Bigger, faster retirement plan tax credits for small businesses? Two ideas for the future

One of the perks of offering your employees a 401(k) plan is that sizable tax credits may lower your company's tax bill. The big three benefits include credits for startup costs, auto-enrollment, and employer contributions.

In recent years, lawmakers have been boosting these incentives under the SECURE Acts to increase the number of small businesses offering retirement savings. While it is still early, it appears to be working — the number of companies offering 401(k) plans increased 56% between 2013 and 2023.

Even so, many small businesses have yet to offer a retirement plan, even with these tax credits. Why? Recent research suggests that revenue, perceived costs, and awareness of what's available remain barriers.

Affordability can make 401(k) plans more accessible

Providers like Guideline are part of the solution for small and mid-sized businesses. Another part is making tax credits work even harder for these businesses. Let's explain.

Tax credits are a lever lawmakers use to reward certain activities or make certain things more affordable. For example, there are several existing credits in the tax code to help offset costs for things like installing solar panels or adopting a child. However, in many instances, the taxpayer must wait until filing their taxes to get the benefit.

In the case of tax credits for companies offering a new 401(k) plan, the benefit of those credits could be felt months after the up-front costs are incurred, which is not great for small businesses running on tight budgets.

The current tax credits available to small businesses include a credit for starting a new plan aimed at offsetting initial costs (eligibility requirements apply) plus another tax credit for implementing automatic enrollment. There is also an additional deduction for employer contributions.

Improving tax credits for small businesses

Several lawmakers are trying to make the tax benefits even more impactful for the smallest businesses. A proposed bill in the Senate and a similar one in the House would raise the minimum tax credit for companies with fewer than 10 employees from $500 to $2,500 per year for the first three years to help them cover these costs. If these bills were to pass as written, these changes would be effective for 2027 tax years.

Even with this bump in the tax credit, 79% of businesses with four or fewer employees cite revenue as their number one concern when it comes to offering a retirement plan to their employees. With uncertain income, the outlay to start a plan — even with a tax credit down the line — remains a barrier. Another idea? Remove the wait time to get that tax credit so it's not a hit on cash flow for smaller businesses.

That’s where policymakers focused on retirement could look at other ways of issuing tax credits. As part of the Inflation Reduction Act, new tax credits for electric vehicles are credited at the point of sale — meaning car buyers can reduce the net price of the vehicle by the tax credit amount. While it's technically a tax credit, it feels more like a rebate and is money back in the buyer’s pocket upfront.

With the existing 401(k) tax credits, a small business with less than 10 workers starting a new 401(k) plan could claim up to $500 or more per year for each of the three years when it offers a 401(k) plan to its workers (see our tax credit calculator below for how it could work for your business).

Note that those dollars are not recouped until it’s tax time, months later.

A better approach? If that tax credit was offered at the point of sale, that credit would come off the net purchase price for providing a 401(k) plan. And if the proposed $2,500 bulked-up tax credit were also made available — plus the current $500 auto-enrollment tax credit — that could be as much as $3,000 upfront — for businesses that qualify for each of the first three years.

Making 401(k) plans more accessible to small businesses is critical to the financial health of the aging workforce. Companies with 10 or fewer employees represent the majority of businesses in the United States and are key to expanding retirement savings coverage. Add to that, many small businesses are in states that have or will have retirement mandates and will have to offer something soon. Lastly, there’s some possibility that a national mandate in the future will mean almost every company must offer a plan.

Helping businesses access retirement plans could help expand retirement coverage to tens of millions more workers and potentially put billions back in their pockets sooner with bigger and faster tax credits.