Company-sponsored retirement plans such as 401(k), 403(b), 408(k), and other qualified plans under Internal Revenue Code Section 401(a) can be a great benefit to help employees save money for retirement. These benefit programs are often used by employers as a perk to attract talent to their organization through matching contributions based on employee elections or, in some cases, non-elective contributions. While these benefits might be common to see with larger and more established organizations, smaller businesses or companies operating in industries with high turnover may find that offering these types of plans to their employees can be difficult due to the added costs and/or administrative burden that comes along with these benefits. Offering a retirement plan benefit to employees means someone will need to be in charge of managing the plans, keeping track of plan rules, and making sure accounts are being funded appropriately.
It’s no surprise then, that many smaller businesses choose not to offer these benefits to their employees. However, employers should know that there are some states that mandate retirement plans for employees. Over half of U.S. states have enacted legislation that requires businesses of a certain size to participate in a state-facilitated IRA program if they don’t already offer another form of a qualified retirement plan for their employees. Non-compliance could potentially lead to the business facing hefty penalties from the state.
What are my retirement plan options?
Each state may have its own requirements for what constitutes a qualified retirement plan, but the following list includes the generally accepted plans:
- A qualified retirement plan under Internal Revenue Code Section 401(a)
- A 401(k) A 403(a)
- A 403(b) Tax-sheltered Annuity plan
- A 457(b) Deferred Compensation plan
- A 408(k), also known as a Simplified Employee Pension (SEP) plan
- A 408(p), also known as a Savings Incentive Match Plan (SIMPLE 401(k) or IRAplan)
- Payroll deduction IRAs with automatic enrollment
Businesses that already offer a workplace retirement plan may be exempt from participation in their state’s retirement plan. Businesses without a retirement plan will need to comply with each state’s program requirements or risk potential penalties. State-facilitated retirement programs can differ based on location, but many are designed as Roth individual retirement accounts (IRAs). Requirements for businesses may vary depending on the size of the business, which means smaller organizations could be exempt from having to offer retirement plans to their employees. Some state-mandated plans might require automatic enrollment of employees with set contribution rates, with the option for employees to opt-out of payroll deductions.
Again, offering retirement plan benefits – whether mandated by the state or not – requires the employer to take on the burden of plan administration. This means the business will be responsible for any necessary reporting and filing requirements, keeping track of contributions and making sure calculations are handled accurately, and general maintenance of the plan. This may also include staying abreast of changing legislation and rules specific to certain retirement plan types and making sure the systems used in HR, payroll, and benefits are being appropriately configured and updated as needed. This can be a huge burden to businesses that don’t have the time or resources to deal with complex plan management.
Which states have mandated retirement plans?
States that have passed legislation and have implemented or have plans to implement state-mandated rules and plans include:
- California – Employers with 5 or more employees are required to provide access to CalSavers or a private retirement plan
- Connecticut – Employers with 5 or more employees who don’t have an existing qualifying retirement plan are required to provide access to the Connecticut Secure Choice Savings Plan or a private retirement plan
- Colorado – Employers with 5 or more employees who have been in business for 2 or more years, and don’t have an existing qualifying retirement plan, must sign up for the Colorado Secure Savings Program or offer an employer-sponsored retirement plan
- Connecticut – The state-sponsored retirement plan, MyCTSavings, is compulsory for all business owners with more than five workers who don’t provide a private qualifying plan
- Illinois – Employers with 16 to 24 employees, who have been in operation for at least two years, are required to provide access to the Illinois Secure Choice state retirement program or a qualified retirement plan
- Louisiana – Introduced Senate Bill 283 which would have established the Louisiana Retirement Savings Plan for employers who do not provide their employees with access to a retirement plan
- Maine – The state-sponsored Roth auto-IRA plan is overseen by the Maine Retirement Savings Board for companies that have been active for at least two years, have more than 5 employees, and do not offer a qualifying private plan
- Maryland – The state’s automatic retirement savings plan, MarylandSaves, offers workers access to a payroll-deduction savings program if they are not eligible to participate in an existing employer plan
- Massachusetts – Nonprofit organizations with 20 or fewer employees must offer a retirement benefits plan through a 401(k) multiple employer plan (MEP) through the Massachusetts Defined Contribution CORE Plan or a private provider
- Nebraska – The The Retirement Systems Committee of the Nebraska Legislature launched a study to examine the availability and adequacy of retirement savings for Nebraska’s private-sector employees
- New Hampshire – The New Hampshire Statutory Commission on Retirement Security launched a study to examine the creation of a state-sponsored retirement plan
- New Jersey – Both non- and for-profit businesses with 25 or more employees that have been in business for at least two years must implement the New Jersey Secure Choice Savings Program or provide access to a qualified retirement plan
- New Mexico – The New Mexico Work and Save Act created a voluntary Roth IRA savings option for workers without employer-based retirement accounts, plus an online marketplace (the Retirement Savings Plan Marketplace) of private-sector providers for employers
- New York – The New York State Secure Choice Savings Plan program requires all private employers who have employed at least 10 New York-based employees during the previous calendar year, and that have been in business for at least 2 years, to enroll their employees in the State program or offer a qualified retirement plan
- North Dakota – Introduced House Bill 1200 which would have established the Save Toward a Retirement Today program for employers with no more than 100 employees and who do not offer retirement plans
- Ohio – Introduced House Bill 645 to establish an auto-enrollment retirement savings program called the Ohio Retirement Savings Program, for private sector employees.
