Did you know the average working household has virtually no retirement savings? Additionally, only four in 10 businesses with fewer than 100 employees offer retirement benefits. The mounting issue has led to many states instituting state-mandated retirement plans.
While a retirement plan is essential to every employer’s benefits package, it is not always easy and affordable for small businesses and nonprofits to administer. State-mandated retirement plans are a simple, cost-effective (typically free) solution for employers. They are intended for low to moderate-income workers of small to mid-sized private businesses to lower the retirement savings gap.
So, what are these state-sponsored plans? How do they differ from employer-sponsored plans? Are retirement plans mandatory everywhere? We’re explaining everything you need to know and the latest regulations from state to state below.
What are state-mandated retirement plans?
A growing number of states are requiring employers to provide employees with retirement benefits through what is known as state-mandated retirement plans. These are typically free for employers to enroll in; they will only be responsible for the time to enroll and manage contributions every pay period.
State-mandated retirement benefits usually apply to private employers who do not already offer another qualifying retirement plan to employees.
Employees can choose to enroll or opt out of the plan. They can also decide how much they’d like to contribute each pay period.
State-mandated retirement plans are usually Roth IRAs, meaning the employee’s contributions are deducted post-tax, so their money is tax-free at the time of withdrawal. With traditional IRAs and 401(k)s, withholdings are deducted pre-tax, meaning participants are taxed when they withdraw funds.
Note that in states that sponsor Roth IRAs, employees must not earn more than the IRS maximum to be eligible.
How will it affect my business?
State-mandated retirement plan requirements vary from state to state. Generally, they are determined by how long you’ve been in business and how many employees you have. A few states offer voluntary retirement plans.
Covered employers can choose to enroll in a state-sponsored retirement program OR provide their own private plan by another benefits company. In most cases, employers are not allowed to contribute a match. Many states also penalize businesses that don’t comply or miss enrollment deadlines.
What’s the difference between state-mandated retirement plans and employer-sponsored retirement plans?
The state-mandated retirement plans are easy and free for employers to enroll in. You simply need to administer employee deductions. However, they don’t offer many options as employer-sponsored plans.
Retirement benefits through the private marketplace usually allow employers to offer better options, helping to make them more attractive to potential candidates. For example, you might choose a plan that provides vesting and employee loans. Or maybe, you want to offer a matching contribution. You can also receive business tax benefits for those matching contributions and credit for program fees.
Plus, IRAs have lower maximum contributions than 401(k)s. In 2022, those under 50 may contribute up to $6,000, and those 50 or over may contribute an additional $1,000 yearly. Meanwhile, 401(k) participants can contribute up to $20,500 annually, which will appeal to employees who want to maximize their retirement savings.
What states mandate retirement plans?
While several states have active state-mandated retirement plans, others are still in the works. And several that are active are being implemented in phases. Check state and local laws regularly to ensure compliance with mandated retirement benefits.
Note that the state-sponsored retirement plans listed below are required unless otherwise noted as voluntary.
California
- Program: CalSavers
- Type of Retirement Plan: Roth IRA
- Status: Active
- Who is covered: Private employers with 5 or more employees that don’t offer another qualified retirement plan
Connecticut
- Program: MyCTSavings
- Type of Retirement Plan: Roth IRA
- Status: Active (still being fully implemented)
- Who is Covered: Private employers with 5 or more employees that don’t offer another qualified retirement plan
Colorado
- Program: Colorado SecureSavings
- Type of Retirement Plan: Roth IRA
- Status: Pilot expected 2022; program begins 2023
- Who is Covered: All employers with 5 or more employees that have been in business for at least 2 years and don’t offer another qualified retirement plan
Illinois
- Program: Illinois Secure Choice
- Type of Retirement Plan: Roth IRA
- Status: Active
- Who is Covered: All employers with 5 or more employees that have been in business for at least 2 years and don’t offer another qualified retirement plan
Maine
- Program: Maine Retirement Savings Program
- Type of Retirement Plan: Roth IRA
- Status: Phase 1 begins April 2023
- Who is Covered: Private employers with 5 or more employees that have been in business for at least 2 years and don’t offer another qualified retirement plan
Maryland
- Program: MarylandSaves
- Type of Retirement Plan: Roth IRA
- Status: Active
- Who is Covered: All employers with 1 or more employees that have been in business for at least 2 years and don’t offer another qualified retirement plan
Massachusetts
- Program: CORE Plan for Nonprofits
- Type of Retirement Plan: Tax-deferred and post-tax 401(k)
- Status: Active
- Who is Covered: Voluntary for nonprofits with 20 or fewer employees (must have payroll administered by an eligible third party)
New Jersey
- Program: Secure Choice Savings Program
- Type of Retirement Plan: Roth IRA
- Status: Implementation TBD
- Who is Covered: Non- and for-profit employers that have been in business for at least 2 years, have 25 or more employees, and have not offered a qualified retirement plan in the past 2 years
New Mexico
- Program: Work and Save Act
- Type of Retirement Plan: Roth IRA
- Status: Implementation expected July 2024
- Who is Covered: Voluntary for private and nonprofit employers
New York
- Program: New York State Secure Choice Savings Program
- Type of Retirement Plan: Roth IRA
- Status: Active as of late 2021, not yet operational
- Who is Covered: Private employers who have employed at least 10 NY employees during the previous calendar year and have been in business for at least 2 years
Oregon
- Program: OregonSaves
- Type of Retirement Plan: Roth IRA
- Status: Active
- Who is Covered: All employers with 4 or fewer employees that don’t offer another qualified retirement plan
Vermont
- Program: Green Mountain Secure Retirement Plan
- Type of Retirement Plan: Multiple Employer Plan (MEP)
- Status: Implementation TBD
- Who is Covered: Voluntary for employers with 50 or fewer employees
Virginia
- Program: RetirePath Virginia
- Type of Retirement Plan: Roth IRA
- Status: Implementation expected July 2023
- Who is Covered: Private employers with 25 or more employees that have been in business for at least 2 years and don’t offer another qualified retirement plan
How can I comply with retirement benefit mandates?
While state-mandated retirement plans haven’t been established in every state, it’s best to stay on top of your local laws, as things are constantly changing. As noted above, many states are in the process of implementing required retirement benefits.
If you are in a state with a retirement plan mandate and the compliance date is approaching, you should enroll to be safe. You can then choose to research other retirement plan options and find one that best fits your business.
Either way, providing some form of retirement benefits is becoming a must for most companies in this employee-favored job market. Candidates are searching for a workplace that prioritizes their work-life balance and well-being, and part of that includes helping them plan for the future. Offering a 401(k), IRA, or combination will make your business stand out in this competitive landscape.
Do you need help implementing a retirement plan for your small business? Or do you have questions about state-mandated retirement plans? Contact BlueLion today at 603-818-4131 or info@bluelionllc.com, and we’ll be happy to walk you through it! You can also check out our HR projects and training services to learn more about what we offer.
The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.
