SECURE 2.0 tax credits: a way to compete with state retirement plans
As a financial professional in the small plan market, the competition for new business can be tough. And now that 47 states have taken steps to enact state-facilitated retirement plans,¹ it may be even tougher to bring new small 401(k)s on board. Although the state programs typically have low costs, the tax credits included in SECURE 2.0 can help you level the playing field. Find out how to make them work in your favor.
The gap in small business retirement plans
You’ve likely encountered many objections from small business owners about setting up a retirement plan, from cost, to administration and fiduciary duties. But in a tight labor market, their reluctance to offer a plan can hinder their talent acquisition and retention efforts. This lack of plan availability is one of the catalysts behind some of the SECURE 2.0 provisions and the growth in state-facilitated retirement plans—as public officials look for ways to close the gap and expand access to all.
2022 retirement plan access by employer size
Source: “U.S. Retirement Markets 2022: The Role of Workplace Retirement Plans in the War for Talent,” The Cerulli Report, Cerulli Associates, December 2022.
State IRA programs vs. traditional 401(k) plans
While state retirement plans help fill a gap in the small plan market for companies with 100 or fewer employees, they're cookie cutter in nature. There’s not much flexibility to tailor the programs to the unique needs of business owners and their employees—something you do every day and likely excel at.
|
State-facilitated IRA programs |
401(k) plans |
Employee contribution limits |
$6,500 (2023)
$7,500 if age 50 or older (2023)
|
$22,500 (2023)
$30,000 if age 50 or older (2023)
|
Employer contributions
|
Not allowed
|
Matching and profit-sharing contributions
$66,000 (2023 defined contribution annual addition limit)
|
Automatic enrollment |
Yes |
Yes |
Automatic escalation
|
May be permitted |
Yes |
Investment options
|
Limited |
Broad offerings available |
Administrative responsibilities
|
As required by state law
|
Subject to Employee Retirement Income Security Act of 1974 (ERISA) reporting, disclosure requirements, and fiduciary duties |
Each state is in varying stages of enacting their plans, so make sure you know where your state stands to help shape your client conversations. Some states have established programs, while others are considering legislation to create one or are studying their feasibility. You can get a brief overview here.
Tipping the retirement plan scales in your direction
A key attraction of state retirement plans is their low cost—in fact, there’s often no cost for employers. But this doesn’t mean you should give up on this market, especially since you can offer more flexible plan design options. Instead, consider using SECURE 2.0’s tax credits, along with the SECURE Act of 2019 automatic enrollment tax credit, to help address cost concerns while explaining the value of a 401(k) plan—and the value you bring to the table.
With these credits, 401(k)s for small businesses may be seen as more affordable. How affordable? Employers with 50 or fewer employees could potentially offset 100% of their initial plan costs.
|
Start-up cost tax credit |
Employer contribution tax credit |
Automatic enrollment tax credit |
Availability |
First three tax years the plan is offered |
First five tax years the plan is offered |
First three tax years the plan includes an eligible automatic contribution arrangement |
Credit amount: employers with 1 to 50 employees |
|
|
$500 |
Credit amount: employers with 51 to 100 employees |
|
Same as above but phased out based on the number of employees over 50 |
Same as above |
Notes |
|
|
Using SECURE 2.0 tax credits to open doors with small businesses
Understanding how the SECURE 2.0 tax credits can help you initiate conversations with small business owners is just the first step. You’ll also want to create an opener that piques their interest. Consider this example to help get your ideas flowing.
Are you aware of our state’s IRA program for small businesses like yours? Before you adopt this program, I’d love to discuss how I can help you create a 401(k) plan that’s tailored to your business, and also affordable, thanks to incentives from the federal government.
From here, you know what to do: Have a consultative conversation with the business owner that demonstrates your value proposition and why your small business retirement plan solutions may be the better choice.
Among other things, the SECURE 2.0 Act was designed to encourage small business retirement plans. Make sure you’re taking full advantage of this opportunity to help grow your practice. We offer several resources, which can help you fine-tune your approach.
Important disclosures
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
This is intended for a financial professional audience.
MGTS-I 454898-GE 06/23 454898 MGR0620232944552
