 50+
Employee elective deferrals up to $23,500 (2025), plus catch-up for 50+;
employer contributions allowed (match, nonelective)
Employer obligations
None; employers cannot match or make nonelective contributions;
must auto-enroll participants at 3 to 15%
(or 3 to 10% per newer auto-enroll rules)
Employer contributions are optional (but often used to attract talent);
if no safe harbor election, employer must monitor compliance testing
Compliance testing
Exempt from ADP/ACP nondiscrimination testing;
not treated as “top heavy”
Subject to annual testing: ADP, ACP, and Top-Heavy tests.
If tests are failed, corrective actions (e.g., refunds, additional contributions) are required
Administrative complexity / costs
Relatively low: fewer testing burdens, simpler design,
no employer contributions to administer
Higher: must track compliance testing, potential refunds to HCEs,
manage employer contributions and vesting schedules,
more documentation and oversight
Will a Starter 401(k) Keep You Out of Trouble?
When you’re a founder or HCE handling retirement, recruiting, and regulatory risk, “just enough compliance” isn’t enough. The question is whether a Starter 401(k) under SECURE 2.0 gives you sufficient legal cover or leaves you exposed.
Non-Discrimination Testing
The IRS requires 401(k) plans to pass nondiscrimination tests (ADP, ACP, Top-Heavy) to ensure that HCEs don’t disproportionately benefit relative to non-HCEs.
ADP test compares the average elective deferral rate of HCEs versus non-HCEs.
ACP test is analogous to employer matching/after-tax contributions.
Top-Heavy test ensures key employees don’t hold too much of the plan’s total assets.
If the plan fails, you may need to refund excess deferrals to HCEs or make corrective contributions for non-HCEs.
A Starter 401(k) often avoids heavy employer obligations, but it doesn’t protect you from these tests. This means if HCEs push contributions too high relative to non-HCEs, you risk failure.
Safe Harbor as Compliance Insurance
If you commit to certain mandatory employer contributions (matching or non-elective) and meet notice and vesting rules, Safe Harbor 401(k) is exempt from ADP/ACP testing.
For example, many safe harbor plans require a match of 100% on the first 3% of salary, plus 50% on the next 2%. Some plans use a “nonelective” approach (3% flat to all eligible employees) to simplify administration. Since contributions vest immediately, there’s no waiting period to lock in safe harbor protection.
With a safe harbor structure, your HCEs can max out contributions without fear of corrective refunds.
Legal Exposure if Misaligned
If your plan is misaligned (for instance, you promised a safe harbor but missed notices or didn’t fund required contributions), you risk losing the safe harbor shield and being subject to full nondiscrimination testing.
That can lead to:
Refunds to HCEs (losing out on compound growth)
Required additional contributions to non-HCEs
Plan qualification jeopardy
IRS audit or penalties under ERISA/IRC rules
In cases of late or prohibited transactions, firms have had to file Form 5330 to stay compliant (even when no tax was due).
If you’re using a 401(k) provider (and platforms like Chore help with compliance documentation and oversight), it can reduce your risk. For example, Chore handles administrative tasks and ensures the required IRS / DOL forms and notices are in place.
Tips for upgrading from Starter 401(k) to Traditional 401(k) (or Beyond)
Transition Rules Under SECURE 2.0
Under SECURE 2.0, the Starter 401(k) is a deferral-only arrangement with no employer contributions allowed and no requirement for nondiscrimination testing. To upgrade from a Starter to a standard or safe harbor 401(k), your company must wait until the beginning of a new plan year.
For example, the retirement-plan provider Guideline notes that upgrading from “Starter” to “Core” or “Enterprise” takes effect at the start of the next calendar year.
The formal conversion must also adhere to IRS rules about plan amendments and notification requirements.
You’ll need to amend the plan documents, notify participants in advance (e.g., 30 to 60 days), and ensure your plan design (eligibility, vesting, matching formulas) complies with the standard 401(k)/safe harbor regulations.
Cost and Timing of Upgrade
The practical window to transition is at the start of a new plan year (often January 1), giving you time in Q4 to finalize plan design changes, obtain board approval (if necessary), and distribute updated plan information to employees.
The following costs are associated with upgrading:
Administrative and document costs: You’ll likely incur legal/consulting fees for drafting new plan documents, restating the plan, and handling additional compliance (such as ADP/ACP tests).
