Benefits of Retirement Plans

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Recent legislation, including the SECURE 2.0 Act, aims to incentivize employers, especially small and midsize businesses, to offer retirement benefits by providing significant tax credits and introducing new plan features.

Incentives for Employers

SECURE 2.0 includes expanded tax credits to offset retirement plan costs. Employers with up to 50 employees can cover 100% of startup costs for three years, while those with 51 to 100 employees can receive 50% of administrative costs, capped at $5,000 annually. Additionally, there are tax credits for employer contributions during the first five years.

Eric Droblyen, CEO of Employee Fiduciary, emphasizes educating potential plan sponsors about these benefits to overcome cost concerns. Matthew Hawes of Morgan Lewis notes that these credits are designed to encourage early plan adoption without penalties for growing businesses.

New Plan Features

SECURE 2.0 introduces over 90 provisions for plan sponsors, including mandatory automatic enrollment for new plans established after December 29, 2022, starting in 2025. This feature ensures employees are automatically enrolled, promoting higher participation rates.

The act also allows 403(b) plans to join pooled employer plans (PEPs), enabling smaller plans to share administrative costs. However, PEPs must meet the same requirements as single-employer plans, which may complicate implementation.

Ari Sonneberg from The Wagner Law Group highlights new provisions like retirement benefits for part-time workers and catch-up Roth contributions. These features may increase administrative complexity but also expand savings coverage.

Balancing Costs and Benefits

While additional features can enhance a plan’s attractiveness, they also increase costs and administrative burdens. SECURE 2.0 allows participants more flexibility with hardship withdrawals, emergency savings accounts, and contributions for student loan repayment, making plans more appealing for current and potential employees.

Transition Challenges

The defined contribution retirement industry is in a transition period to implement SECURE 2.0’s 90 provisions. Recordkeepers and service providers are updating systems, awaiting further guidance from the IRS and Department of Labor.

Droblyen suggests starting with a simple plan design and adding features over time. Michael Gorman of Morgan Lewis advises preparing for full compliance despite potential temporary leniency from regulators.

Employers offering retirement plans can benefit significantly from tax credits and new plan features, but must navigate the complexities of implementing these changes to ensure compliance and maximize benefits for their employees.

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