Sometimes planning and saving for retirement may seem like a task we can put off until “later.” Even if we are saving, many times it’s not enough or unavailable when we actually need it. According to the Federal Reserve, 77% of working Americans are not on track to have sufficient savings by the time they reach retirement.
Most working Americans may have their sights set on retiring — and a more active approach to saving can help U.S. workers avoid the significant decline in living standards, like “old-age poverty” after retirement, that millions of Americans currently face once they stop working.
To address this rising crisis, especially for those who are running small businesses, governments on the state and federal levels have stepped in and created legislation that incentivizes employers to provide retirement benefits to employees.
What are states doing?
States have introduced legislation meant to encourage more private-sector businesses to offer a state retirement plan to their employees. Studies have found that people are more likely to save for retirement if their employer offers a retirement benefit.
Today, 46 states have either implemented a state-based retirement savings program, studied program options or considered legislation. Currently, 16 states and two cities have either passed laws or have pending legislation outlining new retirement programs. Of that number, eight states currently have active programs.
State-run plans are largely Roth IRAs, meaning that contributions are post-tax and are limited to $6,500 for those under 50 and $7,500 for those over 50, annually. Many of these plans also require that businesses take on the administrative role of managing plans and ensuring they are compliant — or face penalties.
How is the federal government responding to the retirement crisis?
Since 2019, the federal government has passed two bills tied to the SECURE (Setting Every Community Up for Retirement Enhancement) Act. While the first iteration of this bill made several much-needed adjustments to the country’s retirement system, it wasn’t a comprehensive solution to the retirement crisis in America.
Fast forward to December 2022, when SECURE Act 2.0 was signed into law. This bill made a huge step forward in addressing the retirement savings gap and added more than 90 new retirement plan provisions. Many significant changes for small businesses, and those saving for retirement, were introduced, including:
- Increasing contribution limits and encouraging saving earlier for retirement
- Broadening the incentives available to small businesses that provide retirement plans to employees
- Increasing flexibility towards savings for those age 60+
New incentives for small businesses with the SECURE Act/SECURE Act 2.0
The original SECURE Act laid out significant tax benefits for small businesses offering retirement plans to employees and SECURE Act 2.0 expanded many of these benefits even further.
- Doubles tax credits for new plans: For small businesses with 50 employees or less, SECURE Act 2.0 tax credits increase to 100% of plan start-up costs (previously 50%), capped annually at $5,000 per employer, every year for the first three years. Eligible businesses with 51-100 employees still receive the original SECURE Act tax credits equal to 50% of administrative costs, capped annually at $5,000 every year for the first three years.
- Expands eligibility for the start-up tax credit: Expanded start-up tax credits are available to employers based on the year they join a multiple-employer or pooled employer plan.
- Adds new credits for employer contributions: Small businesses with 50 employees or less will receive a new tax credit based on a percentage of employer contributions. Eligible employers with 51-100 employees will receive a credit phase-out equal to 2% for each employee for the preceding taxable year in excess of 50 employees. For all employers, the credit phases out based on the number of years the plan has been in existence.
- Maintains tax credit for using auto-enrollment: The tax credit of $500 per year for the first three years of electing auto-enrollment is still available.
Changes to the retirement system
In addition to adding tax credits for employers to start and provide retirement plans to their employees, the SECURE Act 2.0 also makes changes to how the retirement system works. These changes include:
- Mandatory auto-enrollment for new plans starting in 2025
- Auto-enroll in employer retirement plans is a powerful tool to boost participation rates in employer-sponsored plans.
- Auto-enrollment for new plans started after 12/29/22 will be required beginning with the 2025 plan year.
- Certain plans would be exempt from this requirement including, businesses with less than 10 employees, businesses that have been open for less than 3 years, and churches and governments.
- Employees can still opt out of plan participation
- Employers can offer small, immediate, financial incentives to promote the use of plans
- Example: Offer low-value gift cards
- Part-time workers have more access to retirement benefits
- Changes to emergency hardship withdrawals
- Starting in 2024, plan participants can take one penalty-free withdrawal from their retirement plans per calendar year, up to $1,000, starting in 2024 (if plan provisions allow).
- This withdrawal may be paid back within 3 years, but additional emergency withdrawals cannot be taken out in that 3-year period until re-payment is complete.
- Help with student loan repayment:
- In 2024, employers will be able to match their employee’s student loan repayments, allowing employees to pay off eligible student loans while still saving money in a 401(k), 403(b), or SIMPLE IRA plan
What are my options?
Both the state-run plans and the federal legislation (aimed at employer-sponsored plans) are designed to help U.S. workers save for retirement and help find solutions to the current retirement crisis. With all the provisions available in the bills, and eligibility requirements, it may be difficult to understand which option is best for you and your business.
State-run options and an employer-sponsored plan like a 401(k) have different characteristics that businesses should consider when deciding which plan is best for them.
|Plan characteristics||State option (typically IRA)⁴||401(k) (like Human Interest)⁴|
|Contribution amounts||$6,500 if under 50; |
$7,500 if over 50
|$22,500 if under 50;|
$30,000 if over 50
|Administrative work/compliance||The bulk of admin falls on the employer||Most admin and compliance tasks are handled|
|Payroll Integrations||Certain states may offer integration, but many do not||Integrates with payroll providers, like Fingercheck|
|Cost to run plan||Typically, no employer fees for state-run plans||Pricing varies based on provider and plan costs|
If you want to learn more about state mandates, or the tax credits your business may be eligible for with SECURE Act 2.0, Human Interest + Fingercheck are here to help! With our integration, Fingercheck clients have access to affordable, customizable plans that can satisfy the mandate in your state, allow you and your employees to save more money each year, and take on the burden of administering and managing your retirement plan.
Watch our webinar on SECURE Act 2.0 here!
Human Interest Inc. is an affordable, full-service 401(k) and 403(b) provider that seeks to make it easy for small and medium-sized businesses to assist their employees with investing for retirement. For more information, please visit humaninterest.com.
Human Interest Inc. does not provide tax, legal or accounting advice. Plan Sponsors should take independent steps to validate the tax, legal, or accounting considerations of hiring any service provider for the Plan, obtaining guidance on any Plan document (or amendment thereto), and for any issues pertaining to design, implementation, or operation of a Plan.
Please note: Fingercheck has a partnership with Human Interest Inc. and will be compensated if you hire Human Interest Inc. Fingercheck and its representatives are not affiliated with or employed by Human Interest Inc. For the full disclosures, please refer to https://humaninterest.com/disclosures/