Small-business owners and startup business owners have a lot on their minds these days, so perhaps they can be forgiven for not knowing about a couple of the many provisions from the SECURE Act, passed by Congress and signed into law by President Trump at the end of 2019.
These two provisions come in the form of tax credits for small employers intended to encourage them to provide their employees with a retirement plan.
Because they aren’t likely aware, advisors working in the small retirement plan market have a great opportunity to “be the hero” by letting them in on these little secrets that can make offering an important perk like a workplace retirement plan feasible when they previously thought it was beyond their means.
In a Thursday afternoon breakout session, “How SECURE Could Stoke Your Start-Up Business” on Day 2 of the NAPA 401(k) Cyber Summit, Jim Sampson, CPFA, AIF, C(k)P, Director, Retirement Advisory Services at Hilb Group Retirement Services, and Bonnie Treichel, JD, Co-Founder and Partner of ZUNA, discussed the SECURE Act’s tax credits for small employers.
These two provisions, in a nutshell, are:
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- New Plan Credit: Tax credit for the first 3 years after adopting a new plan for 50% of startup costs equal to the greater of (1) $500; or (2) $250 multiplied by the number of non-highly compensated employees (NHCEs) eligible to participate up to a maximum of $5,000 per year
- Automatic Enrollment Credit: Tax credit of up to $500 per year for 3 years to defray costs for the addition for automatic enrollment provision, for either a new plan or an existing plan
They became effective on Dec. 31, 2019, and are for small employers with no more than 100 employees receiving at least $5,000 in compensation in the prior year.
“It is a real opportunity for advisors to bring this to an employer’s attention,” Treichel said.
Sampson said it is incumbent on the advisor community to get out there and educate small employers and startups about these provisions, which he estimates perhaps just 5% are aware. “To let them know they could potentially get a $5,000 a year tax credit—that could move the needle,” Sampson said, noting that there’s a subsection of small business owners out there that have always wanted to offer a 401k for their employees but have never really been able to wrap their heads around spending the time and money to get one off the ground.
“It’s really the cost, though. I think this could be the incentive that really pushes them over the edge,” he said. “How it jump-starts your business is it gets those small plans who have shown interest but didn’t think they could afford it—this might push them to action.”
Treichel and Sampson also addressed the need to educate potential clients about eligibility, the difference between a tax deduction and a tax credit, potential costs for clients, how to prospect for this market and price services accordingly, and questions about whether clients should explore Pooled Employer Plans or not.
Key takeaways for advisors
- Before you present the tax credit as an option to an employer, make sure it is available to them (as it isn’t as expansive as it might have seemed)
- Understand that it is a credit; if the plan sponsor doesn’t spend the money, they don’t get the credit
- Use a minimum fee schedule to remain profitable
- Identify and target plans that will grow, build your service model and fee schedule to grow with them
Registered NAPA 401(k) Cyber Summit attendees can access the full session on-demand.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
