Lawmakers Reintroduce Bill to Boost Retirement Plan Tax Credits for Micro-Businesses

WASHINGTON — A bipartisan group of House lawmakers has reintroduced the Retirement Investment in Small Employers (RISE) Act, a legislative proposal aimed at making it more affordable for the nation's smallest businesses to offer retirement savings plans to their employees. The bill, if passed, would enhance existing tax credits established under the SECURE 2.0 Act of 2022, specifically targeting micro-businesses with 10 or fewer employees by increasing the available startup cost credit from 100% to 125% of qualified expenses. The push to expand these incentives builds upon the significant changes enacted in the SECURE 2.0 Act, which was designed to bolster retirement savings nationwide. Currently, small businesses with up to 100 employees can leverage substantial tax credits to offset the costs of establishing and maintaining new retirement plans like a 401(k), a Simplified Employee Pension (SEP) IRA, or a SIMPLE IRA plan. According to the Internal Revenue Service, these credits are intended to remove financial barriers that have historically prevented small employers from offering retirement benefits. The tax credits introduced by the SECURE 2.0 Act were a significant step forward, but for the smallest businesses—those with just a handful of employees—the upfront costs and administrative complexities of starting a retirement plan can still feel daunting. A tax credit that reimburses costs later doesn't eliminate the need for cash flow to pay those initial vendor and setup fees. Under the current framework, businesses with 50 or fewer employees can claim a tax credit for 100% of their qualified startup costs. This credit is capped at the greater of $500 or $250 per non-highly compensated employee (NHCE), up to a maximum of $5,000 per year for the first three years of the plan. For businesses with 51 to 100 employees, the credit covers 50% of those costs, subject to the same annual cap. Qualified costs include expenses for plan setup, administration, recordkeeping, and employee education materials. In addition to the startup credit, SECURE 2.0 introduced a separate, powerful incentive for employer contributions. For businesses with up to 50 employees, the government provides a tax credit for a portion of the contributions made to employee accounts. This credit can be as much as $1,000 per employee per year and phases down over five years. In the first and second years of the plan, the credit covers 100% of the employer's contribution up to the $1,000 limit. It then decreases to 75% in the third year, 50% in the fourth, and 25% in the fifth. This credit is phased out for employers with between 51 and 100 employees and is not available for contributions made to employees earning more than $100,000 (for 2023), as specified by the IRS. The proposed RISE Act zeroes in on the smallest segment of this group. By increasing the startup cost credit to 125% for employers with 10 or fewer workers, the bill would effectively mean these businesses could receive a tax credit larger than their initial outlay. This would transform the establishment of a retirement plan from a net cost into a net financial positive for the first three years, a powerful motivator for business owners on the fence. In our experience, the RISE Act’s proposal to increase the startup credit to 125% for the smallest employers is precisely the kind of targeted incentive that could finally move the needle. It effectively means the government would pay these micro-businesses to establish a plan, turning a financial hurdle into a net benefit for the first few years. This acknowledges the unique cash flow and resource constraints these companies face. Navigating the rules to maximize these credits and ensure proper plan setup is crucial. For business owners considering this, our expertise in tax preparation and compliance can provide essential clarity. We help clients structure these benefits correctly from the start; you can learn more about how C&S Finance Group LLC at csfinancegroup.com assists with these matters. To be eligible for the existing credits, an employer must have had 100 or fewer employees who received at least $5,000 in compensation in the preceding year. The plan must also cover at least one NHCE. Furthermore, the employer cannot have sponsored a substantially similar retirement plan for the same employees in the three tax years prior to eligibility. The reintroduction of the RISE Act highlights a persistent gap in retirement plan coverage. While larger companies almost universally offer retirement benefits, smaller firms lag significantly, leaving millions of American workers without access to a workplace savings vehicle. Proponents of the bill argue that by making the financial incentives overwhelmingly positive for micro-businesses, Congress can encourage the creation of thousands of new plans, helping to close this coverage gap and improve long-term financial security for a vulnerable segment of the workforce. As the bill has been reintroduced with bipartisan support, its prospects are considered stronger than many other proposals. However, it must still navigate the legislative process, including reviews by House and Senate committees, before it can be brought for a full vote. Business owners and industry advocates will be closely watching its progress.