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Tax Credit Boost Could Increase Small-Business Retirement Plans: LPL

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An overwhelming majority of small-business owners would be likely to adopt or enhance employee retirement plan coverage if they were provided increased tax incentives, according to a recent report from LPL Financial.

The Small Business Retirement Savings Challenge report is based on findings from a survey LPL commissioned of 791 small businesses, defined as those with 25 to 99 employees, in February.

Sixty-eight percent of the owners in LPL’s survey reported offering a plan. Of the remaining 32% that did not, cost (cited by 39%) and complexity (cited by 19%) were the common barriers to offering a plan. Approximately 25% also stated that employees weren’t interested.

Current law provides a non-refundable tax credit of up to $500 per year for up to three years for small businesses that start a plan. LPL’s survey found that many small-business owners feel that the tax benefits are not a strong enough incentive to overcome the hurdles of cost and complexity.

“Although there is no magic number that will ensure every small business owner will implement a plan, our data did show that an increase in the tax credit would likely have a large impact on holdouts,” the report states.

The survey found that 91% of small employers without a plan would be at least somewhat more likely to start a plan if the cap on the current tax credit for starting a plan were increased to $5,000 (as under several bipartisan legislative proposals, the report notes) and adjusted to cover all initial costs.

“[T]he results show that well-targeted tax incentives will help provide Americans with the tools they need to increase their retirement savings,” Dan Arnold, president and CEO of LPL, wrote in the report. “We fully support legislation that will help small businesses offer savings plans to their employees, and believe the time to act is now.”

LPL also asked if changes to tax policy could impact a small business’ willingness to automatically enroll their employees. The results were encouraging.

According to the survey, only 53% of small-business owners that have a retirement plan use automatic enrollment. Of those that didn’t automatically enroll employees, the top reason (cited by 41%) was that it is too expensive because if employers automatically enroll employees then they would have to pay more in matching contributions, according to the report.

The survey found, though, that a majority of those who don’t currently auto-enroll their employees would be either much more or somewhat more likely to do so if a tax credit was offered. According to the survey, 86% of small employers with a plan would be at least somewhat more likely to offer automatic enrollment if they were eligible for a $500 credit for doing so (also as under bipartisan legislative proposals, the report notes).

“Given the large footprint of small business on the American economy, a relatively small outlay for improved tax incentives could go a long way toward improving the retirement security of a large number of Americans,” the report concludes.

— Check out 5 Mistakes That Could Derail Your Clients’ Retirement on ThinkAdvisor.

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