Surveys of small business owners have consistently shown cost to be a significant impediment to the adoption of a retirement plan for employees. Well, the recently enacted SECURE Act has a provision that could really make a difference.
Congress has previously tried to address this concern by providing a tax credit to offset the start-up costs of establishing/administering the plan for the first three years to small businesses with no more than 100 employees and at least one non-highly compensated employee (NHCE), and previously without a plan. However, this credit was capped at $500, or 50% of the year’s start-up costs, whichever was lower. While there has been some utilization of this credit, small business retirement plan coverage continues to lag behind larger businesses, and surveys continue to suggest cost as a significant reason. Some have pointed out that the current credit does not begin to offset those early start-up costs.
Enter the SECURE Act, which dramatically expands this tax credit to cover potentially more than half of the cost of a new small business retirement plan. Under SECURE, the amount of the tax credit is now capped at $250 times the number of NHCEs eligible to participate in the plan up to a $5,000 annual maximum (but never less than $500), though, as we saw with prior law, the credit is still limited to 50% of the start-up costs. Additionally, if the new plan automatically enrolls employees into the plan on a uniform basis (but at no minimum rate), the employer will get an additional annual credit for start-up costs of $500 per year. And all of this is effective Jan. 1, 2020. Yes, effective for new plans beginning now!
For example, take a small business employer with 15 NHCEs that wants to establish a safe harbor 401(k) plan for her employees and is willing to do automatic enrollment. The provider quotes an out-of-pocket cost to the employer of $1,500 per year. In that case, the tax credit available to this employer will be $750 plus $500 or $1,250, which is almost the entire cost to the employer.
I have spoken to representatives of several companies that specialize in start-up plans for the small business market and they all believe these new credits could have a meaningful impact on small plan adoption and coverage. Obviously time will tell, but this is definitely a good message for small business owners previously reluctant to offer a retirement plan to their employees.
Brian Graff is the Executive Director of NAPA and CEO of the American Retirement Association.