How do state-mandated retirement plans affect your business?
Updated July 1, 2022
Retirement plans usually appear toward the top of wish lists for employees and job seekers, but not all employers offer them. There is no one reason: federal requirements don’t exist, organizations may not understand how to provide one, and some business owners just might not think they can afford them. That could begin to change as state-mandated retirement plans become more commonplace.
Let’s unpack what state-mandated retirement plans are, where they exist (so far), and what this could mean for your organization. Or, choose your state below to see if there are specific requirements where you do business:
State-mandated retirement plans: what are they?
First things first: state-mandated retirement plans require employers to offer their workers access to a retirement savings program or savings opportunity. These are state mandates to offer a plan – you do not have to choose your state’s specific plan – you are free to pick what you think is best for your employees and company.
Currently, 14 states have some type of state-facilitated retirement program active or in the works, and more participants could be on the horizon. Most cover private-sector employees, with Massachusetts the current exception: their state plan is only available for non-profits.
These plans continue to pick up steam because many individuals are in a tough spot approaching retirement age. There are some sobering stats and details out there:
- Around 45% of households have zero retirement assets
- The Brookings Institute reports a growing gap between Americans with and without access to retirement plans
- An estimated 57.3 million private-sector workers don’t have access to a retirement plan through their employer
It’s not all doom and gloom, though. State-mandated plans could chip away at these numbers. Studies suggest 75% of workers may be more inclined to save for retirement when their employers offer a 401(k) or other savings program.
There’s also evidence that when businesses make it easier for employees to sock away a portion of their paycheck toward savings, it can make a big difference. For example, a whopping 90% of households with access to a workplace retirement plan said automatic payroll deductions make it easier to save.
How do state-mandated retirement plans commonly work?
Programs vary, but most state-sponsored plans stick with Roth IRAs. Employees pay tax on contributions today – the investment grows – and it is generally tax-free income when they reach retirement age. Some states have traditional IRAs where contributions can be made pre-tax – when you start to withdraw funds – the income can be subject to taxes. From state to state, plans generally do have some things in common.
Some things employers might want to know:
- Usually, you must participate if you have five or more employees and don’t currently offer a retirement plan or provide staffers access to one
- Some states such as Connecticut and Oregon can work with your current payroll software to process deductions
- Already offer a plan? Typically, you can register for an exemption on your state’s website
Some things employees might want to know:
- Depending on the state, there is automatic enrollment for new hires after 30 to 60 days
- Generally, plans deduct three to five percent of an employee’s paycheck
- Employees can opt-out whenever they choose or change the amount they contribute
Are there penalties if a business ignores a state mandate?
Don’t get mad at the messenger, but yes, there can be penalties if your business does not comply and each state has different regulations. For example, employers in Oregon could face penalties up to $5,000 per calendar year for non-compliance. If an employer in Illinois ignores their state mandate, they could face fines of $250 per employee in the first calendar year, which climbs to $500 per employee year two.
These numbers can fluctuate, so it makes sense to research your state website for information.
Should you choose your states plan or an independent provider?
State retirement plans can be rigid, while most employer-sponsored programs offer flexibility. On the other hand, many state plans don’t have upfront costs, while traditional plans have administrative fees. A private plan might cost less to maintain and offer more value in the long run.
For example, you might be eligible for tax credits to help recoup some administrative costs of an employer-sponsored plan. The IRS start-up costs tax credit is available to some organizations with fewer than 100 employees – and if you are eligible, it can help with up to 50% of your startup costs. The IRS website says “you may claim the credit for ordinary and necessary costs to:
- Set up and administer the plan
- and educate your employees about the plan
It can be a big help when some set up fees can range from $1,000 to $3,000 per year, on average. No one provider is the same, so it could make sense to research a couple to understand the options and costs.
Also, state-facilitated programs usually limit how much employees can put toward their nest egg. Many state plans offer a Roth IRA, with contribution limits set by the federal government at $6,000 per year. Some traditional 401(k) plans allow options to contribute as much as $20,500 annually. So, if you are thinking about the long-term retirement prospects for your employees, these could be some numbers to keep in mind.
We also put a little cheat sheet to break out some differences:
|Details||State-mandated plan||Employer-sponsored plan|
|Employees auto-enrolled?||Yes, usually after 30 to 60 days||Employer discretion|
|Can employees opt out?||Yes||Yes|
|Savings structure||Most states have a Roth-IRA or individual retirement account||Can be a defined contribution plan where employees can make contributions from a paycheck pre-or-post tax|
|Options||Most are chosen by a state board||Various investment choices and firms|
|Contributions limits||Up to $6,000 annually for most plans||Up to $20,500|
|Catch-up contributions for age 50+||$1,000||$6,500|
|Employer contributions allowed?||No||Yes|
|Federal tax credits for employers?||No||Tax credits are available for some eligible employers’ start-up or administration costs, employee education about the plan, and for matching part or all of employees’ contributions|
|Costs?||No||There can be fees for administrative tasks, consultation, and plan set up.|
|Employer contributions tax-deductible?||N/A||Yes|
Our small business 401(K) guide might be helpful as you consider retirement plans and what makes the most sense for your organization. No matter the path you take, there are options for every company! Happy planning, and be sure to check out individual state resources below.
More details on state-mandated plans
OK, we got through a high-level overview of what’s happening with state-mandated plans. Now let’s dive a little deeper into the details on active state programs and plans that are still pending.
Current rule: As of June 30, 2022, California requires employers with five or more employees, to offer a retirement savings plan.
