Many states are starting to require businesses–even smaller businesses with as few as 5 employees–to participate in a state-sponsored retirement plan (generally an IRA), unless they already offer an employer-sponsored plan, in response to what is being called the “retirement crisis.” If you are a small business of any size, now is the time to start looking at retirement plans. Not only does offering a retirement plan help level the playing field when competing against big companies to recruit top talent, but if you aren’t paying to the deadlines ahead, you could get stuck offering the state-sponsored plan that won’t give you as many perks as other retirement options. The most important thing to recognize when talking about state-mandated retirement plans is that these plans are made with employees in mind, not the employers. State-mandated plans are typically Roth IRAs that are often meant to be easy for employees to carry with them throughout their careers. There are no incentives for the employers to offer the plans–except for fear of penalty. If this information automatically makes you want to go into panic mode, fear not. We have put together this comprehensive guide to give you the full picture of your options and important deadlines to note for each state.
Retirement Savings Crisis OverviewStudy after study has shown that Americans simply aren’t putting away enough for retirement. The 2018 Consumer Spending Report from the U.S. Bureau of Labor Statistics shows that the average American spends around $3,900 a month on basics including food, housing, and household bills. At that time, the average Social Security payout was $1,470, with the expectation that an individual’s retirement savings would make up for the rest. Leaving Americans to foot the rest of the bill–close to $2,500. A shocking reality if you aren’t saving for the future, which according to the Federal Reserve is roughly a quarter of non-retired adults. Furthermore, as many as 41 million US workers currently don’t have access to an employer-sponsored plan.
Responding to the CrisisThese statistics have caused many states to jump into action and take matters into their own hands by mandating businesses to offer retirement plans–whether it’s the state’s plan or one of the employer’s choosing (as long as the plan meets the state’s requirements). The following states have enacted legislation: Maryland, Colorado, Connecticut, New York, New Jersey, Virginia, Maine, Vermont, and New Mexico. The following states have pending legislation that has yet to move forward but may do so in the near future: Louisiana, Nebraska, New Hampshire, North Dakota, Ohio, Utah, and West Virginia. Different states have different programs in place but, for the most part, share several notable similarities. We will now go over the key similarities and differences.
State Retirement Programs at a GlanceMost state-facilitated programs are set up as Roth Individual Retirement Accounts (IRAs) with automatic enrollment–as well as the ability to opt-out–and a default contribution rate of 3-5% per paycheck (this can be adjusted by employees after enrollment). Roth IRA’s differentiating feature is that withdrawals are done tax-free since the accounts are funded with after-tax dollars. The reverse is true for other types of retirement plans, like 401ks, which are funded with pre-taxed dollars and are taxed upon withdrawal. This type of retirement plan can be advantageous to employees should taxes be higher in their retirement years than they are currently. Whether or not your business will be required to offer a retirement plan depends on the state. Generally, this will be determined by how many employees a business employs, however they may also take into consideration how many years a business has been open. Newer businesses that have been open for less than two years may be exempt. Overall, the state-sponsored plans don’t offer much help to the businesses required to offer them. Employers are generally responsible for the administrative work and most importantly, these types of retirement plans aren’t eligible for SECURE Act tax credits that can help take care of start-up fees. This is why it’s so important for employers to keep an eye on the upcoming deadlines for their state and to start thinking about offering a retirement plan. Make sure you understand all of your options before you are pressed for time and are rushed to make a decision or risk penalties for noncompliance. The penalty for noncompliance is a fine per employee who has not enrolled and who hasn’t opted out, and this penalty can escalate with each subsequent year–up to $500 per employee. Many small business owners find that a Pooled Employer Plan (PEP) is the better way to go, costing less in both time and money. We will take a closer look at what a PEP is and its advantages later on in this guide.
OutliersThere are a couple of states whose legislation is a bit different that we will take note of here.
