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Is the Starter-K the Jumpstart Retirement Plan Coverage Needs?

If Congress were to succeed this time around with the Starter-K provision, over 19 million American workers would gain access to and have the ability to participate in a workplace retirement plan.

By Bonnie Treichel, JD

To pass or not to pass? If you follow retirement plan policy and legislation, that is the big question surrounding “SECURE 2.0” as the current legislative session comes to a close.

Bonnie Treichel, JD, is the founder and chief solutions officer of Endeavor Retirement. She works with financial services companies on best practices related to qualified retirement plans.

Bonnie Treichel

Coined by the financial services industry as SECURE 2.0, that’s just the nickname for the culmination of three different bills (one from the House and two from the Senate). There was strong momentum for this bipartisan legislation earlier in the year when the House passed the Securing a Strong Retirement Act, H.R. 2954, with a vote of 414-5 in March. Over the summer, the Senate passed two more complementary bills. Now, in the final days of the year, it remains to be seen if these bills will be reconciled and make their way to the President’s desk.

There are almost 150 provisions across the three bills. The spirit of the legislation builds on some of the major initiatives from the first SECURE Act of 2019. This includes expanding access to workplace savings, simplifying plan administration for employers offering a workplace plan, providing more flexibility for those Americans who are saving in a workplace plan and a host of other provisions.

Need for Workplace Retirement

Ample data shows that when the opportunity to save is made easy, people are more likely to do it. It starts with having access to a plan at work as opposed to an optional plan such as an IRA that you have to set up on your own. According to a study from Vanguard, Americans are 12 times more likely to save for retirement if they have access to a workplace retirement plan. When coupled with auto features like automatic enrollment and automatic escalation, Americans can save much more effectively.

Yet, 65 million American workers don’t have access to a workplace plan, according to pooled plan provider Sallus Retirement. The problem is magnified in small businesses across America. According to the Starter-K Act introduced in 2022, only half of small businesses with less than 50 employees provide a workplace retirement plan for their employees today.

Historical Attempts to Expand Coverage

Expanding coverage is not a new initiative. Recall the myRA program launched in 2015 that was shuttered shortly thereafter. Despite the federal program’s criticism, states like Oregon, California, and Illinois (and now several others) proceeded and set up their own state-run programs to encourage access to savings. (Check out more from the National Association of State Treasurers)

The SECURE Act of 2019 further encouraged access with provisions such as the expanded tax credit for businesses that started a new retirement plan and/or included automatic enrollment in the plan’s design. Other provisions included the opportunity for employers to come together in the form of a “pooled plan” arrangement to shift their liability and responsibility to someone else (one of the main impediments to offering a plan) and still offer a plan to their employees.

The Starter-K Provision

What’s that saying? If, at first, you don’t succeed, try, try again. That’s the plan in Congress. Some of the major provisions in SECURE 2.0 are again focused on expanded coverage for Americans. One of those provisions is the Starter-K provision, which is part of one of the Senate’s bills that came from the Starter-K Act introduced in the Senate earlier in the year.

The Starter-K provisions allow but do not require an employer to start a workplace plan. So why would an employer do it? Typically, workplace plans are viewed as expensive and hard to administer, which results in the potential for a lot of liability under ERISA (and for those not familiar, there can be steep penalties for violations of ERISA).

Under the Starter-K proposal, many of those obstacles are eliminated or reduced. Starting in 2023, employers that have never had a plan can set up their 401(k) or 403(b) plan. Employers would not be required to make a contribution and their employees would be automatically enrolled at 3% of pay.

The limits on contributions look more akin to IRAs, though this is a 401(k) or 403(b). The limits start at $6,000, indexed to inflation. There is an additional opportunity for a catch-up contribution of $1,000 for those individuals over 50.

Employers also don’t have to worry about nondiscrimination or top-heavy testing requirements. This eliminates both cost and complexity that plagues a lot of employers in their decision to offer a plan.

Coupling with the Tax Credits

What’s better? There are other provisions of SECURE 2.0 that look like SECURE of 2019 but better! Just like the expanded tax credits of the first SECURE Act, there is another set of proposed tax credits for starting a plan in SECURE 2.0. Though there are differences between the House and Senate versions of the bills, either way, when coupled with the Starter-K, Congress is making a compelling run at encouraging small business owners to start a plan and expand access to workplace savings programs.

The Impact of Starter-K

If Congress were to succeed this time around with the Starter-K provision, according to the American Retirement Association, over 19 million American workers would gain access to and have the ability to participate in a workplace retirement plan. These provisions can always change during the legislative process, but as we close in on the final days of the legislative session, it’s important to keep an eye on those provisions that allow and really encourage employers to start a retirement plan in the coming year.

About the author: Bonnie Treichel

Bonnie Treichel, JD, is the founder and chief solutions officer of Endeavor Retirement. She works with financial services companies on best practices related to qualified retirement plans.