Matching or employer contribution burden: Once you convert, you may begin offering employer matches or nonelective contributions (especially in a safe harbor design), which are additional cash outflows.
Testing and compliance: Traditional 401(k) plans require nondiscrimination testing (ADP/ACP) unless you adopt a safe harbor variant, which reduces failure risk at the cost of mandatory employer contributions.
Once you have a traditional or safe harbor 401(k) in place, here are the options at your disposal:
Profit Sharing
Employers can contribute discretionary allocations based on profits. The Department of Labor explains that Profit Sharing plans give you flexibility in good years (or none in leaner years) to reward key contributors.
Cash Balance Plan
For high-income founders, cash balance plans are attractive. These plans allow much higher retirement contributions than standard 401(k) limits, especially as owners age. They can also be paired with your 401(k)/profit sharing for “cross-testing” designs.
Mega Backdoor Roth (or After-Tax Continuation)
If your upgraded 401(k) supports after-tax contributions and in-plan conversion features, you can push additional dollars beyond deferral limits into Roth or non-Roth buckets, thereby boosting tax-efficient wealth accumulation.
Which Plan Fits Your Startup in 2025?
When you're choosing between a Starter 401(k), Safe Harbor 401(k), or a hybrid/advanced plan, your choice will be determined by stage, founder wealth goals, recruiting needs, and cash flow stability. The table below can help you make the right decision:
Stage / Context
Recommended Plan
Why It Fits
Seed / Pre-revenue
Starter 401(k)
Minimal administrative burden, zero employer contribution requirement.
SECURE 2.0 tax credits (for businesses with fewer than 100 employees)
can offset startup costs.
Series A/B with HCEs and Recruiting Goals
Safe Harbor 401(k)
Allows employer contributions, avoids nondiscrimination testing,
lets HCEs hit limits, and offers strong recruiting signals.
To maximize founder savings beyond basic 401(k),
add flexibility and scale for large deferred compensation strategies.
Stay SECURE 2.0 Compliant and Take Control of Your Startup’s 401(k)
Deciding between a Starter 401(k) and a Traditional or Safe Harbor 401(k) entails balancing growth, founder savings, and recruiting optics. The truth is, most early-stage teams don’t have the ability to conduct nondiscrimination testing, manage plan notices, or chase compliance updates under SECURE 2.0.
This is where your startup can take a smarter path by pairing lean plan design with expert back-office support.
Chore streamlines the entire 401(k) lifecycle for founders and operators. Instead of wasting hours managing plan documents, compliance forms, and payroll integrations, Chore ensures your Starter or Traditional 401(k) runs seamlessly in the background.
That means your finance team avoids ADP/ACP testing headaches, your employees get a seamless enrollment experience, and you (if you’re a high-comp founder) can focus on maximizing tax-advantaged savings without worrying about corrective refunds.
Ready to see which 401(k) fits your startup and get it running without the challenges? Talk to Chore today.
FAQs
What is a Starter 401(k) under SECURE 2.0?
A Starter 401(k) is a new type of retirement savings plan created under the SECURE 2.0 Act of 2022 to make it easier and less expensive for small businesses to offer retirement benefits to employees.
Can founders maximize savings with a Starter 401(k)?
Founders cannot maximize savings with a Starter 401(k) because:
Contribution limits are very low ($6,000 to $7,000 vs. $23,000 to $30,500 in a Traditional 401(k)).
Employer contributions (match/profit sharing) are not allowed.
Advanced strategies (profit sharing, cash balance, mega backdoor Roth) are unavailable.
How do I upgrade from Starter 401(k) to Traditional 401(k)?
Here’s how to upgrade from Starter 401(k) to Traditional 401(k):
Wait for the new plan year (usually January 1) since Starter plans can’t be amended mid-year.
Amend or replace plan documents to reflect the new 401(k) design.
Notify employees in advance (at least 30 days for safe harbor plans).
Update payroll/HR systems for new contribution types.
Prepare for compliance testing (or adopt a safe harbor design to avoid it).
Maximize SECURE 2.0 tax credits to offset admin costs.
Consider advanced features like profit sharing, cash balance plans, or Mega Backdoor Roth.
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Chore Team
| Last updated on
Jan 6, 2026
The Chore team consists of individuals from diverse backgrounds with a passion for learning and a desire to share knowledge.
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