Why it’s difficult for small businesses to offer retirement plans.
I recently had the opportunity to testify before the U.S. House Committee on Small Business in Washington, D.C. The Committee is investigating the factors that small business owners consider when deciding whether or not to offer
a retirement plan to their employees.
This is an important consideration for America. A 2010 study by the Employee Benefit Research Institute indicates that participation rates for employees with moderate incomes ($30,000-$50,000 range) are 71.5 percent when they are covered by an employer retirement plan versus only 4.6 percent who contribute to an IRA on their own.
Complexity, Cost and Contribution Limits
The cost of setting up the plan, tracking the employees’ account balance on a daily basis, making sure the plan complies with IRS and DOL governance, and preparing the annual Form 5500 tax filing can be daunting. Some employers may be able to afford to establish a retirement plan, but choose not to do so if the total tax benefit they receive does not offset the cost of the contribution to the employees.
In a traditional 401(k) plan, the amount business owners can personally defer is limited, by law, to 2 percent more than their employees. A traditional 401(k) plan can be converted into a Safe Harbor 401(k) plan, which means the business owner can contribute the maximum allowed by law. The tradeoff is that the company must generally contribute 3 percent to 4 percent of compensation for the employees, and that may be too expensive for the employer.
Solutions?
What could Congress do to encourage more business owners to offer retirement plans? How can they make such plans more affordable for companies that already offer them?
The government could expand the tax credits available to help offset some of employers’ costs. It could increase the amount of money that individuals can defer from their paycheck from the current $17,500 limit. Finally, we talked about perhaps adding another type of Safe Harbor 401(k) plan that doesn’t require as much of an employer contribution.
Congress now realizes that small business owners have particular problems when it comes to offering retirement plans and are looking into ways to help. So we shall see what legislation they propose, hopefully in the near future.
