It’s OK—you’re far from alone—47% of small to midsize businesses don’t offer a retirement plan, and you have reasons for being one of those. You have more to do than run a retirement plan and don’t want to spend your time administering a plan or picking investment options. And, given your company’s size, you think the costs of offering a plan outweigh any tax, recruiting, employee retention or other benefits you might get in return.
New legal changes may make you rethink your decision. First, there are new tax incentives for offering a retirement plan. Second, there are new ways for employers to take advantage of professional plan administration and the economies of scale that had been available only to larger employers. Third, states may soon require employers to offer a plan or participate in a state-run scheme.
The first question to ask: Why should we offer a retirement plan? There are many reasons, including the following:
- So your employees can save for their retirement and then retire, allowing the next generation of employees to help lead your company into the future.
- So employees can receive a tax deferral for their contributions.
- So you can deduct your contributions made on employees’ behalf.
Additionally, employers may even be eligible for a tax credit for the startup costs for their plan.
New Tax Credits
This past December, Congress added to the tax incentives employers get for offering a retirement plan—viz., for starting one. With passage of the SECURE Act, now, an employer can receive a credit of $500 to as much as $5,000 for three years for starting a plan. The employer also will get a credit for including an automatic enrollment feature that defaults employees into participating in the plan. This credit is $500 and can be claimed for three years. All in, these changes mean that employers are eligible for tax credits of up to $16,500 if they create a retirement plan.
New Ways to Band Together
While these tax incentives may make you want to create a retirement plan after all, there are more new ways to provide retirement benefits to your employees as a result of regulatory and legislative changes last year.
First, there are two options for employers that would rather participate in a plan run by a third party. Right now, chambers of commerce and other associations are designing and sponsoring “association retirement plans.”
Next year, there will be another possibility, “pooled employer plans.” These plans will be run by a professional entity. In a pooled employer plan, an employer’s responsibilities are limited to monitoring the entity administering the plan, providing information, making timely contributions and taking steps to maintain tax qualification. In some cases, an employer may have some investment responsibility. For all other aspects of plan administration, the professional entity will be responsible.
In both association retirement plans and pooled employer plans, employers can offer retirement benefits while leaving most aspects of plan administration to others and taking advantage of the opportunity to benefit from aggregating with other employers for better pricing.
Those pooled plans are not the only avenue being considered by and for small and midsize employers. Some states have and others are considering mandates whereby an employer that doesn’t offer a retirement plan would be required to make a filing and contribute to a state program on behalf of employees. However, if a small or midsize business is operating in multiple states, a nationwide retirement plan could offer a single solution to providing that company’s retirement benefits. Such a plan could help the employer avoid the need for determining the filings that various states may require and weaving through possible mandates in each jurisdiction. Importantly, many of these state laws exempt employers that offer a nationwide retirement plan.
Kevin Walsh is a principal at the Groom Law Group. He advises clients on a wide range of “standard of care” matters. His practice encompasses helping retirement plan service providers, including registered investment advisers and broker-dealers, comply with the Department of Labor’s fiduciary rules, the Securities Exchange Commission’s best interest rules, FINRA’s suitability rules, and evolving state care standards.
David N. Levine is a principal at the Groom Law Group, where he advises plan sponsors, advisers, and other service providers on a wide range of employee benefit matters, including retirement. He was previously the chair of the IRS Advisory Committee on Tax Exempt and Government Entities and is currently a member of the executive committee of the Defined Contribution Institutional Investment Association.This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services (ISS) or its affiliates.
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