I read with some interest the latest findings from the National Bureau of Economic Research (NBER) regarding the uptake (or lack thereof) of tax incentives for starting a retirement plan. As usual, my mind wandered off to "solutions world".
The SECURE 2.0 Act provided for tax credits up to $5,000 for employers with 50 or fewer employees who start a 401k. This credit could easily offset the start-up costs of a retirement plan. And yet the authors of the NBER paper found that between 1% and 5.5% of employers are taking advantage of this credit.
SECURE 2.0 also created an employer contribution credit, which covered 100% of employer contributions for two years up to a maximum of $1,000. The proportion covered by the credit declines by 25% each year until it reaches 0 in year six.
Why are so few employers taking advantage of these credits? They are in effect leaving free money on the table. Why might this be?
The authors point to a lack of awareness of these credits. This makes sense. As a small business owner, I have many things on my plate and this might not jump to the top of my priority list. The authors further point to confusion or frustration with related paperwork. Again, understandable. The more complicated things are, the less likely someone is to tackle the matter.
There was also a concern among the authors that employers are not claiming the on-going credits. It may be easy to think that this is a one and done.
And finally, the uptake is correlated with those who use a CPA or are themselves very aware of the credits.
Solutions? It is important to ruminate on th auese as the tax credits may not be producing the increase in retirement plans that were desired. Not being a tax person but being a rather simple-minded 401k advisor, I can't help but wonder if the TPA and/ or record keeper could automatically file a form with the IRS alerting them to the new plan. The tax credit would then be automatically applied. I got this idea based on how 401k distributions create 1099-Rs. A copy of the 1099 is automatically sent to the IRS. How hard would it be to have a crediting tax document created?
In any case, back to the drawing board trying to solve the age-old conundrum of how to give all employees the opportunity to retire with dignity.