Plan details: Employers may choose an independent retirement plan administrator, or participate in California’s state-run plan, Calsavers.
History and update: The June 30, 2022 deadline is part of a three-year rollout that began with a retirement plan mandate for larger employers in 2020.
Current rule: Starting in July 2023, Colorado requires all employers with five or more employees, in business for two or more years, to offer a retirement savings plan.
Plan details: Employers may choose an independent retirement plan administrator or participate in Colorado’s state-run plan, Colorado Secure Savings Program.
History and update: Signed into law in July 2020, the pilot program is scheduled to begin in October 2022. The 2023 compliance deadline does not start until at least one year after the program is officially enacted (this date is still to be determined.)
Current rule: Connecticut will require employers with five or more employees, who do not offer a retirement savings program, to offer one. Businesses with fewer than five employees or those that already provide a work-based retirement savings option will not be required to participate.
Plan details: Employers may choose an independent retirement plan administrator or participate in Connecticut’s state-run program, MYCTSavings.
History and update: The program recently opened for enrollment on April 1, 2022 and the first deadline comes up for employers with 100 or more employees on June 30, 2022. An October 31, 2022 deadline follows for employers with 26 to 99 employees. After that passes, there is a March 30, 2023 deadline for employers with five to 25 employees.
Current rule: As of November 2022, Illinois will require employers with 16 to 24 employees — that have been in operation for at least two years – to offer a retirement program. The deadline for employers with 25 or more employees has passed.
Plan details: Employers may choose an independent retirement plan administrator or participate in the state program, Illinois Secure Choice.
History and update: The upcoming November 1, 2022 deadline for businesses with 16 – 24 employees and November 1, 2023 deadline for businesses with 5 to 14 employees are part of a four-year rollout that started with a retirement plan mandate for larger employers in 2018.
Current rule: As of April 1, 2023 the state of Maine will require companies with 25 or more employees, that do not currently offer a retirement program, to provide one.
Plan details: Employers may choose an independent retirement plan administrator or offer an auto-IRA plan through Maine’s Retirement Savings Board.
History and update: In June 2021, Maine’s state legislature passed an act to promote individual retirement savings through a public-private partnership. Implementation has three deadlines of April 2023, October 2023, and April 2024.
Current rule: The state of Maryland will provide workers with access to a payroll-deducted savings program if they cannot participate in an existing employer plan.
History and update: Signed into law in 2016, Maryland Saves is scheduled to launch in Summer 2022.
Current rule: As of October 2017, Massachusetts requires non-profit organizations with 20 or fewer employees to offer a retirement benefits plan.
Plan details: Employers may choose an independent retirement plan administrator or participate in the state 401(k) multiple employer plan (MEP), CORE Plan for Non-Profits.
History and update: Signed into law in 2012, CORE currently affects non-profits only, but requirements could change. A state-mandated retirement plan that applies to 25 employees or more for-profit businesses was proposed, but not enacted in 2021.
Current rule: New Jersey requires employers that do not currently offer a retirement program to provide one. Employers of any size, even those with fewer than 25 employees, can participate if they choose.
Plan details: Both non and for-profit employers, that have been in business for at least two years, may choose an independent retirement plan administrator or offer the New Jersey Secure Choice Savings Program.
History and update: The state passed legislation for their retirement program in March 2019. The original launch date of March 2021 was rescheduled for March 2022. Employers will have nine months until after the program is enacted to be compliant with the legislation and assume responsibilities of the program.
Plan details: New Mexico has plans to offer a voluntary, automatic low-cost retirement savings option for workers without employer-based retirement accounts, plus an online marketplace of private-sector providers for employers.
History and update: Enacted in 2021, the state board received an extension through July 1, 2024 to create their plan, New Mexico’s Work and Save Program.
Current rule: As of October 2021, requires employers – both for-profit and nonprofit – that have ten or more employees during the previous calendar year and have been in business for at least two years to offer a retirement program.
Plan details: Employers may choose an independent retirement plan administrator or enroll in New York’s Secure Choice Savings Program.
History and update: Lawmakers created the program in 2018. Although the Act is in effect, enrollment is not yet open. While the exact date is still to be determined, enrollment is expected to open at some point in 2022. Employers will have nine months once the program is enacted to participate and comply with legislation.
Current rule: Since July 2017, Oregon requires all employers to offer a retirement savings plan.
Plan details: Employers may choose an independent retirement plan administrator or offer the state-facilitated program, Oregon Saves.
History and update: The next deadline is in late 2022, part of a five-year rollout that began with a retirement plan mandate for larger employers in 2020.
Current rule: The voluntary program allows employers with less than 100 employees and their employees to shop and compare state-verified and low-cost retirement savings plans.
History and update: The Small Business Retirement Marketplace launched in March 2018 and most recently updated it in 2020 with additional providers and plan options.
Company size: The program will be available voluntarily to employers with 50 employees or fewer and employers that do not currently offer a retirement plan to their employees.
History and update: Vermont’s general assembly passed legislation in 2017. There were plans for a soft launch of the Green Mountain Secure Retirement Plan in the middle of 2021. The date passed without further details.
Company size: Starting in July 2023, requires employers, with 25 or more employees that have been in business for at least two years, to offer a retirement savings program.
Plan details: Employers may choose an independent retirement plan or retirement plan administrator or offer the state-facilitated program, Virginia Saves.
History and update: The Virginia General Assembly passed legislation establishing a retirement savings program in 2021.
Below are states with proposed legislation where mandates might be on the way:
Arizona, Arkansas, Idaho, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, Utah, West Virginia, Wisconsin and Wyoming.