EBRI Finds Small Businesses Don’t Know About Start-Up Credits

A survey published Monday by the Employee Benefit Retirement Institute suggests that most small businesses which do not have a qualified plan do not add one because they believe such plans do not cover the expense of plan creation. The research also shows that small businesses lacking a plan are more likely than not to be unaware of tax credits that would likely cover the cost of plan start-up.

The 2023 Small Business Retirement Survey was published by EBRI, Greenwald Research and the Center for Retirement Research at Boston College. The survey was conducted from February through April 2023 and surveyed 703 small businesses, meaning those with 100 or fewer workers; 323 of those sampled offered a plan, and 380 did not.

Of the 380 businesses that reported they did not have a plan, 72% responded “No” when asked if they were aware of tax credits for starting a 401(k)-type plan, SEP or SIMPLE IRA, credits that can total up to $5,000 per year for three years.

The question was asked in reference to a provision in the SECURE 2.0 Act of 2022 that provides tax credits for expenses related to plan creation and administration for the first three years of the plan. Since small business plans rarely cost more than $5,000 per year to operate, this would make plan administration effectively free for three years for most small businesses.

The lack of awareness of these tax credits is particularly relevant because EBRI also found that the primary reasons given for not starting a plan among small businesses were related to cost. Of respondents who lacked a plan, 48% said their business being “too new or too small” was a “major reason” for not having a plan; 36% said “revenue is too uncertain to commit to a plan;” and 35% said “it costs too much to set up and administer.”

The smaller the business, the less likely it is to know about available tax credits, according to the findings. For employers with 1 to 4 employees, only 16% answered that they were aware of the start-up tax credit, whereas 24% of employers with 20 to 49 employees and 50% of employers with 50 to 100 employees said the same.

Craig Copeland, the director of wealth benefits research at EBRI, explains that there “still are not a lot of interactions between advisers and small businesses.” Many lack exposure and access to outside expertise from retirement advisers and other services and, as such, remain unaware of the assistance available to them.

Of those offering a plan, nine out of 10 said they do so for the positive effect it has on employee attitudes and performance. Furthermore, 90% of those offering a plan said it was a competitive advantage for their business in employee recruitment and retention.

State Auto-IRA Programs

A second key finding of the survey was that a handful of small businesses (21%) that already offer a plan may scrap it if the state in which they do business offers an automatic individual retirement account program, such as those found in California, Illinois, Maryland, Oregon and other states.

An auto-IRA program is a state-run defined contribution plan that increases plan coverage by mandating or incentivizing (as in Maryland) participation by all businesses not already offering their own plan. Joining is typically easier to set up than a plan from the private market, though often also with fewer options for administration. Businesses may continue to operate their existing plan or elect to make a new plan independent of the program.

The survey found that “only” 21% of sampled small businesses with a plan responded, “Yes, Would Stop Offering Current Plan” when asked “If it was a requirement in your state to require employers who do not offer a retirement plan to automatically enroll their employees in an IRA, would you stop offering your retirement plan and enroll your employees in an IRA?”

Copeland says “21% could be a large amount” but adds EBRI has not “seen that in states where they are in effect.” Though 21% “could be considered a considerable number,” dropping a 401(k) plan in favor of an IRA could upset employees and prove more of an obstacle than the respondents realized.

The majority (68%) responded that they would continue to offer their existing plan, and 11% indicated they did not know their next course of action.

Since auto-IRAs are subject to the same annual limits as any other IRA—$7,000 for 2024, less than the $24,000 limit for DC plans—21% of small businesses scrapping their DC plan to join an auto-IRA program could lead to less savings among affected workers.