In recent years, a growing number of states in the U.S. have implemented laws requiring private businesses to offer retirement savings plans to their employees. This has created a new set of responsibilities for businesses that don’t already have retirement options. Those that fail to comply with these new laws may face penalties.
State-mandated retirement plans aim to address a retirement savings crisis in which millions of workers have no access to workplace retirement plans. That leaves them financially vulnerable when they reach retirement age.
Here’s what employers need to know about the legislation behind state-mandated retirement plans, what these programs involve, and how Mosey can help businesses meet state compliance requirements.
Why Are State-Mandated Retirement Plans Important?
About 1 in 5 Americans don’t have any retirement savings. Millions of workers in the U.S. have no access to workplace retirement plans, which are crucial for building savings.
What’s more, the Federal Reserve’s 2023 Survey of Household Economics and Decisionmaking (SHED) revealed that only 31% of non-retirees felt their retirement savings were on track, a decrease from the previous year. Over a third of respondents also said they were worse off financially than they were the year before.
In response to this crisis, more than half of U.S. states have passed legislation requiring certain businesses to participate in state-facilitated retirement plans. These programs are designed to help workers build retirement savings by automatically enrolling them in individual retirement accounts (IRAs) through payroll deductions.
Most states offer Roth IRAs, but some provide other types of accounts. The idea is to make saving for retirement easy and automatic for employees who do not already have access to workplace plans.
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How Do State-Mandated Retirement Plans Work?
State-mandated retirement plans require businesses to offer retirement savings options to their employees, either by enrolling them in a state-facilitated program or offering their own retirement plan that meets state requirements.
If a business already offers a qualified retirement plan, such as a 401(k), it can typically file for an exemption. If it does not offer a retirement plan, it must participate in the state’s program to avoid penalties.
Most state programs are designed as Roth IRAs, which means that contributions are made with after-tax dollars, and withdrawals during retirement are tax-free. States choose investment firms to manage these funds, and employers are responsible for enrolling employees and handling payroll deductions. Some state governments manage their own state’s retirement plans.
Employees are automatically enrolled at a default contribution rate, typically between 3% to 5% of their wages, but they can opt out or adjust their contribution rate if they wish.
Most state-mandated retirement plans work similarly, often utilizing the following criteria:
- Automatic enrollment of employees at a default contribution rate
- The ability for employees to opt out or change their contribution amount
- State-chosen investment firms manage Roth IRA accounts
- Employers are responsible for enrolling employees and handling payroll deductions
Check with your state’s retirement plan authority for specific details about your state’s plan. It may slightly differ or have additional provisions.
Which States Have Mandated Retirement Plans?
As of 2024, 19 states and two cities have passed legislation requiring private-sector employers to participate in state-facilitated retirement programs if they don’t already offer their employees a retirement plan.
Of the 19 states, 11 have fully implemented their programs, and the rest are in the process of rolling them out.
Fully Implemented State Programs
California: The CalSavers program offers both Roth and traditional IRAs and applies to almost all employers with at least one employee. Employers must register by Dec. 31, 2025, or offer their own retirement plan.
Colorado: The Colorado Secure Savings Program requires businesses with five or more employees to offer a retirement plan. Employers who fail to comply could face penalties.
Connecticut: The MyCTSavings program is mandatory for businesses with five or more employees. Employers must register and enroll employees to avoid penalties.
Delaware: The Delaware EARNS program, launched in 2024, is mandatory for businesses with five or more employees. Non-compliant employers can face penalties of $250 per worker, up to $5,000 annually.
Illinois: The Illinois Secure Choice program requires employers with five or more employees to enroll in the state’s Roth IRA program. Non-compliance penalties can be as high as $500 per employee per year.
Maine: The Maine Retirement Investment Trust (MERIT) launched in 2024 and applies to businesses with five or more employees. Self-employed workers can also participate.
Maryland: The MarylandSaves program is mandatory for all businesses in the state and automatically enrolls employees in a Roth IRA.
Massachusetts: The Massachusetts Defined Contribution CORE program is a voluntary retirement plan for nonprofit organizations with 20 or fewer employees. However, pending legislation could make the program statewide with additional mandates.
New Jersey: The New Jersey Secure Choice program requires businesses with 25 or more employees to enroll their workers in a Roth IRA plan. Smaller businesses can participate voluntarily.
Oregon: The OregonSaves program was one of the first state-mandated retirement programs. It requires employers to automatically enroll their workers if they do not offer their own retirement plans.
Virginia: The RetirePath Virginia program launched in 2023 and applies to employers with 25 or more employees. Employees are automatically enrolled but can opt out.
The core of each state’s program is similar, but there may be compliance differences. Multi-state employers should be mindful of these differences if they operate in multiple states with mandated retirement plans.
States in the Process of Implementation
Hawaii: The Hawaii Retirement Savings Program is expected to launch soon and will be mandatory for businesses operating for at least two years with at least one employee. The program was approved in 2022 but has encountered implementation roadblocks that have prevented a specific roll-out date.
Minnesota: The Minnesota Secure Choice program will launch in 2025 and be mandatory for businesses with five or more employees.
Nevada: The Employee Savings Trust Program, which will apply to businesses with more than five employees, is scheduled to launch in 2025.
New Mexico: The New Mexico Work and Save program provides small businesses and self-employed workers with a state-run retirement savings option. Implementation was slated for July 2024, but the plan is currently on an indefinite hold.
