How Do Tax Incentives Influence Employer Decisions to Offer Retirement Benefits?

• In Event: Economic Shocks and Retirement Choices

Abstract

To expand retirement plan coverage among U.S. workers, policymakers have adopted tax incentives to encourage small employers to establish employer-sponsored retirement plans (ESRPs). One such policy is the federal startup credit under Section 45E of the Internal Revenue Code, which was introduced in the early 2000s and made more generous by the SECURE (2019) and SECURE 2.0 (2022) Acts. This paper evaluates the effect of that credit using administrative tax data covering the near-universe of U.S. firms, allowing us to observe plan offers more comprehensively than past research.

We find that take-up of the startup credit is extremely low: only around 5% of apparently eligible firms claim it, even after recent policy expansions. This implies that the credit has, at most, a modest influence on plan formation. Credit usage varies widely across industries, with take-up highest among professional services and lowest in agriculture. Take-up also varies with firm size, workforce earnings, and especially tax preparer characteristics. Preparers with prior experience filing Form 8881 are strongly associated with higher client take-up, and we document “preparer learning,” where take-up among a preparer’s clients increases after their first credit filing.

Despite the credit’s three-year availability, most firms that claim it do so for only one. Finally, we implement a regression discontinuity design using eligibility thresholds but find imprecise null results, consistent with the upper bound suggested by the take-up analysis. Together, our findings suggest that administrative burden, low awareness, and intermediary effects significantly limit the impact of tax-based incentives on retirement plan offers.

Authors

• Adam Bloomfield, adam.bloomfield@gmail.com

• Lucas Goodman, Treasury Department

• Shanthi Ramnath, Federal Reserve Bank of Chicago

• Sita Slavov