Current Retirement Credit Impact
The SECURE Act 2.0 increased the maximum retirement plan start-up tax credit from 50 percent of qualified plan start-up costs to 100 percent of those costs (the three-year period over which that credit applies did not change) for employers with 50 or fewer employees. The law also created an additional tax credit for a percentage of the employer's contributions made to employees with compensation that does not exceed $100,000 for the year. The additional credit cannot exceed $1,000 per employee and phases out over a five-year period. The additional credit also phases out for employers with between 51 and 100 employees, and the credit is reduced by 2% for each employee that exceeds the 50-employee limit in the prior year. This new provision is effective as of 2023.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about whether the current retirement plan startup tax credit is meaningful enough to encourage small business owners to adopt plans.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: The currently available retirement plan startup for the smallest employers is a massive expansion over what has historically been available. Small employers with 50 or fewer employees are eligible to claim the tax credit for three years--providing up to $15,000 in tax benefits. Businesses who add automatic enrollment features are also entitled to an additional $500 credit. The point of the credit isn't to federally fund small business retirement plans for private employees--it's designed to draw awareness to the benefits of these plans as employment benefits.
Bloink: In reality, the existing retirement plan startup credit is rarely sufficient to encourage the smallest employers to offer retirement plans to employees. Yes, a maximum annual $5,000 tax credit is available--but the actual amount varies depending on the number of non-highly compensated employees that are eligible to participate in the plan. Some employers end up with tax credits that are much lower--as low as $500, when starting up and administering the plan can cost thousands.
_____________________________________________
Byrnes: This tax credit is designed to offset retirement plans for the smallest employers who are employing ordinary, hard working Americans--the existing credit can cover virtually all costs associated with the plan for three years. That's plenty of time for a small business to get a plan established and learn about the benefits.
Bloink: When we're talking about the smallest startup companies, we may also be talking about businesses with little-to-no tax liability. A tax credit is meaningless without enough tax liability against which to use the credit. This is the same problem that existed with the pre-SECURE 2.0 saver's credit—the current option has done nothing to solve this problem.
_____________________________________________
Byrnes: Yes, the existing credit phases out when businesses hire fewer non-highly compensated employees--because it isn't designed to provide a federal retirement benefit for highly compensated employees who have options of their own. It's designed to encourage businesses to offer retirement savings options for lower and middle-income employees. The credit as designed accomplishes just that.
Bloink: We also have to remember that many of the small businesses operate on extremely tight margins—especially when they're just getting started. With this current tax credit, they're required to advance the funds and claim the credit at a later date--something that can be hard to swallow. Small businesses would be much better served with some type of immediate incentive, rather than a credit they may be able to use months down the road. One proposal would transfer the credit to the retirement plan provider when they reduce the business' startup costs to begin with. In the end, the bottom line is that we can do better when it comes to encouraging small businesses to adopt retirement plans.