Relax the Rules to Help Small Plans

The U.S. House of Representatives Committee on Small Business held a hearing October 2, titled “The Challenge of Retirement Savings for Small Employers,” to examine the state of retirement savings for small employers, the barriers they face in offering plans and options for expanding coverage.

Catherine Collinson, president of the Transamerica Center for Retirement Studies and Transamerica Institute, pointed out policymakers, experts and the retirement industry seek to increase plan coverage among workers, specifically those of small companies (10 to 499 employees). Much of this discussion has focused on encouraging more employers to offer a plan; however, plan sponsorship is not synonymous with plan coverage, she said.

During her testimony, Collinson shared results of the 14th Annual Transamerica Retirement Survey, which showed fewer small companies offer retirement benefits than large companies. However, the degree of the gap may be smaller than expected. The survey found 72% of small companies offer a plan, including 71% of micro companies (10 to 99 employees) and 89% of small non-micro companies, compared to 95% of large companies.

According to Collinson, a key to expanding coverage among workers of small companies is increasing plan sponsorship rates for micro companies. A key to expanding coverage among workers of all company sizes is encouraging existing plan sponsors to extend eligibility to their part-time workers.

To do this, Collinson suggested additional tax incentives to help offset the cost for small employers to establish new retirement savings plans. She also suggested increasing the available amount and number of years for the start-up tax credit, which currently allows small businesses to claim a tax credit of up to $500 for three years for establishing a retirement plan.

In addition, for small businesses in which a stand-alone 401(k) plan is not feasible, consideration should be given to enabling and providing incentives for them to join a multiple employer plan (MEP), she said. To be effective, an MEP should be simple to administer and should provide safe harbors from fiduciary liability for each employer. In addition, care should be taken to (1) protect employers from any liability for the acts or failures to act of other employers participating in the plan, and (2) provide tax incentives for employers and employees to encourage participation. However, Collinson noted, MEPs tend to provide standard plan terms, and therefore, employers that want plan design flexibility, such as by offering a more robust investment menu, should continue to offer their own plans.

To expand plan coverage among part-time workers, Collinson suggested additional tax incentives and safe harbors from nondiscrimination testing, lower or eliminate required top-heavy minimum contribution for part-time workers, and provide relief from being a Form 5500 “large plan filer” if the reason that the plan has more than 100 participants is covering part-time workers.

Other hearing witnesses also encouraged a relaxing of rules to help small business retirement plans.

Paula A. Calimafde, Esq., chair of the Small Business Council of America, and member of the Board of Directors of the Small Business Legislative Council, told committee members a major disincentive for a small business owner to sponsor a plan is the heavy administrative requirements (such as notice requirements, top-heavy rules and nondiscrimination testing), which can often be very burdensome for the employer. She shared ways many administrative requirements could be eliminated or simplified without negatively impacting retirement plan participants.

Calimafde also noted, in the recent discussions about how to raise revenue (and conceivably lower tax rates through tax reform), the deduction for retirement plan contributions has been treated the same as other tax expenditures in the tax code. She said this is a mischaracterization because retirement plan contributions are eventually brought into income, along with any earnings. The only loss to the government with respect to the deduction for retirement plan contributions and tax-free growth inside the plan is the time value of money. But the potential detrimental impact on savings by Americans due to a reduction on contributions to retirement plans could be huge, she contended.

C. Roy Messick III, CPA, QPA, partner at TPP Certified Public Accountants, LLC and managing partner at TPP Retirement Plan Specialists, LLC, told committee members he would explore the expansion of the current tax credit for companies to start new retirement plans. An increase in this tax credit would help defray the startup cost of the plan. He also suggested adding a tax credit of some amount based on the number of employees enrolled. The expanded tax credit could be “capped” at some amount based on the size of the employer.

Messick also suggested lawmakers consider increasing the current limit employees can defer into retirement plans from the current $17,500. The increase in deferral limit might help small business owners decide to start a retirement plan for their employees, he said.

Finally, Messick told lawmakers to consider another type of Safe Harbor 401(k) Plan for smaller businesses that somewhat reduces the employer mandated contribution. This may make the required contribution a little less daunting and encourage the business owners to actually do something.

Links to the hearing video and witness testimony can be found here.