- Oregon – All employers with employees in Oregon must offer a qualified retirement plan to their employees or implement OregonSaves
- Utah – Introduced a resolution to urge Utah’s small business community to work with the state’s Legislature and Treasurer to study and develop a model for a state-sponsored retirement savings program
- Vermont – The Green Mountain Secure Retirement Plan is available as a voluntary MEP to employers with 50 employees or fewer and employers that do not currently offer a retirement plan to their employees, as well as self-employed individuals
- Virginia – The VirginiaSaves program will require employers who have been in business for at least 2 years with 25 or more employees to implement the state program or offer a qualified retirement plan
- Washington – The Washington State Legislature created the Small Business Retirement Marketplace to provide small businesses and individuals access to a retirement plan. It is a website where employers and employees can shop and compare state-verified and low-cost retirement savings plans
- West Virginia – The Joint Committee on Government and Finance was tasked with launching a study to determine the need and feasibility of creating a state-sponsored retirement program
Keep in mind that not all of the states above have mandates that are currently active, and legislation is constantly changing. Businesses with a presence in multiple states should do their best to stay up to date with the rules of each state, as well as any new developments, deadlines, and other regulatory requirements to keep in compliance and avoid penalties. With the continuing trend of remote work arrangements, companies may find themselves suddenly subject to the rules and regulations of a new state and be forced to quickly adapt to remain compliant and competitive.
Should I offer a retirement plan if it’s not required?
The important thing to remember is that, in addition to state compliance, retirement plans are highly desirable benefits for many employees and can help improve recruitment and retention. Especially in today’s economy, offering great benefits to attract and retain talent, as well as showing employees that the company cares about their financial future and well-being can be extremely powerful. Setting up retirement plan benefits can prove to be a worthwhile investment in the future of the organization, even with the added burden of administration.
As a business owner, making the decision to go with a state-sponsored retirement plan or their own private market plan can be tough. State programs are generally lower-cost solutions with few fiduciary responsibilities for employers, but at the same time, these plans may not be as flexible or customizable to the needs of the organization. Private market plans can typically be customized to fit the needs and wants of the business, but setup and ongoing maintenance could be a hindrance. Another benefit to a private market plan is that they can be built to be fully compliant with the requirements of all states in mind. For businesses expecting to see growth and expansion, or organizations with employees in multiple states, this can greatly cut down on the time and efforts needed to register and get set up with each state’s program and allows the administrator to work with a single private plan provider to manage the employees’ retirement plans.
Some businesses might choose to partner with a PEO, or professional employer organization, which might entitle the company to participate in a multiple employer plan that could be more cost-effective than seeking out a private plan on their own. However, many organizations may find that working with a PEO could result in a loss of control since PEO partnerships generally result in co-employment arrangements. As the co-employer, a PEO might implement and enforce other rules and requirements, which could be off-putting to some businesses. Depending on the size of the company, a PEO’s service fees may also be a deterrent.
Working with a service provider can be another way to relieve some of the administrative burdens that comes along with managing retirement plans and benefits for employees. Many service providers can offer levels of service and support that are more flexible than the offerings of a PEO, and businesses can benefit greatly from having the industry expertise of their service team. Outsourcing administrative functions to a service provider can be an easy and cost-effective alternative to adding on to the responsibilities of an already overworked HR and benefits team or hiring an in-house expert, especially for smaller organizations.
