Thinking about entering the small-business market? A Sept. 10 workshop session at the 2020 NAPA 401(k) Cyber Summit offered insights on how and why advisors might focus on small plan opportunities—with a focus on two key tax credits under the SECURE Act.
Moderated by Jeb Graham, Plan Advisor and Principal with CAPTRUST, and featuring Bonnie Treichel, Principal and Co-Founder of Zuna, and Jim Sampson, Director of Retirement Advisory Services at Hilb Group Retirement Services, the panelists offered tips on evaluating the cost of the solution for these small plans, the marketing strategy for doing so and the way to service these plans while meeting the requirements of ERISA.
To help address the coverage gap and give more people access to a workplace retirement plan, the SECURE Act includes significant increases in tax credits to encourage start-up plans, but it also includes an additional credit for small employers that embrace automatic enrollment:
- New Plan Credit: Tax credit for the first three years after adopting a new plan for 50% of start-up costs equal to the greater of (1) $500; or (2) $250 multiplied by the number of non-highly compensated employees (NHCEs) eligible to participate up to a maximum of $5,000 per year.
- Automatic Enrollment Credit: Tax credit of up to $500 per year for three years to defray costs for the addition for automatic enrollment provision, for either a new plan or an existing plan.
“The tax credit for the startup of a new plan isn’t new in the tax code, but the real thing under the SECURE Act is that it massively expanded that tax credit,” explained Treichel, who noted that it used to be a $500 total tax credit, but now you can get up to $5,000 per year.
But since the SECURE Act passed in December 2019, it seems that many may have forgotten about the provisions, particularly given the pandemic. “I think it’s upon us to educate people on the fact that it’s no longer this $500 credit, which really didn't get anybody excited, but to be able to potentially get up to $5,000, okay, that might be enough to move the needle,” noted Sampson, who added that he believes it’s really on the advisor community to get the word out there and let people know that this is an option.
Sampson believes there will be a subsection of clients that have always wanted to do a 401(k), but have never been able to get their hands around, not only the costs, but the amount of time they have to spend on doing it. “I think this really could be what pushes them over the edge to be able to really take a significant bite out of those costs for those first three years,” he noted.
Start-up Costs
Treichel cautioned that when talking to prospective clients and employers about setting this up, it’s important to emphasize that they have to actually spend the money to be able to get the credit back, instead of trying to pay for it out of plan assets.
Other considerations include costs for recordkeeping, the services of an advisor and a third-party administrator, which can add up quickly, Sampson emphasizes. Of course, much of this depends on the cost structures of the various providers, but he noted there are enough expenses to take full advantage of the credit.
Regarding startup costs, Treichel explains that there are three things that technically qualify: the cost of establishing the plan, administrative expenses and participant-related educational expenses. “That's where your advisor fee probably fits in if there’s some education there, but as long as the expense is one of those three categories, then it counts as the quote startup costs that qualify under this tax credit,” she advised.
Small Plan Options
As for how he sees pooled employer plans (PEPs) playing out as part of the equation, Sampson believes people are really starting to dig in to figure out which way they’re going to go on this, but that he believes there will be room for both. “I think there are two camps—there’s one camp that is all in on the PEP and thinks it’s the greatest thing since sliced bread, and it’s just the way business is going to be done. And then I think there’s another camp of people who are thinking, you know what, I probably have to have one of those to be able to say, I have it and compete, but maybe it’s not the best option and maybe I’ll still drive folks to that standalone plan option.”
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Treichel notes that it’s possible to go in and out as a PEP, but there still appears to be an open question of who gets the tax credit if you have several employers inside a PEP that have a plan for the first time as part of the PEP. Another open question is what happens with the start-up credit if you’re in a PEP as a small employer for one year, but then decide you want to start your own plan, are you still eligible for the credit and for how long.
Another variation is if you’re in a state-run plan and whether that would count as being in a plan for purposes of the tax credit if the employer later decides they want to start their own plan. [Note: the IRS issued guidance on Sept. 2 addressing the small employer automatic enrollment credit portion, which may shed some light on how the agency may rule on the start-up credit.]
In considering the various options and where plans are in their lifecycle, Treichel observes that some are never going to outgrow a state-run plan, or a PEP or a small plan, while others are going to start small but quickly outgrow it and need a custom solution. “So just thinking about this from an advisor standpoint, if you’re prospecting, think about what type of plan you’re prospecting, where they’re going to go, and who’s a target to talk to about this tax credit,” she advises.
When asked about working in the smaller end of the marketplace, Sampson notes that you do have to adapt your service model. “In the smaller end of the market, they don’t want to see you that often. They want someone to come in, set it up, get it running smoothly, give them all the things they have to have to keep their people happy and they’re good,” he explained. So instead of doing four investment due diligence meetings a year, Sampson notes that you’re doing one investment review a year and maybe a couple of Zoom calls to go through the high points and for education. Sampson notes that his firm also requires their smaller plan clients to allow his firm to be a 3(38) advisor.
Sampson also recommends making sure that you’re offering the appropriate levels of service, which is probably less than your used to doing. What’s more, he suggests identifying what those deliverables are going to be and what you need to charge to remain profitable. From there, he suggests identifying potential referral sources, such as CPAs or the local Chamber of Commerce.
As a concluding remark, Treichel observes that COVID-19 seemingly presented a big obstacle that has the perception that the small businesses aren’t going to want to start plans. “And so, the problem is the timing of when this [start-up credit] came about, because it lost the traction, but the opportunity is, because of COVID, people are thinking outside the box and more businesses are thriving and starting because they’re embracing the opportunity for innovation,” she emphasizes.
