Small Business Retirement Benefits Made Easier: 3 Reform Ideas

Small Business Retirement Benefits Made Easier: 3 Reform Ideas

Providing quality employee benefits is an important way for businesses to compete for top-notch talent.  But for small businesses, the cost and complexity around offering good benefits can drain scarce resources.  Only 51 percent of U.S. workers in firms with less than 100 employees have access to retirement benefits and less than 70 percent of those workers are taking advantage of this opportunity to save for the future.   Policymakers are concerned about the long-term implications of ill-prepared retirees, and they are proposing some bipartisan solutions to help small employers, in particular, offer retirement plans to their workers.

At an October 28th Senate hearing on “Retirement Plan Options for Small Businesses” witnesses offered support for some of the recent proposals being floated in Washington:

  1. Open Multiple-Employer Plans (MEPs) – Open MEPs offer small businesses a way pool their resources and take advantage of economies of scale and lower administrative and fiduciary burdens associated with offering a retirement plan to employees. Proposals under consideration would make MEP plans more attractive to small employers by not requiring businesses to have a “nexus” or “commonality” to participate, not tanking the whole plan due to the behavior of one non-compliant business, and simplifying reporting and disclosure requirements.

  2. Tax Credits for Starting a Retirement Plan – Currently, small employers can claim a tax credit of up to $500 per year over three years for the costs of setting up a qualified retirement plan. But, it’s not proven to be much of an incentive and is scarcely utilized.  Various proposals would increase the credit from $500 to closer to $5000.  There is also support for offering additional financial incentives for those businesses that adopt automatic enrollment policies.

  3. Non-Discrimination Safe Harbors – Businesses that set up 401(k) plans have to meet certain nondiscrimination requirements to discourage favoring highly compensated employees over lower paid colleagues. Smaller businesses may have a harder time passing these tests due to lower plan participation.  Businesses that meet certain contribution and matching requirements can escape the nondiscrimination tests, but that can be costly. Some reform proposals would expand those safe harbors and provide a tax credit to small employers to address the associated costs of making the required contributions.

The recent subcommittee hearing follows a July report by the Senate Finance Committee’s Bipartisan Tax Working Group that offers these and other suggestions for positive policy changes to increase the offering of and particiation in retirement plans.  The interest of two powerful Senate committees and support of both parties in pursuing reform is a good sign for legislative progress.