Retirement plans may not be out of reach for small businesses

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 09/25/19

Retirement plans may not be out of reach for small businesses

Offering a workplace retirement plan may be challenging for small businesses that often cite cost as an obstacle.

Only 28% of businesses with fewer than 10 employees offer a retirement plan, according to a recent study by SCORE, a nonprofit network of business mentors. Businesses with larger numbers of workers were more likely to have a workplace plan. The study noted that 51% of businesses with 10 to 24 employees and 63% of businesses with 25 to 49 employees offered retirement savings plans.

Business owners cited cost and lack of resources to administer the plan as the leading reasons why they do not offer workplace savings plans.

Many small-business owners may not realize that the Internal Revenue Service offers a tax credit for the costs of starting a SEP (Simplified Employee Pension), SIMPLE IRA, or qualified plan. The credit is available for businesses with 100 or fewer employees who received at least $5,000 in compensation in the preceding year. Additional eligibility criteria are outlined on the IRS website. Businesses that qualify can claim up to 50% of startup costs up to a maximum of $500 per year.

Congress eyes legislation to expand savings

More workers may have access to retirement savings plans at work if retirement legislation advances on Capitol Hill. The SECURE Act (Setting Every Community Up for Retirement Enhancement) could change the way that individuals save for retirement. It could provide access to workplace retirement savings plans for millions of workers who currently do not have a plan. The bill, which passed the House May 23 by a margin of 417 to 3, is currently stalled in the Senate.

The SECURE Act includes a provision to expand the existing tax credit for startup costs. The legislation “increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.”

The legislation also proposes a new tax credit for plans offering auto-enrollment. Automatic enrollment is shown to increase employee participation and higher retirement savings. The legislation “creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan startup credit allowed under present law and would be available for three years. The credit would also be available to employers who convert an existing plan to an automatic enrollment design.”

Retirement benefits may help recruit workers

Many workers note the importance of retirement benefits when seeking a job or deciding to stay with a company. The SCORE survey found that 48% of workers who left a job noted that the lack of retirement benefits had an impact on their decision to leave. The majority of small-business owners polled also acknowledged that retirement benefits were important to recruit and retain workers.

Small-business owners may want to review options with a financial advisor to determine which type of plan would be appropriate for the business.

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