State-Mandated Retirement Plans and Your Business: What to Know
Few would argue against the fact that there is a retirement savings crisis in this country. According to a recent survey, about half of American households have no retirement savings whatsoever, and only 21% report savings in excess of $100,000. On the positive side, research conclusively demonstrates that employees are much more likely to save when their employer provides a 401(k) or similar plan. Unfortunately, only about a third of small businesses in the U.S. offer any type of plan to their employees.
Many state governments have decided to step into this gap by passing legislation mandating that small businesses (typically those with at least five employees) must either offer an employer-sponsored plan or make available to employees a state-mandated retirement plan. In Illinois, for example, businesses with at least five employees have until the end of November 2023 to either demonstrate that they are already offering a plan or to facilitate their employees’ enrollment into the Illinois mandatory plan, called Illinois Secure Choice. Similarly, Connecticut businesses face an October deadline. Nine other states’ deadlines have already passed, and legislation is pending in most of the remaining states.
What are the implications for your business? Let’s take a look at some frequently asked questions about state-mandated retirement plans.
Q: If I’m currently offering a retirement savings plan to my employees, do I need to do anything?
A: If you are already offering a qualifying retirement plan, such as a 401(k), Simplified Employee Pension (SEP), or a savings incentive match plan for employees (SIMPLE IRA), you will not be required to make a state-mandated plan available to your employees. However, you may need to request an exemption if you receive a notice or “welcome letter.” Processes vary by state; some states provide an online opt-out form, while others may require a toll-free call or written exemption request. Illinois Secure Choice, for example, provides a website for registration or requesting exemptions.
Q: Are there any advantages of state-mandated plans?
A: The chief advantage of state-mandated retirement plans is that they are relatively simple and inexpensive for the employer. States with mandated plans in place typically provide online registration, both for the employer and the employee, and contributions to the plan come via payroll deduction from the employee’s wages; the employer does not contribute on employees’ behalf. Another advantage for employers is that outside of certain obligations for facilitating payroll deductions and maintaining accurate employee records, there is little to no fiduciary responsibility involved.
Q: What about the disadvantages?
A: As you can probably imagine, state-mandated plans tend to be “one size fits all” affairs, with minimal opportunity for customization and, in some cases, limited investment options for the participants. Since most state-mandated plans are structured as Roth IRAs, annual contributions are more limited than with a company-sponsored 401(k), which typically allows for higher contribution limits. Employer-sponsored 401(k) plans can also afford the option for employers to match employee contributions or to offer profit-sharing contributions.
Q: If I am required to offer a state-mandated plan, what are the penalties for non-compliance?
A: Penalties vary by state, and they can be stiff. In Illinois, for example, employers who fail to facilitate the state-mandated plan or offer their own plan to employees can be fined $250 per employee the first year and $500 per employee in the second year.
Q: What about multiple employer plans (MEPs)?
A: Some states are considering MEPs as an alternative to the Roth IRA approach. Prior to the passage of the SECURE Act of 2019, companies participating in MEPs had to be related in some way: either as members of an association, the same industry, or geographically. With the passage of the act, which created pooled employer plans (PEPs), non-related businesses were given the ability to share and utilize a common 401(k) plan. This allows small businesses to save on administrative costs and, typically, to delegate the fiduciary liability for the plan to the pooled plan provider (PPP).
It’s important to keep in mind that offering a well-designed retirement savings plan to employees is an important tool for businesses that want to attract and retain top talent. And obviously, encouraging long-term saving is just a smart thing to do. At Savant Wealth Management, we offer industry-leading guidance and services to businesses who want to make sure their company-sponsored plans are doing all they can for employees and business owners. To learn more, visit our website.
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