A GOOD chunk of the new tax law aims to boost retirement savings among individuals, but there's something for small businesses, too.
The law, signed last month by President Bush, relaxes rules and offers tax perks to encourage small businesses to establish a retirement plan.
Increasing the number of plans among small businesses is a government goal, retirement experts said.
According to the most recent data from the Bureau of Labor Statistics, 46 percent of full-time employees at small companies are covered by a workplace retirement plan, compared with 79 percent of those at larger businesses.
"The fact that you do have close to one-third of the labor force that works for small employers, the only way to get those individuals in the system is if small employers decide to sponsor plans," said Dallas Salisbury, president of Employee Benefit Research Institute in Washington.
Sonny Morstein, owner of Morstein's Jewelers in Baltimore and chairman of the City Council's ad hoc committee on small business, says it's not easy for small employers to set up plans. Morstein doesn't have a retirement plan for his two full-time and two-part-time workers.
Sometimes workers are juggling other costs, such as a child's college education, and don't want to contribute to a plan, Morstein said, or they would rather have other benefits such as health insurance.
And many businesses have unpredictable cash flow and don't want to commit to a retirement plan, Morstein said. "You don't know what the economy will be like," he said. "There are good years and lean years."
EBRI, which conducts an annual survey on small businesses, found that another reason for a lack of a plan is that many companies often were not aware of their options, including some simple, less expensive plans created by Congress with small businesses in mind.
Despite these hurdles, retirement experts expect that the new tax law will prompt small businesses to adopt a plan.
Among the new provisions:
Tax credit: Beginning next year, a company with 100 or fewer workers that starts a plan will get a tax credit for 50 percent of the cost, for a maximum credit of $500 a year, for three years.
"It would cover administrative expenses or if you wanted to hire someone to come in and do some [retirement] education or seminars for employees," said Lindsey Wilkins, a principal with Edward Jones investment firm in St. Louis.
Definition change: When a plan primarily benefits owners or other so-called key employees, it's considered "top heavy." One of the outcomes is that the company must contribute a certain amount of money to the plan on behalf of lower-level workers.
The new law changes the definition of key employees, thereby making it less likely a plan will be deemed top-heavy. "It makes the administration of these plans less difficult. When it's easier to administer, hopefully, it costs less," Wilkins said.
Noncompliance testing changes: The old law set standards that limited how much highly compensated employees can put in a plan based on what lower-level workers contribute. These rules, too, have been made more liberal for all employers, but the change will be meaningful for small businesses, Wilkins said.
"When you've got just a few employees, those testing requirements are sometimes really hard to pass. Just one or two [workers] leaving can affect how much you can put in your plans," she said.
Fee waiver: Starting next year, businesses with 100 or fewer employees won't have to pay a fee when seeking a letter from the Internal Revenue Service to verify they have a qualified plan that meets IRS rules.
The fee can range from $750 to $1,300, Wilkins said. The fee is waived for letter requests during the first five years of the plan.
Plan loans: The rule has been that a sole proprietor, a partner and an owner of an S corporation could not borrow from their personal account in a retirement plan, such as a 401(k), as their counterparts at larger corporations could do, Wilkins. Next year, they will be able to take out loans like everyone else.
Contribution increases: The maximum contributions that workers can make each year to some plans commonly used by small businesses will also rise, making those plans more attractive, experts said.
Annual contributions to Savings Incentive Match Plan for Employees, or SIMPLE plans, go up by $500 next year, to $7,000, and gradually rise to a $10,000 maximum contribution in 2005. For 401(k)s, contributions go up by $500 next year, to $11,000, and then increase $1,000 each year until reaching a maximum contribution of $15,000 in 2006.
Profit-sharing deductions: It's up to employers to decide the size and when contributions are made to profit-sharing plans on behalf of workers. But when employers do make contributions, they usually are the same percentage for all workers.