The current state of retirement is that 45% of employers with fewer than 100 employees do not offer a retirement plan, according to the latest statistics from the U.S. Bureau of Labor Statistics.
Many states are looking to remedy this by providing a state-sponsored IRA savings plan to small businesses.
Currently, ten states have enacted legislation or launched pilot programs, while others have legislation pending. There is also talk on Capitol Hill about federally mandating retirement plans for businesses with 10 or more employees.
State-run IRA plans have limits on employee contributions, and companies aren’t allowed to make employer contributions. The employer is also typically responsible for administration and remitting employee contributions.
With a 401(k), employees can make larger contributions than state-run programs, and employers may also make profit sharing or matching contributions at their discretion. Plans satisfying the state mandate offer eligible employers potential tax benefits, such as those defined by the federal Setting Every Community Up for Retirement Enhancement (SECURE) Act.
SECURE Act:
- Up to $5,000 in tax credits for plan startup, currently 50% of administrative costs, each year for three years (total $15,000)
- Additional $500 annual credit when your business establishes a retirement plan with automatic enrollment
- Start a profit-sharing plan right up to your tax filing deadline
- Increases required minimum distribution age (RMD) to 72 from 70½
- Create a new type of 401(k) plan: Pooled Employer Plan (PEP)
Proposed SECURE Act 2.0:
- Tax Credits: The 50% would be increased to 100% for eligible employers with up to 50 employees
- May incorporate all or some of the proposals in the Retirement Improvement and Savings Enhancement (RISE) Act (H.R. 5891)
What is a Pooled Employer Plan (PEP)?
- It’s a retirement plan that allows unrelated employers to band together to join a 401(k) (not for 403(b) or 457(b) plans)
- PEPs are designed to be more of a turnkey solution compared to other retirement plans
- Designed to relieve employers of much of the fiduciary and administrative burden that often keeps small businesses from offering a plan
- Employers offload the administrative burden to the Pooled Plan Provider (P3)
- Benefits are less work and lower costs for employers, but less control than traditional 401(k)