America is currently facing a retirement crisis. It is commonly agreed that a best practice to decrease the coverage gap is by encouraging Americans to save for retirement via an employer sponsored 401(k). However, there are two major hurdles for employers in offering a 401(k) plan: cost and administrative burdens. In this article we will dive into the cost aspect of a 401(k) plan and how Congress is trying to get 401(k)’s in motion by dangling a metaphorical carrot in front of the rabbit.
In December of 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) was passed through Congress. This piece of legislation includes two tax credits to employers in regard to their 401(k) plans.
The Start-Up 401(k) Tax Credit is available to business owners who haven’t had a 401(k) plan within the last three years. Additionally, the exact IRS verbiage of the credit amount is as follows:
The credit is 50% of your eligible startup costs, up to the greater of:
- $500; or
- The lesser of:
- $250 multiplied by the number of Non-Highly Compensated Employees (NHCE’s) who are eligible to participate in the plan, or
Essentially to figure out how much of a credit you’ll receive, you must first evaluate the costs the business will cover. With a startup plan, it might make sense for the business to pay the advisory fee, recordkeeping fee and third-party administration fee out of pocket. Not only are these business expenses eligible for the tax credit, but this strategy allows the employees to build up their savings in the first few years. After you figure out the total expenses the business will cover, you’ll need to figure out how many non-highly compensated employees (NHCEs) will be in the plan and multiply that by $250. You’ll then use whichever number is less: what you calculated or $5,000. But remember – the credit is only for up to 50% of start up costs. So if your total costs are $5,000, the maximum credit possible is $2,500. I know what you’re thinking, if only tax laws could be simple, right?
The second tax credit is the Automatic Enrollment tax credit. To encourage employers to add an automatic enrollment provision to their plan, the government is giving a $500 per year tax credit for three years. With automatic enrollment, once an employee becomes eligible for a workplace plan they’re automatically enrolled to defer into the plan at a certain percentage of wages. Employees can change their percentage or opt-out of the deferral entirely. The thought process here is a “gentle nudge” or taking the path of least resistance will get employees saving in the plan more quickly and typically at larger rates.
If you have any questions about how these tax credits could help your company offset the costs of starting a retirement plan or more efficiently help employees save for retirement, please contact Kampstra Wealth Management by emailing firstname.lastname@example.org.