There’s a few provisions in the SECURE 2.0 legislation that Fred Reish seems particularly excited about.
The noted ERISA expert and Faegre Drinker Partner spoke at the Qualified Plan Fiduciary Summit in Overland Park, Kan. on Tuesday, and told attendees about some of the more intriguing incentives among the expansive new law’s 92 provisions.
A couple that have really caught his attention have to do with startup tax credits. Specifically, the 3-year startup credit for new plans, where up to now 50% of the administrative startup costs up to $5,000 ($2,500) are covered by the government. “Going forward starting this year, for newly established plans, that is increasing to 100%.”
That means 100% of plan startup costs up to $5,000 for companies with up to 50 employees. For 51-100 employees, it’s 50%.
“Why did Congress do this? The major area in America today where employees don’t have the opportunity to defer their money into retirement savings is from small companies. Congress is saying we are going to so incentivize the adoption of new plans—which have to be automatically enrolled—by throwing money at it,” Reish said. “We’re going to make it free for the first 3 years if you have 50 or fewer employees to actually cover the cost of setting up the plan.”
He added that if you think that’s good, the next point is even better.
“This is nothing short of remarkable. I’ve never seen a tax credit like this. You put in $1,000 per employee and you get it all back?”
Fred Reish
For the first 5 years, with up to 50 employees, the government will now credit your contributions for not having highly compensated employees—up to $1,000 per employee.
“You set up a new plan. You have 20 employees. You’ve designed a plan to say, I’m going to put $1,000 in for each of my 20 non-highly compensated employees,” Reish said. “At the end of the year, the government gives you back $20,000—free!”
He added that it’s 100% free the first year, 100% the second year, 75% the third year, 50% the fourth year, 25% the fifth year, and 0% after that. “So the first 3 years, you essentially have a plan free from the administrative costs, and free for the contributions (depending on how you design your plan).
“This is nothing short of remarkable,” Reish said. “I’ve never seen a tax credit like this. You put in $1,000 per employee and you get it all back?”
He noted that between 51-100 employees it gradually prorates down.
Lots of optional provisions
While covering a wide variety of other provisions, Reish also noted that many of those in SECURE 2.0 are optional. “Think about that. Think about a tax law that says you can do this, but you don’t have to do it if you don’t want to,” he said. “What kind of tax law is that? I never heard of such a thing.”
The optional provisions, he added, are a challenge for fiduciaries because they have to make decisions about them. “The company can decide to do what’s best for the company. You don’t have to do what’s best for the employee,” Reish said. “That doesn’t mean you may not want to do what’s best for the employees. But you don’t have to. The provisions are truly optional.”
For instance, any plan established after Dec. 29, 2022 has to auto-enroll (with a couple of exceptions). But not until 2025. Plans can start auto-enrollment now if they want to, but don’t have to until 2025.
“Why did Congress do this? Generally Congress doesn’t like to impose mandates on employers,” Reish said. “Let me very briefly tell you why. Because 401(k) plans are proven to be successful at increasing savings.”
Reish said the average regularly enrolled 401(k) plan has about a 70% participation rate. The average auto-enrolled plan has about a 90% participation rate. “This is about the 20% (difference),” Reish said. 20% of let’s say 100 million workers—that’s a lot of people. So it’s important to Congress that Americans be saving, that they be prepared for retirement.”
But they didn’t want to impose it on existing plans, so it’s important to remember that any plan started before Dec. 28, 2022 doesn’t have to auto-enroll.
“I think this might be significant because I believe that by 2024-2025-2026, the way that 401(k) plans will normally be looked at—the standard plan will be an automatically enrolled plan. Somebody who still has a regularly enrolled plan will be the exception,” Reish said.
He noted that some plans are excepted –such as the first 3 years of a new business and small businesses with less than 10 employees.
SEE ALSO:
• 401(k) Specialist’s SECURE 2.0 Guide
• Pete Swisher Deciphers SECURE 2.0’s Complex Startup Tax Credit