If You Incent It, Will They Do It? a Hot Take on SECURE 2.0 and New Plans

This is Part 3 in a series covering key elements of SECURE 2.0, entered into law as part of the 2023 Appropriations Act (Division T).

We’ve just covered Automatic Enrollment and the Saver’s Match, one auto-feature, and one incentive with an auto-feature. Now we’ll focus on straight-out incentives to employers to start new plans.

Small employer pension plan startup cost credits: it’s good news.

SECURE 1.0 in 2019 made up to $5,000 in retirement plan startup cost credit available to employers with 100 or fewer employees. The credit covered up to 50% in eligible expenses for the first three years of operation of the new plan. This credit came available for plan years starting January 1, 2020, so employers using this credit would have seen smaller tax burdens in 2021, and again for 2022.

S2.0 enriches this credit, covering 100% of eligible expenses for smaller employers who start plans – those with 50 or fewer employees.

… and contribution credits: the news gets better.

Small employers can also now take a tax credit for their employer plan contributions on a one-for-one basis, with limits.

Employers with 50 or fewer employees can take a credit of up to $1,000 per employee. Employers with 51 to 100 employees can also take a credit, but it declines by 2% for every employee, down to 0%.

Both changes are applicable to tax years beginning January 1, 2023.

Does it matter?

This is a good question. The short answer is “yes” for at least two reasons.

One, these dollar amounts are the exact amounts employers reference when they say plans are too expensive for them to start and operate. We have personally heard multiple times that “$2,000 to start this plan is more than we can afford.” For these employers, a three year running start should make a big difference in whether they can afford to start a plan or not.

Two, and this is a softer reason, it’s good to show that the logical avenues have been exhausted before we pull federal levers like a requirement to make some form of retirement savings available at work. Skeptics may feel that almost all logical avenues – simpler, cheaper plans, protections from liability, small-scale incentives, and lots of private sector marketing – have already been tried and shown wanting. These stronger incentives will provide better information and a more solid proof point either that we are doing enough to ensure universal workplace access to retirement savings, or that we have a ways to go still.

And will it close the retirement savings gap.

The short answer here is likely “no.” For lots of reasons, including good ones, the likelihood is that many employers who today do not offer plans will continue in the future to not offer plans.

We haven’t seen, but would like to see, the data on employers that took advantage of the tax credits offered in the SECURE Act in 2019. In this information will be useful guidance on the likely usage levels of the sweetened incentives of SECURE 2.0.

Because employers continue to be subject to facilitation requirements in Auto IRA states, we know a large number continue not to offer plans.

For that reason, extending access and coverage through state Auto IRAs continues to be one important way to make sure workers can easily save for retirement automatically, straight from their paychecks.

Retirement security matters! / Lisa

This piece was written by Lisa Massena and the views expressed are her own. You can get your own copy of the Secure 2.0 Act as included in the 2023 Appropriations Bill here.

This piece was also featured in the February 9, 2023, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.