Small business retirement plans: Lower-cost options and tax credits for employers
Many firms have some misconceptions about the costs of offering and administering a retirement plan and were not aware that they can claim a tax credit of up to $5,000 for 3 years to help offset the start-up costs, says a new study.
The Center for Retirement Research at Boston College recently published a new study entitled “Small Business Retirement Plans: How Firms Perceive Benefits & Costs.” The study focuses on small businesses and why they might or might not offer a retirement plan for their employees.
Factors that make a firm more likely to offer a retirement plan
The study cited several situations that tend to make a small business more likely to offer their employees a retirement plan. These include:
- Having at least 50-100 employees.
- Firms that offer higher than average salaries.
- Companies in the professional, technical and scientific services sectors.
Another factor that was cited was the firm’s belief that offering a retirement plan was an important factor in employee retention and in the ability to hire the type of new employees they are seeking.
A factor that surprisingly to the study’s author was not key to whether or not a firm offered a retirement plan were the company’s views on the future of their revenue growth. This factor had little or no bearing on the decision as to whether or not to offer a retirement plan for their employees.
Anqi Chen, Senior Research Economist and Assistant Director of Savings Research at the Center, said this when asked about what she says as trends moving forward for small businesses adding retirement plans. “New technologies have helped reduce the administrative burden and costs of offering a retirement plan. So, as HR management software and automatic payroll systems, etc., become more widespread and better integrated, it will reduce the burden of offering a plan and hopefully encourage more small firms to offer plans.”
Factors the keep firms from offering a retirement plan
The study found a number of factors that might keep a firm from offering a retirement plan for their employees. The top five reasons were:
- Concerns about revenue stability (60% of the firms surveyed)
- The cost of maintaining a plan (52%)
- Administrative and compliance burdens (38%)
- High levels of employee turnover within the firm (37%)
- Perception that their employees prefer wages over a retirement plan (33%)
According to the study, it would seem that many firms have some misconceptions about the costs of offering and administering a retirement plan. Additionally, it would seem that many of these smaller firms were not aware that they can claim a tax credit of up to $5,000 for three years to help offset the start-up costs of offering a retirement. This credit is available to companies with 50 or fewer employees.
Another finding of the study was that many smaller plans were unfamiliar with small business retirement plans beyond the 401(k) that might be an option for them. Many of these plans, such as a SEP-IRA, a SIMPLE IRA and a MEP/PEP could be less expensive for them to offer.
Chen said this with regard to her most surprising finding from the study. “The cost and time misperceptions were surprising. Given how much time and money small employers perceived it would take to offer a plan, it is not surprising that so many did not offer a plan. However, there are many affordable and integrated options out there. Additionally, many employers were also not aware of the tax credits they could receive to help offset the cost of offering a plan.”
The impact of state-sponsored retirement programs
Currently 14 states offer or will be offering a state-sponsored retirement plan of some sort. These programs require employers without their own employer-sponsored retirement plan to automatically enroll employees with automatic Individual Retirement Accounts or auto-IRAs.
The 2023 Small Business Retirement Survey asked all employers surveyed, even those in states without plans to offer a state-sponsored retirement account, whether the presence of this type of plan would make them more or less likely to offer a retirement plan on their own.
The results indicated that the presence of this type of plan would not make firms less likely to offer their own plan. Among firms who already offer their own retirement plan, 70% indicated they would continue to offer their own plan. Of firms not currently offering a plan, 60% indicated a state-sponsored plan might make them more likely to offer one.
At the federal level, SECURE 2.0 added the ability for small businesses to offer starter 401(k) plans to make it easier for small businesses to add a 401(k) for their employees.
Related: Starter 401(k): A fast, simple, budget-conscious solution for small employers
The study showed that larger firms in more professional situations seem more likely to offer a retirement plan for their employees. Concerns about plan cost and company revenue stability are major concerns among smaller companies not currently offering a plan.
When asked what she would say to a small business owner who is on the fence about adding a retirement plan, Chen says. “First and foremost, I want to understand why they are on the fence. If the reason is because they are new and finding their footing as a new business, I would leave them be. But, if the reason is because they think it’s too burdensome, then I would want to make sure they understand the real financial costs and administrative burdens of offering a plan as well as the tax credits available to them.”