New survey results from LPL Financial suggest that well-targeted tax incentives for either starting a retirement plan or automatically enrolling employees in one may be a powerful motivator for small businesses to adopt and enhance a retirement plan for their employees.
Based on the survey’s findings, LPL contends that lifting the cap on the current tax credit for starting a plan to $5,000 and offering a $500 tax credit to employers for automatically enrolling their employees in a plan would help small businesses overcome challenges to helping their employees save for retirement.
“Given the large footprint of small business on the American economy, a relatively small outlay for improved tax incentives could go a long way toward improving the retirement security of a large number of Americans,” the report contends.
Start-up Costs
Under current law, a three-year, $500 non-refundable tax credit is available for small businesses that start a plan, but the survey found that many small business owners believe the tax benefits are “not a strong enough incentive” to overcome the hurdles of cost and complexity.
The survey data shows that 91% of small employers without a plan would be somewhat or much more likely to start a plan if the cap on the current tax credit were increased to $5,000 and adjusted to cover all initial costs. “Although there is no magic number that will ensure every small business owner will implement a plan, our data did show that an increase in the tax credit would likely have a large impact on holdouts,” according to the report.
Auto Enrollment
The survey results also show encouraging signs that changes to tax policy could influence small business owners’ willingness to implement automatic enrollment.
When asked about the impact of receiving a tax credit for automatically enrolling their employees, the survey found that 86% of small employers with a plan would be at least “somewhat more likely” to offer automatic enrollment if they were eligible for a $500 credit for doing so.
Only 53% of small business owners that have a retirement plan currently use automatic enrollment, according to the findings, and the top reason cited by those who do not use the feature was that it is “too expensive” (41%), followed by concern over the notion that “employees would be upset” (35%). The remaining 24% responded that it either “sounds risky and complicated” or they “didn’t know it was an option.”
The findings in LPL’s report were based on survey results of 700 small business owners (defined as those with 25-99 employees) conducted in February 2017 about their retirement plan offerings or lack thereof.
Waiting on Congress
The start-up and auto enrollment provisions were previously included in broader, bipartisan legislation sponsored by Senate Finance Committee Chairman Orrin Hatch (R-UT). The committee approved Hatch’s Retirement Enhancement and Savings Act in September 2016, but the bill never made it through the full Senate and has not yet been reintroduced this year.
The ARA offered its support for Hatch’s bill in a July 17 letter addressing the importance of retirement tax incentives as Congress works to overhaul the tax code.
