State-facilitated Workplace Retirement Programs: What Your Business Should Know
Over half of U.S. states have enacted legislation requiring private-sector businesses of a certain size to participate in a state-facilitated IRA program if they don’t currently offer an employee retirement plan. Businesses that don’t comply could potentially incur state penalties. Employers can choose a retirement plan from a non-government provider as long as it meets state requirements.
Across America, many states are experiencing a retirement savings crisis. For example, in Connecticut, 600,000 working people still have no access to retirement plans. In New York State, that number is in the millions. The Federal Reserve reports that roughly a quarter of non-retired adults have no retirement savings.
To deal with this crisis, nine states and two cities have enacted legislation and five have been fully implemented. Of the enacted states, almost all are mandatory except for Massachusetts, New Mexico, Vermont, and Washington.
Enacted: Maryland, Colorado, Connecticut, New York state, New Jersey, Virginia, Maine, Vermont, and New Mexico, and the City of Seattle, WA.
Fully implemented and active—California, Illinois, Massachusetts (for non-profits), Oregon, and Washington
State Retirement Programs, at a Glance
If your business already offers a workplace retirement plan, you may register for an exemption from the state retirement program. If you have a business without a retirement plan, however, you will need to comply with the state’s program requirements or risk potential penalties. While every state is different, most state-facilitated retirement programs:
- