Among the many changes to retirement plans made by the SECURE 2.0 legislation are changes meant to encourage more employers to adopt retirement plans for their employees. Additionally there are provisions simplifying many rules of operating plans and provisions encouraging employees to participate and save for retirement. This article will discuss a couple of provisions encouraging employers to adopt plans.
Changes to Credit for Startup Expenses of Small Employers. The original SECURE Act of 2019 drastically increased the employer credit for employers with 100 or fewer employees adopting a new retirement plan. It increased the amount of credit for startup costs and provided the credit could be taken in the first 3 years of the plan. Beginning in 2019 the credit was 50% of the startup expenses up to the lesser of $5,000 or $250 for each eligible nonhighly compensated employee.
SECURE 2.0 changes the credit for employers with up to 50 employees for taxable years beginning after 2022. It increases the percentage to 100% of the startup costs. In addition, SECURE 2.0 creates an additional credit based on the amount of employer contributions to plans other than defined benefit plans. The credit is a percentage of the amount contributed for employees who make less than $100,000, up to $1,000 per employee. The percentage of contributions is 100% for the first two years of the plan but drops by 25% for the next three years with no credit available after the fifth year of the plan. The full credit is available to employers with 50 or fewer employees but is phased out for employers with 51 to 100 employees.
The Act clarifies that the credit is available for employers who join an existing Multiple Employer Plan including Pooled Employer Plans.
Starter Plans. Effective after 2023, Employers who don’t offer a retirement plan can adopt a “Starter” 401(k) or safe harbor 403(b) plan that only permits employee elective deferrals. The plan must auto-enroll all employees with a 3% to 15% deferral rate. The elective deferrals would be limited to the IRA limits (currently $6,500 with a $1,000 age 50 catch-up). Such plans would not be subject to nondiscrimination or top heavy testing which many employers see as deterrents to adopting a plan.
Conclusion. Millions of Americans do not have access to a retirement plan at work. The credits and starter plans are both aimed at increasing the ability of Americans to save for retirement at work by providing incentives for employers to adopt retirement plans. Whether it works remains to be seen.