New Legislation Expected to Boost Pooled Employee Plans and Small Business Tax Incentives

Since their introduction decades ago, employer-sponsored retirement plans have been in desperate need of updating, particularly for small businesses. That was until the SECURE (Setting Every Community Up for Retirement Enhancement) Act was enacted in 2019. The SECURE Act went a long way to leveling the playing field for smaller businesses with fewer resources that had to play by the same rules as larger corporations when offering a 401(k) plan to their employees.

The SECURE Act introduced several key provisions that make it more cost-effective for small businesses to offer their employees a way to save for retirement. Among them are tax credits for plan startup costs and auto-enrollment, as well as Pooled Employer Plans (PEPs) to lower the costs and ease the regulatory burdens of plan administration.

Currently, a bill before Congress called the Simplifying Small Business Retirement Savings (SSBRS) Act enhances both of those provisions, making it even easier and more cost-effective for small businesses to offer retirement plans and increasing access to millions of employees wanting to save for retirement. Here’s a look at those provisions and their proposed upgrades.

Pooled Employer Plans

The introduction of PEPs was the central provision of the SECURE Act, allowing small, unrelated employers to band together under a single 401(k) plan. It’s essentially an upgrade of the Multiple Employer Plan (MEP) but without the “one bad apple rule,” which could disqualify an entire pooled plan due to just one plan sponsor not operating per the MEP’s plan document.

The idea behind PEPs is they would offer smaller businesses economies of scale that lower costs and reduce sponsors’ administrative duties and fiduciary responsibilities. However, PEPs established under the SECURE Act must use only discretionary trustees named in a plan document with “exclusive authority and discretion over the management and control of plan assets.” This has created a limiting effect on the number of PEPs that can be offered to small businesses.

The proposed SSBRS Act would allow plan sponsors to choose an option other than discretionary trustees, referred to as directed trustees, subject to the directions of a named fiduciary who is not a trustee. The new option would have the effect of expanding the marketplace of PEPs and giving small businesses more choices at lower costs.

In addition, the SSBRS Act would simplify a PEP’s IRS filing. Generally, small businesses with no more than 100 employees are subject to simplified IRS filing requirements with respect to their retirement plans. However, under the SECURE Act, administrators of PEPs are required to meet IRS filing requirements for larger companies because the collective employees among the group of participating small businesses exceed 100.

The SSBRS Act would have the IRS treat a qualified PEP as if it were a small business with 100 employees or less, subjecting them to simplified compliance requirements.

Tax Incentives

Under the SECURE Act, eligible small businesses can claim a tax credit for establishing a 401(k) plan of up to $5,500 per year ($16,500 over three years). Businesses can earn a tax credit of up to $5,000 for qualified startup costs and a $500 credit for adding an automatic enrollment feature to a new or existing plan.

Congress has introduced a follow-up bill to the SECURE Act, appropriately titled the SECURE Act 2.0, which would increase the tax credits for qualified startup costs.

Another bill introduced earlier in 2022, called the Incentivizing Small Business Retirement Savings Act, would provide a tax credit for small businesses that make retirement plan contributions on behalf of employees for the first five years they are made. Businesses with 50 or fewer employees would be eligible for a tax credit of up to $1,000 per employee, which would be phased out gradually for businesses with 50 to 100 employees.

The SECURE Act 2.0 has already been passed by the House and is expected to pass the Senate with a bipartisan vote. The SSBRS Act was voted through a Senate Committee and is expected to reach a floor vote later this year.