The tax incentives included in these laws provide key inducements for small businesses to start a 401(k) Plan, today!
The SECURE Act of 2019:
- Established $500 annual tax credit for automatically enrolling employees in the plan;
- Enhanced small business tax credits to 50% of “start-up” costs – up to $5,000/year;
- Created the Pooled Employer Plan (PEP) to allow “unrelated” employers to band together and pool their assets;
- Codified a fiduciary safe harbor to offer annuities as distribution vehicle in 401(k) plans.
The SECURE Act 2.0 of 2022:
- Increased “start-up” tax credits to 100% of costs – for employers with less than 50 employees;
- Established employer contribution tax credits of up to $1,000 per employee/year;
- Will mandate automatic employee enrollment for all new 401(k) and 403(b) plans;
- Will enable mid-year SIMPLE-to-Safe Harbor 401k conversions (versus only allowing conversions annually).
Tax Credits v. Tax Deductions
The vast majority of small employers pay their retirement plan administration fees from a corporate bank account (versus debiting them from plan assets). This is hardly surprising when you consider the approach is usually a win-win for the business owner, as they can deduct the fees as an ordinary business expense. The SECURE Act(s) made this approach even more attractive by increasing the available tax credits a small business owner can claim by starting a new plan - eliminating the plan's out-of-pocket cost for up to 3 years.
Enhanced Small Business Start-Up Tax Credit
Beginning in 2023, eligible businesses with 50 or fewer employees can qualify for a federal tax credit equal to 100% of the administrative costs for establishing a workplace retirement savings plan – capped at $5,000/year for the first 3 years after plan establishment. The original SECURE Act gave startup businesses with up to 100 employees a tax credit equal to 50% of administrative costs; whereas this still applies to . Eligible businesses with 51 to 100 employees remain subject to the original SECURE Act provision.
New Tax Credit For Employer Contributions
Beginning in 2023, eligible businesses with up to 100 employees can earn additional tax credits based on their employee matching or profit-sharing contributions. This credit provides 1:1 value for employer contributions up to $1,000 per employee/year. However, this provision phases down gradually over five (5) years and is subject to further reductions for employers with 51 to 100 employees.
How much can the tax credits reduce the cost of a new 401(k) Plan?
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Automatic Enrollment | Yes | Yes | Yes |
| Number of Non-HCEs | 10 | 10 | 10 |
| Plan Establishment Fe | $500 | - | - |
| Annual Administration Fee | $1,800 | $1,800 | $1,800 |
| Annual Participant Fees | $700 | $700 | $700 |
| Start-Up Credit | ($3,000) | ($3,000) | ($3,000) |
| Contribution Tax Credit | ($10,000) | ($10,000) | ($10,000) |
| TOTAL TAX CREDITS | $13,000 | $13,000 | $13,000 |
The Pooled Employer Plan (PEP)
The SECURE Act created a new type of defined contribution "multiple employer plan" that enables small businesses to band together to reduce administrative burdens and gain costs efficiencies - dubbed the pooled employer plan (PEP).
In general, two or more unrelated small businesses can come together within a PEP - regardless of where they operate in the U.S. or if they have a shared trade or other association. Unlike its predecessor, PEPs as a whole are protected from disqualification due to the non-compliance of another Participating Employer - commonly referred to as the "bad apple rule".
As a result, participating in a PEP
is likely most attractive to employers who are willing to cede some
control - in exchange for a program that can largely operate independently, reduce administrative burdens, and typically provide cost savings.
A PEP Overview
Turn-Key Plan
The organization that creates a PEP is called the "pooled plan provider" (PPP) and is the named fiduciary under ERISA 402(a) and designated Plan Administrator under ERISA 3(16). Although the PPP appoints the respective service providers of the PEP - including the Custodian, Recordkeeper and Investment Manager, the PPP retains responsibility for the oversight of these service providers and is responsible for administering the Plan on behalf of all Participating Employers.
Reduced fiduciary exposure
Any employer who chooses to enroll in a PEP is known as a "Participating Employer" and has the core fiduciary duties of care & diligence with respect to selecting and monitoring the PPP. Beyond those core duties, it is the responsibility of the PPP to oversee and monitor the performance of all other PEP service providers. Additionally, because the PPP can insure its professional liability by acquiring "Errors & Omissions" & Fiduciary Liability insurance policies, the PPP provides a sort of fiduciary warranty to Participating Employers. As a result, Participating Employer can relieve themselves of the majority of all fiduciary responsibilities by enrolling in a PEP.
Reduced administrative burdens
The role of the PPP as the designated Plan Administrator relieves Participating Employers of core fiduciary obligations, related to the ongoing operation of the Plan. Ancillary functions such as employee enrollment, processing participant loan & distribution requests, and distributing required annual disclosures & notices are handled by the PPP - instead of requiring each Participating Employer to do them individually. As a result, Participating Employers are generally only responsible for maintaining their employee census records and processing payroll to ensure timely remittance of participant contributions.
Economies of scale
The nature of a PEP provides economies of scale, by aggregating the employees and assets of all Participating Employers to negotiate pricing. In fact, unlike individual "stand-alone" plans, by enrolling in a PEP the Participating Employer's requirement for an ERISA Fidelity Bond and the annual filing of a Form 5500 are removed. Additionally, the PPP is responsible for the annual limited-scope Retirement Plan Audit once the PEP encompasses more than 1,000 participants. As a result, PEPs are typically able to offer reduced administrative, recordkeeping, and investment management costs than would commonly be available to a single employer plan.