Firms miss out on incentives for offering retirement plans

Many employers — particularly small-business owners — may not be taking advantage of some new incentives connected with setting their employees up for retirement success, according to one area wealth-management expert.

Two laws covering retirement planning bookended the COVID-19 pandemic, with the SECURE Act passing in late 2019 and the SECURE Act 2.0 becoming law on Dec. 29, 2022, says Gregory Tedone, senior advisor and head of retirement plans for Utica–based Strategic Financial Services.

“A lot happened during or right after the pandemic,” he says, and businesses may have missed hearing the news as a result. That is especially true for the tax credits available to small businesses through SECURE 2.0.

The goal of both laws, and especially SECURE 2.0, is to promote retirement savings and encourage employers to offer retirement-planning options to employees.

Anywhere from two-thirds to three-quarters of small businesses don’t offer a retirement plan to their employees, Tedone says. That’s because it’s expensive to set up and administer those plans.

SECURE 2.0 tries to remedy that by offering tax credits to businesses to start a plan, automatically enroll employees into that plan, and make employer contributions.

Employers may claim up to 100 percent of qualified startup costs for adopting and maintaining a new 401(k) plan, Tedone notes. The maximum credit is $5,000 a year, and the credit is available for the first three years of the plan.

Those tax credits, for many small businesses, will cover the cost of establishing and administering the plan during those early years. Then, the next credit can kick in once the plan is well-established and the employer is ready to make contributions, Tedone notes.

Employers who contribute to their 401(k) plan may claim $1,000 per eligible employee per year. Eligible employees are those who make less than $100,000 per year. Workers may claim the tax credit for five years.

For adding an automatic enrollment feature to a new or existing plan, employers are eligible for a $500 tax credit. Previously, an employee had to opt into the retirement plan, Tedone says. Now, with auto-enrollment, participation is around 90 percent, on average. “It’s really helping people get saving,” he says.

Finally, a big benefit that came with SECURE is the ability for employers across all industries and sizes to join pooled employer plans together, Tedone shares. Rather than having to go out on their own and establish a plan, unrelated employers can join a bigger plan together, making the plan more efficient and affordable. While not as customizable as an individual plan, pooled employer plans can be a great entry point for a business looking to establish a retirement plan, he says.

While all of those benefits and tax credits are there to entice employers to establish plans, the ultimate goal, Tedone says, is to assist people with planning ahead for retirement.

Social Security generally only replaces a small portion of someone’s working income, he says, and most people need some other form of retirement income to fill the gap and maintain their standard of living.

Employers may not realize that helping employees plan for retirement also benefits them, he adds. Most employees plan to retire around age 67, when they can collect the full amount of Social Security, but those who haven’t saved for retirement tend to keep working longer.

In turn, employees who have been there for a long time or are older can cost employees more in salary, health-care costs, and other expenses, Tedone explains. A good retirement plan allows for natural turnover in the workplace.

“A 401(k) plan, when performed correctly, it really helps recruit, reward, retain, and we’re even saying retire employees,” Tedone says.