Referrals are a leading source of revenue for many TPAs and recordkeepers. Financial advisors, payroll companies, accountants, and attorneys can all help drive business to you. With the expansion of the start-up tax credits in SECURE 2.0, new retirement plans can be advantageous for both you and your referral sources.

The use of start-up tax credits is a win-win for both you and your referral sources. These tax credits are being under-utilized, resulting in plenty of opportunity by marketing their benefits. To illustrate, 72% of small business owners not offering a plan were not aware of tax credits being available to cover the costs of starting a retirement plan. However, 78% said the tax credits would make it at least somewhat more attractive to offer a plan.¹

Here is how you can promote start-up tax credits to gain new retirement plan business while also driving business to your referral sources.

Targeting Eligible Employers

The first step is knowing who can take advantage of the start-up tax credit. Eligible employers must satisfy three requirements:

1. Have 100 or fewer employees
2. Cover at least one non-highly compensated employee or a non-HCE (i.e., an employee who makes less than $155,000 in 2024 and owns less than 5% of the company)
3. Have not sponsored a retirement plan in the past three years

Unfortunately, these requirements eliminate two categories of employers. First, the owner-only businesses looking to adopt a solo 401(k) plan. Without covering a non-HCE, the owner-only business cannot take advantage of the start-up tax credit. Second, the employer that already has a plan (i.e., profit sharing plan) and is looking to add a feature (i.e., 401(k) or another plan (i.e., ESOP). If the employer already sponsors a retirement plan, it cannot utilize the start-up tax credit.

On the other hand, the pool of businesses meeting the eligible employer definition is significant. With your assistance, proper marketing of the start-up tax credit can increase the adoption of new retirement plans.

Determining Maximum Tax Credit Limit

The maximum tax credit limit each year is $250 multiplied by the number of non-HCEs, not to exceed $5,000. The tax credit is available for the first three years, beginning when the plan is effective. A couple items to consider:

1. The minimum tax credit is $500 for eligible employers. An employer with only one non-HCE receives a tax credit of $500 instead of $250.
2. Employers with 20-50 employees hit the sweet spot of receiving a tax credit for all start-up costs up to $5,000.
3. Employers with 51-100 employees only receive a tax credit for 50% of start-up costs. Therefore, they need to incur $10,000 in costs to receive the full $5,000 tax credit.
4. Qualified startup costs include expenses incurred by an employer to either (i) establish or administer a plan; or (ii) educate employees about the plan. These broad categories cover a vast range of different services provided to retirement plans.
5. Although the credit is available for the first three years, an employer may elect to take the credit for the year preceding the plan’s effective date. For example, work is being done and charged to the employer in 2024 for a plan effective at the beginning of 2025. In this case, the employer may elect to use the tax credit for those costs, plus the costs for the next two years of operation.

Integrating the Tax Credit into Your Marketing Plan

When marketing your fee structure, do so in the context of the tax credit. More importantly, highlight how a referral source can increase its business by using the difference between your fees and the tax credit maximum limit.

Think of the power of that message to a referral source. If they partner with you in setting up a retirement plan for a mutual client, you can both charge up to $5,000 total in fees for three years which will all be offset by the start-up tax credit.

To illustrate, you develop a marketing piece that specifically targets employers with 20-50 employees. Assume you charge a flat fee of $2,700 for this employer size. Other service providers can charge that same employer up to $2,300 and those fees will be completely offset by the start-up tax credit ($5,000 limit) for the plan’s first three years.

Develop a Plan of Attack

Depending upon your target employer demographic, you should consider at least three different marketing pieces:

1. Employers with 2-19 employees: tax credit limit will be less than $5,000
2. Employers with 20-50 employees: 100% of start-up costs up to $5,000
3. Employers with 51-100 employees: 50% of start-up costs up to $5,000

In each of these pieces, you should compare your fees to the tax credit limit demonstrating what a referral source can charge without going over the limit. Please note, even if the total fees exceed the tax credit limit, fees associated with retirement plans are generally tax deductible. You can then go after new referral sources that either don’t know about the tax credits or don’t recognize their financial opportunity.

I have talked with financial advisors who are now marketing to small employers without a retirement plan based on the expanded start-up tax credits. Before, financial advisors lacked any incentive because there was little, if any, assets in the plan. With the tax credit, a financial advisor can charge a flat fee for getting the plan started which may be fully offset by the tax credit. When the tax credit ends after three years, the expectation is that sufficient assets are in the plan to change the fee arrangement, or the employer recognizes the value delivered by the financial advisor.

Start-Up Tax Credits Benefit Everyone

Start-up tax credits can be a win-win for both employers and service providers, but many don’t know this benefit even exists. By incorporating the tax credits into your fee structure, you can educate referral sources on how to drive business to both you and them.

Even better, a bill in Congress is considering an increase in the minimum start-up tax credit from $500 to $2,500. This would benefit employers with fewer than 10 employees. By developing your marketing plan of attack now, you can take advantage of the current (and any future) start-up tax credits to increase revenue and expand your referral network.

¹ www.ebri.org

About The Author

Brian Furgala is Senior Director, Retirement Services Strategy for PenChecks Trust®, a leader in outsourced retirement plan distribution processing and Automatic Rollover/Missing Participant IRAs and related services. His broad experience as an ERISA attorney and senior executive for several leading retirement plan service providers gives him a unique perspective on the industry.

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The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.
 

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