By Chris Luongo, DVP Strategy & Business Development, Retirement Services, ADP
If your small business doesn't currently offer a retirement plan, the proposed Starter 401(k) may be the solution you've been waiting for.
[Related: SECURE 2.0 Act of 2022.]
Many small businesses feel they simply can't afford the time and resources it takes to sponsor an employee retirement plan. But with some new legislation poised for Congressional approval, that thinking may be about to change.
In the flurry of proposals making their way through the U.S. House and Senate, one (the EARN Act) includes a new type of plan called a Starter 401(k). Designed for small businesses that don't currently offer any retirement savings vehicle, the Starter 401(k) aims to eliminate common barriers to plan sponsorship.
Among the key provisions, which if passed would be effective after 2023:
- Small businesses with no current plan can offer either a starter 401(k) plan or safe harbor 403(b) plan.
- Eligible employees would be automatically enrolled at the minimum default level of 3% of compensation.
- No employer contributions would be required, which would lower costs.
- No major year-end testing would be required, which would save time and reduce stress,
- Limits on annual contributions would be the same as the IRA contribution limit, which for 2022 is $6,000 with an additional $1,000 in catch-up contributions beginning at age 50.
Auto enrollment: Setting employees up for success
The automatic enrollment provision of the current legislation can help small businesses cut down on manual tracking and paperwork, while helping employees automatically get started on their retirement savings.
That's a huge benefit, since a retirement plan has become an important component in hiring and retention. Recent research shows that 55% of companies expect to face challenges in these areas over the next two years, and 35% expect retirement benefits to help differentiate them from the competition.
Keep in mind that the automatic enrollment provision only applies to new plans after the legislation passes. If you'd prefer to have more control over the enrollment process, you may want to set up your retirement plan sooner rather than later.
Educate yourself on retirement plan options
The barrage of recent legislation can be overwhelming for small business owners not currently offering a retirement savings plan. But ignoring likely outcomes isn't going to make them go away.
Instead, connect with a trusted resource to better understand what's ahead — and to start attracting the top talent your company needs to grow.
For information on how the legislation might impact your current retirement plan — or to start the process to offer a retirement plan — reach out to ADP today.
Registered representative of ADP Broker Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 and Associated person of ADP Strategic Plan Services, LLC (SPS) an SEC Registered Investment Adviser. Registration does not imply a certain level of skill or services.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor. ADPRS-20220930-3666