There may never be a better time to create a retirement plan


The incentives include tax credits, which are particularly attractive for businesses with fewer than 50 employees. They are intended to encourage smaller companies to offer retirement plans for employees. This is especially true for the smallest businesses, where less than half of them (48%) do so, according to a study by Anqi Chan and Alicia Munnell of Boston College’s Center for Retirement Research, which used 2019 U.S. Bureau of Labor Statistics statistics. The situation is changing now, partly due to more attractive tax incentives and a highly competitive job market where every benefit counts in the battle for talent. According to a survey conducted by the nonprofit Transamerica Institute’s Transamerica Center for Retirement Studies, 42% of companies that do not offer a 401(k), or a similar plan, are likely to sponsor a plan within two years. Cost concerns were cited by 31% of those who are unlikely to sponsor a plan within this timeframe. There are eligibility requirements and specific variables that can affect these benefits, so it makes sense to consult a tax advisor to help weigh the various options. There are eligibility requirements and specific variables that can affect these benefits, so it makes sense to consult a tax advisor to help weigh the various options.

But as a general rule, these credits “add up to sizable benefits for employers looking to start plans,” said Amy Vaillancourt, senior vice president of workplace product, strategy and architecture at Voya Financial.

Here are some basic features of the legislation and points to consider in balancing costs and benefits — to both employer and employee.

A big tax credit can cut down on plan setup costs

Secure 2.0 created a souped-up credit to offset administrative costs associated with starting a qualified retirement plan. A large tax credit can reduce plan setup costs. The cap is $5,000 per year for a period of three years. Larger businesses — those with 51 to 100 employees — are still eligible to receive up to 50% of plan start-up costs.

Employer contributions also generate tax advantages

Additionally, Secure 2.0 offers a new tax credit for five years to businesses with up to 100 employees who make employer contributions to a new defined contribution plan. The credit was created to encourage small business to contribute to the retirement savings of their employees. The credit amount depends on factors like the number and age of employees eligible for the plan. The tax credit for larger businesses — those with 51 to 100 employees — is based on a sliding scale. Kelly Gillette, partner at Armanino, says that small businesses can reduce some costs by using a smaller auto-enrollment tax credit. Gillette says that while this feature won’t be required until 2025 for small businesses, they can choose to add it sooner and receive the credit. While auto-enrollment tends to increase participation, and thus add costs for a small business, the credit could help offset these added costs.

Starter 401(k) plan doesn’t require an employer match

Employers can now offer a starter 401(k) plan that allows them to take advantage of the applicable administrative tax credits even though they aren’t making contributions on their employees’ behalf, Scudillo said. This option is a boon to employees, as many small businesses cannot afford or do not want to offer an employer matching contribution.

Seventy-one percent of respondents said they expect their primary source of income in retirement to come from what they save on their own in an employer-sponsored defined contribution plan, according to a recent survey from Natixis Investment Managers.

This new type of plan can be useful for recruiting purposes and for helping employees prepare for retirement, Scudillo said. The option is available to small businesses that do not have a plan in place.

Military families receive extra attention in legislation

Military spouses often lose out on the ability to save for retirement because they may not stay at a job long enough to qualify for retirement benefits or become vested. If certain conditions are met, Secure 2.0 will offer eligible employers up to $500 per spouse who participates in a defined contribution plan. For example, spouses of military personnel must be eligible to join the plan immediately after being hired. Also, upon plan eligibility, the military spouse must be eligible for any matching or nonelective contribution that he or she would have been eligible for otherwise at two years of service.

The credit applies for three years and does not apply to highly compensated employees.

New Roth IRA options for small businesses

Secure 2.0 allows business owners to offer a Roth version within SEP IRAs and SIMPLE IRAs. Small businesses often use these because they have fewer administrative requirements than a 401k,” said Eric Bronnenkant. Bronnenkant explained that the ability to include a Roth option within these plans is not only beneficial for the plan owner, but also helps with recruitment and retention.

The self-employed are not left out of legislation

The retirement legislation also has multiple benefits available for all individuals, including the self-employed. The ability to contribute to retirement more money after 50 is one of the benefits. The catch-up contribution cap for 2023 is $7,500 compared to $6,500 from 2022. This limit applies to people aged 50 and older. Under Secure 2.0, the catch-up contribution limit will increase even more for participants between the ages of 60 and 63 starting in 2025, Gillette said.

Additionally, the age at which people must take required minimum distributions from their traditional 401(k) or traditional IRA has increased. Secure 2.0 increased the age at which a person is required to start taking RMDs in 2023. Gillette added that, beginning in 2024 there will be no RMD requirements for Roth 401(k), Roth 403(b), or Roth 403(c) plans. This puts them at parity with Roth IRAs, and can also provide a substantial benefit.