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Changing the Default Answer on Whether to Offer a Retirement Plan

In the current governmental environment, one could be forgiven for failing to notice that major bipartisan legislation was signed into law on December 20, 2019. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 makes sweeping changes to the rules surrounding retirement savings accounts, such as a 401(k) offered by employers or personal IRAs. The act includes significant changes to how these accounts can and should be utilized for retirement security and estate planning purposes. If you participate in or are contemplating participating in retirement savings account, you should consider meeting with a qualified advisor to discuss how these new rules will affect your financial planning goals.

But, arguably, the bigger economic impact of this law will be in changes made to tax credits for small business employers who are interested in changing their 401(k) or IRA plan or setting up a new one.

When starting a new plan, a tax credit has long been available, consisting of 50% of the costs for starting up a new plan or educating employees about the plan, up to a maximum of $500 in each of the first three years of the plan. The SECURE Act increases this credit to be $250 per eligible, non-highly-compensated employee, with a minimum of $500 and a maximum of $5,000 in each of the first three years of the plan.

This means that only employers with 20 or more eligible employees will have access to the maximum credit. However, new dual eligibility rules will require plans to extend participation to certain long-term part-time workers. For some industries, this could significantly increase the number of eligible employees as well as access to the expanded Pension Plan Start-Up Credit.

The Act also adds a separate $500 credit for new or existing plans that adopt an automatic enrollment provision, also available for the first three years of the plan. Those who have long offered plans to their employees may be familiar with a well-established pattern of low participation rates. This trend has been observed even in the face of significant incentives such as employer matching programs. The surprising truth of the matter is that large numbers of eligible participants do not check any box at all when offered a retirement plan. Automatic enrollment provisions change the default answer for non-box-checkers from “no” to “yes.” This simple change has a significant impact on overall participation rates as has been shown by the research of Nobel Prize winning economist Richard Thaler, and others. This may well be the best provision a company can adopt to enhance the long-term welfare of their employees, and now provides a tax credit in addition.

The bottom line of these new tax credits is that small businesses now have an important “sweet-spot” to watch out for as they grow. Considering if and when to adopt a retirement plan is always important consideration in a business’ growth cycle. Going forward, the well-timed adoption of a new automatic enrollment retirement plan could result in tax credits as high as $16,500 over three years, which could coincide nicely with a broader tax strategy. As always, tax planning is an extremely complex process. This new tool should be considered carefully in consultation with your tax advisor to ensure maximum benefit to your business and employees. If you would like more information or a consultation on this or other tax topics, please let us know.


Brad Hammond

Tax Staff – ACM LLP


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