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

In recent years, policy makers have adopted many measures to incentivize the establishment of employer-sponsored retirement plans (ESRPs). One such measure – implemented in the early 2000s and made more generous in recent years – allows smaller firms that establish an ESRP to claim a tax credit to offset part of their costs during the initial years. We examine firm take-up of this credit. We find that only 1 percent (pre-policy expansion) to 5.5 percent (post-policy expansion) of apparently eligible firms claim the credit. We document heterogeneity in credit take-up rates by industry, firm owner education, and use of tax preparation services. We also document evidence of “tax preparer learning,” whereby take-up among a tax preparer’s clients increases after that preparer files their first credit. Finally, we document that most firms only claim the credit for one year despite being eligible to do so for up to three years.