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How Congress can turbocharge small business retirement savings
401(k) Public policy

How Congress can turbocharge small business retirement savings

Jeff Rosenberger, PhD

Small businesses are facing a new set of challenges as we move beyond the pandemic to an economy coping with inflationary pressures, higher interest rates, and supply-chain constraints. Simultaneously, there is a labor shortage, and the pandemic laid bare that employees want additional benefits beyond increased pay.  They also are expecting access to healthcare, paid leave, flexible and remote work arrangements, and retirement savings.

Many small businesses struggle to offer benefits due to cost, which puts them at a disadvantage to their larger competitors. However, with the passage of the Enhancing American Retirement Now (EARN) Act by the Senate Finance Committee and the Securing a Strong Retirement (SECURE 2.0) Act of 2022 by the House of Representatives, Congress has the opportunity to level the playing field and boost the ability for small businesses to provide retirement benefits. The goal of this legislation is to (1) expand the coverage of employer-sponsored auto-enrollment retirement plans and increase savings through higher default contribution amounts (2) encourage more small businesses to offer a plan with tax credits and (3) help lower-income workers build wealth through an enhanced saver’s credit.  

The vast majority of workers save through employer-sponsored retirement plans; however, a third of American workers are not covered by a plan.  Additionally, only half of employers with 100 or fewer employees offer retirement benefits, and plan coverage drops to 40% of workers with incomes in the bottom quartile.  

Despite the massive disruptions caused by the pandemic, Guideline’s data show that workers that have access to a retirement plan have continued to save and grow assets over the past two years. Furthermore, we’ve seen participation and contribution levels increasing even amongst small businesses and their employees.

The evidence is clear, if workers have access to auto-enrollment retirement plans, they participate and save.  Congress has an opportunity to build on EARN, RISE & SHINE, and SECURE 2.0 to make it simpler for small businesses to offer retirement benefits and expand the saver’s credit even further.  These changes will have a meaningful impact to expand coverage for underserved businesses and communities, allowing them to save and build wealth.    

Increased Tax Credits for Small Businesses

Gusto’s platform data shows that pay alone is not enough to attract and retain workers, and that employers who offered retirement plans saw lower quit rates than those who did not.  Lowering the cost for small businesses to offer retirement benefits will immediately make them more attractive to potential employees.  Currently, businesses that start a new 401(k) are eligible for a tax credit of up to 50% of plan costs, up to $250 per non-highly compensated employee, with a maximum of $5,000 each year for the first three years.  

SECURE 2.0 would increase the credit to 100% of costs, further reducing the cost to start a plan, however the EARN Act only increases the credit up to 75% of plan costs for employers with 25 or fewer employees. Both Acts introduce new credits for employer contributions incentivizing businesses to add a matching provision to their plan.

Simplification of Safe Harbor Plans

Congress should build on both SECURE 2.0 and EARN by including the Retirement Security Flexibility Act of 2021 (S. 2602), which would reform the safe harbor 401(k) provisions, making it simpler and more cost effective for employers to offer a plan by adopting automated features and setting maximum contribution levels commensurate with an employer’s ability to afford a match.  For example, a plan’s safe harbor match could be lower if the plan decreased the max employee deferral limit for a given year.  This would make it even easier for small businesses to offer a 401(k) plan for the first time and for their employees to get enrolled, alleviate the need for certain non-discrimination testing, and reduce the risk of small employers being out of compliance.  

Expansion of the Savers Credit

The expansion and simplification of the saver’s credit included in the House passed version of SECURE 2.0 and the Senate’s EARN Act will make a meaningful difference to lower-income workers’ ability to save and build wealth, but unfortunately most workers that are eligible are unaware of it and do not take advantage. The Senate should include the provisions from the Retirement Security & Savings Act (S. 1770), which would further expand eligibility for the saver’s credit, make it refundable, and have the credit deposited into the worker’s qualified retirement account.  

This would effectively create a “government match” for lower income workers and would help narrow the racial wealth gap as black and hispanic workers have lower lifetime earnings than white workers and would benefit the most from this expansion.    

Gusto and Guideline are committed to serving small business owners and their employees by empowering them to achieve financial wellness through offering retirement products that meet their needs. We urge Congress to build on the SECURE Act 2.0 and the Senate’s EARN Act and pass a bill that will be a catalyst for small business retirement plan creation and a boon to worker economic security.  

The small business way to 401(k)

Jeff Rosenberger is the COO of Guideline, the easy, affordable retirement platform trusted by more than 29,000 small businesses and self-employed to manage over $6 billion in assets.

Steve Abbott is the Policy Lead for Gusto, a people platform, that provides payroll, hr, and benefits to small and medium sized businesses in all 50 states across all industries.