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How policy changes are making offering a 401(k) more affordable than ever
Employers Retirement legislation

How policy changes are making offering a 401(k) more affordable than ever

Jeff Rosenberger, PhD

💡 Key takeaways:

  • Most businesses in the US currently don't offer a retirement plan, but recent policy changes could mean that many more companies will need to offer one to stay compliant.
  • New tax credits can help reduce the cost of offering a retirement plan, like a 401(k).
  • Offering a 401(k) has been shown to help employers attract and retain talent

One of the most common ways people save for retirement is through employer-sponsored retirement plans, like a 401(k). A recent survey showed that 90% of jobseekers say a 401(k) plan is a must-have benefit. However, many small and mid-sized businesses often don't think they can afford to offer a 401(k).

Now that's changing. Thanks to policy changes, new tax credits, and affordable 401(k) options, offering a meaningful retirement benefit has never been easier. Let's take a quick look at the trends making 401(k) accessible to businesses today.

Trend 1: Policy is adding pressure for businesses to offer retirement savings plan — but is also offering a carrot

Lawmakers have been working to increase the number of people who have access to retirement savings plans. How? By encouraging businesses to offer one.

Today there’s no national requirement for businesses to offer a retirement plan but at least 15 states have their own policies that require businesses to either offer a private retirement plan or enable workers to use a state-sponsored retirement program.

While there are some differences from state to state, these programs are designed to automatically enroll employees who are not covered by employer-sponsored retirement plans into state-sponsored retirement programs. Several other states have new voluntary programs where employees can access a low-cost retirement option on their own but don't require any facilitation by the employer.

These mandates may feel daunting, but the federal government has offered a carrot by way of tax credits. At the federal level,  the SECURE Act (2019) and SECURE 2.0 (2022) have included  tax incentives to make retirement savings plans more accessible for small and mid-sized businesses. The tax credits outlined in these two acts can help offset costs and the legislation even allows multiple employer plans or pooled employer plans to offer a plan.

Trend 2: Tax credits and deductions are growing, helping companies cut costs

If you're concerned about the cost of offering a retirement plan, you're not alone. More than two-thirds of benefits decision-makers who don't offer a retirement plan said they believe offering a 401(k) is cost-prohibitive

However, several new tax credits can help offset the costs of starting a new retirement plan. Depending on your company's eligibility, these tax credits could cover 100% of your company's 401(k) plan costs for the plan's first three years.² These credits include:

Small Employer Pension Plan Startup Credit

  • This credit is available for businesses 100 or fewer employees to offset the costs of starting a retirement plan, including a 401(k).
  • The credit can be up to $500 per year for the first three years. Eligibility requirements apply.

Small Employer Automatic Enrollment Credit:

  • If your business implements automatic enrollment in the 401(k) plan (which will be required in almost all new plans started in 2023 and after), there may be an additional tax credit available.
  • This credit can be up to $500 per year for three years.
  • It's important to note that you must keep automatic enrollment active to continue to qualify for this credit. For example, if you stop auto-enrollment after two years, you'll only be eligible for the credit for those two years.

Tax deductions for employer contributions:  

  • Employers can generally deduct contributions made to their employees' 401(k) accounts, as long as contributions don't exceed limitations in section 404 of the Internal Revenue Code
  • This deduction can help reduce the taxable income for the business.

Be sure to talk to your accountant or tax advisor about which credits your company may qualify for and what makes the most sense for you and your business.

Trend 3: Offering a match is more affordable

While providing a 401(k) match can benefit both employers and employees, it may seem expensive or unaffordable to some business owners. SECURE 2.0 aims to make this benefit a little more tempting for employers with an additional tax credit for employer-matching — up to $1,000 per employee.

Even if you can’t swing the match, employees earning low income might still qualify for the new Saver’s Match, a program that starts in 2027. This replaces today’s Saver’s Credit program which provides a $1,000 tax credit to people earning low income. In the new Saver’s Match program, employees who contribute to 401(k) or IRA can receive a match of 50% up to $2,000 from the federal government to be deposited into their retirement account if they meet the income requirements.  

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¹ Source: Guideline research run with Suzy. Insights based on data collected February 2024, from a survey of 350 US-based employers who do not offer a retirement benefit. Guideline was not identified as the survey sponsor. The experiences of the respondents in this survey may not be representative of all people.

² This content is for informational purposes only and is not intended to be taken as tax advice. Please consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.