The New Mexico & Colorado AgreementThis is the first program of its kind that reaches across state borders. The partnership makes it easier for employees to keep their retirement plan, even if they move. Should the partnership be successful, other states may join in the agreement.
MassachusettsThe legislation offers retirement plan options to non-profits with less than 20 employees. This plan is completely voluntary and is a way for non-profits to offer a 401k Multiple Employer Plan (MEP), which is very similar to a Pooled Employer Plan. Legislators have proposed new legislation for a state-mandated retirement plan for-profit businesses too, but has not moved forward as of this writing.
What is a 401k?Before 401ks came along, the burden was placed on the employer to put aside money for employees and distribute it as a monthly payment based on each employee’s role and how long they had been with the company. This ended up creating a lot of extra administrative work on the employers’ end. With the creation of 401ks, named after the section in the Internal Revenue Code, the burden was placed on the employee to contribute to their retirement and grow their nest egg. The plan quickly gained popularity due to its ease for business owners and the ability for employees to invest their funds for the future in a way that wouldn’t otherwise be possible.
PEPs – 401ks for AllIn the not too distant past, offering a 401k was only feasible for large companies. The plans were too complex for small businesses to handle without outsourcing the administrative work that would only add to the already high start-up fees. In 2019, the SECURE Act passed ushering in the creation of Pooled Employer Plans, which relaxed the rules of Multiple Employer Plans. Previously, MEPs required businesses to have a connection (such as a shared industry) to combine their resources and be able to offer a 401k with lower overall costs. With PEPs, the only requirement is that businesses have one Pooled Plan Provider (PPP), like peppermint, administering the plan. A good Pooled Plan Provider lowers the fees of the plan by finding more businesses to join the pool. They also take the stress out of offering a retirement plan by taking care of the majority of administrative work. Additionally, the SECURE Act created a tax credit for small businesses that will cover start-up fees just for signing up and even more if they choose automatic enrollment. Here at peppermint, we offer automatic enrollment for all of our plan options. If you aren’t convinced that a PEP is the way to go, our experts can help answer any lingering questions you may have.
Important Information for EmployersIf your state was mentioned above as one of the states that have enacted legislation, you will want to pay special attention to the section ahead. Most states that have enacted legislation have deadlines that are quickly approaching, and those with pending legislation will follow suit within the next year or two. Below, we’ve gathered the deadlines for state-mandated plans as well as other important information.
|California||5+ employees||CalSavers||Active||June 30, 2022|
|Connecticut||5+ employees||Connecticut Secure Savings Plan||Pending||June 6, 2022 for businesses with 100+ employees October 31, 2022 for businesses with 26-99 employees March 20, 2022 for businesses with 5-25 employees|
|Colorado||5+ employees & have been in business for 2+ years||Colorado Secure Savings Program||Enacted||Pilot Program launching in October with enrollment starting next year|
|Illinois||16-24 employees & have been in business for 2+ years||Illinois Secure Choice||Active||Nov 1, 2022 for businesses with 16-24 employees|
|Maryland||Mandated for businesses of all sizes||MarylandSaves||Enacted||Open enrollment starts in Sept 2022|
|Mass.||Voluntary, offered to non-profits with 20 or fewer employees must offer a 401k MEP||Massachusetts Defined Contribution CORE Plan||Active||None|
|New Jersey||25+ employees & have been in business for 2+ years||New Jersey Secure Choice Saving Program||Active||Have nine months to comply|
|New Mexico||Voluntary||New Mexico Work and Save Act||Enacted||None|
|New York||10+ employees & have been in business for 2+ years||New York State Secure Choice Savings Plan||Active||Have nine months to comply after program is enacted|
|Oregon||5+ employees||OregonSaves||Active||All other businesses must register by end of 2022|
|Virginia||25+ employees & have been in business for 2+ years||VirginiaSaves||Active||TBA|
|Washington||Voluntary||Washington’s Small Business Retirement Marketplace||Active||None|