Ongoing economic uncertainty, persistently high inflation and a tight labor market have made it increasingly difficult for employers to attract and retain top talent. However, according to the result of a survey published in July 2023, one of the best ways employers can differentiate themselves from the competition is to offer a retirement savings plan with an employer match.
The National Bureau of Economic Research’s report on “Worker Valuation of Retirement Benefits” found that most workers deciding between two similar job opportunities will choose the one that offers better retirement benefits, even when that job pays lower total compensation. Across all age groups, job-seekers value retirement dollars almost twice as much as they value a dollar in wages; among older workers with higher incomes, retirement dollars are four times more likely to sway a prospect’s decision than wages alone.
Even with this information, many businesses remain resistant to starting a 401(k) plan due to the perceived costs of investment and administration. The good news is that with the enactment of the SECURE Act 2.0, establishing a defined contribution retirement savings plan is more accessible and less costly than ever.
Lower Costs, Easier Administration
Not only may the fees businesses incur to establish 401(k) plans be deductible as business expenses, but the SECURE Act 2.0 also provides small employers with up to 50 employees a tax credit to use against 100 percent of those start-up costs beginning in 2023. Under prior law, the credit offset only 50 percent of those expenses. An additional credit equal to $1,000 per employee is also available for small businesses that make an employer contribution to their employee plans.
Another way employers can establish a defined contribution plan for their employees without a significant investment of capital is by implementing a starter 401(k) or 403(b) under Section 121 of the SECURE Act 2.0. A starter plan simply requires employers to automatically enroll employees in the plan with an annual salary-deferral contribution of no more than the IRA contribution limit in place for that year, which for 2024 is $7,000, or $8,000 for plan participants age 50 and older.
Starter 401(k)s also provide employers with relief from administrative headaches, such as nondiscrimination testing, because they qualify as a “safe harbor plan” that escapes many of the restraints that come with a traditional 401(k) plan. Additional provisions of the SECURE Act 2.0 that will make plan administration easier on employers are automatic enrollment requirements and faster eligibility for part-time workers.
Effective for tax years beginning on Jan. 1, 2025, new 401(k) plans must automatically enroll employees in their plans as soon as they reach eligibility and set their initial salary deferral contributions at no less than 3 percent and no more than 10 percent of compensation. For all subsequent years, deferrals should automatically escalate by at least 1 percent of compensation but no more than 15 percent. In the meantime, the law allows employers to use low-dollar gift cards and other incentives to boost employee participation in their 401(k) plans,
For purposes of determining when employees are eligible to participate in employers’ retirement plans, the SECURE Act 2.0 eases the qualifications beginning on Jan. 1, 2025, to include full- and part-time employees with at least 1,000 hours of service in a 12-month period or 500 hours in a two-year consecutive period (rather than three years under prior law.)
Finally, the best way employers can ease the administrative burden of managing an employee retirement savings plan while also maximizing the benefits under the new law is to work with an experienced retirement plan adviser. These professionals can help you maintain compliance with tax laws and the Employee Retirement Income Security Act of 1974 (ERISA), educate your workforce and help them realize the benefits your plan intends for them.
About the Author: Olga Ismail is the head of Retirement Plan Consulting and a financial advisor with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. She can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or firstname.lastname@example.org.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Olga Ismail is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
Posted on November 16, 2023