New York: New York established the New York State Secure Choice Savings Program, which mandates that private-sector employers with ten or more employees who don’t offer a retirement plan must enroll their workers in a Roth IRA. The plan was intended to go into effect in 2021, but its implementation is also indefinitely delayed.
Rhode Island: Rhode Island passed the Rhode Island Secure Choice retirement program, which requires employers without an existing retirement plan to offer a state-facilitated, auto-enrolled IRA. There is currently no date for implementation.
Vermont: The VT Saves program will be mandatory starting in 2025 for businesses with five or more employees.
Washington: The Washington Small Business Retirement Marketplace will connect employers and employees to private retirement plans that meet specific standards. The state is also exploring a voluntary marketplace model. There is no official rollout date.
Expect the list of states to change with time. State-mandated retirement programs are becoming more popular as a practical solution for a serious concern.
States are continuing to research retirement solutions for their workforce, and those that don’t currently utilize a mandated retirement savings program may decide to do so at any moment.
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How To Manage Compliance With Retirement Plans
If your business operates in a state with a mandated retirement program, it’s essential to understand your responsibilities. Each state has specific requirements for which businesses must participate, but most states base eligibility on the size of the business and the number of employees.
Generally, businesses with five or more employees are required to participate, although some states have higher thresholds or different timelines.
Register for the State Program
Businesses must register with the state’s retirement program if they don’t already offer a retirement plan. This usually involves providing information about the business and enrolling eligible employees.
Employee Enrollment
Employers are responsible for automatically enrolling employees in the state retirement plan unless an employee opts out. Employees can typically adjust their contribution rate or opt out entirely. It’s your responsibility to explain the retirement program to your workers and inform them of how to modify their participation should they choose to do so.
Handling Payroll Deductions
Once employees are enrolled, employers must handle payroll deductions for contributions to the state retirement plan. This involves deducting a percentage of each employee’s wages and remitting those funds to the state’s chosen investment firm.
Maintaining Records
Employers must keep accurate records of employee contributions and comply with the state’s reporting requirements. Recordkeeping is vital to prove your compliance with all payroll and employment requirements that impact your business.
Filing for Exemptions
If your business already offers a qualified retirement plan, you can file for an exemption from the state program. This involves providing proof of your private plan and ensuring it meets the state’s requirements.
Penalties for Non-Compliance
Businesses that fail to comply with the state retirement mandate may face penalties. These penalties vary by state, but they typically include fines for each employee who is not enrolled in a retirement plan.
Plan options and required contribution amounts can vary by state. Check with your state’s labor authority for detailed information regarding compliance and implementation.
What Are the Pros and Cons of State-Mandated Retirement Plans?
State-mandated retirement plans offer several benefits for employees and businesses, but they also come with their fair share of challenges. Recognizing these advantages and disadvantages can help you decide whether to participate in the state program or offer your own retirement plan.
Here are the pros and cons:
Pro: State Programs Are Easy To Set Up
State programs are designed to be simple for employers to use. The state handles most of the administrative work, including managing the investment accounts and reporting contributions. The goal is to make participation easy so employers can comply quickly and efficiently.
Pro: Low Cost
State-facilitated IRAs offer a low-cost option for providing employees with retirement savings. Unlike 401 (k) plans, there are typically no employer matching requirements. State programs are designed to simplify the process of offering retirement savings for employers who otherwise can’t offer options to their workers.
Pro: Automatic Enrollment
Automatic enrollment helps employees save for retirement without requiring them to take action. This can lead to higher savings rates and better retirement outcomes for workers.
Additionally, many people don’t contemplate the importance of retirement savings or may feel too intimidated by a complicated process to participate voluntarily. Automatic enrollment creates a safety net that requires little to no maintenance on the part of the employee.
Pro: Employee Retention
Offering a retirement plan, even a state-facilitated one, can improve employee satisfaction and help with retention. Employees appreciate having access to retirement savings options, and a retirement plan shows your workers that you care about their financial futures.
Con: Contribution Limits
State-facilitated IRAs, such as Roth IRAs, have lower contribution limits than 401(k) plans. In 2024, the annual contribution limit for Roth IRAs was $7,000, compared to $22,500 for 401(k) plans (or $30,000 if you are 50 or older).
Con: Employer Administrative Responsibilities
While the state manages most of the investment side of the plan, employers are still responsible for tasks like enrolling employees, managing payroll deductions, and filing reports. This can be time-consuming, especially for small businesses.
Con: No SECURE Act Tax Credits
Unlike 401(k) plans, state-facilitated IRAs do not qualify for SECURE Act tax credits, which offer businesses up to $16,500 in tax credits over three years to help offset the costs of starting a retirement plan.
Ensure Compliance With Mosey
As more states implement mandated retirement plans, businesses must stay informed about their obligations. If your business operates in a state with a retirement mandate, you must decide whether to participate in the state’s program or offer your own retirement plan.
For businesses that lack the resources to manage a private retirement plan, state-facilitated IRAs offer an easy and low-cost solution. However, if your business is looking for more flexibility and higher contribution limits, offering a 401(k) or other qualified retirement plan may be a better bet.
Regardless of the path you choose, you must ensure that your business complies with the state’s requirements to avoid penalties. By offering your employees a retirement savings plan, you can help them secure their financial futures while improving satisfaction and retention.
Mosey’s compliance management platform is designed to help businesses of all sizes comply with state and local business requirements. We can simplify the process of meeting your state’s rules for HR, payroll, tax, and entity compliance. Book a demo with Mosey to learn how we can help you streamline compliance.
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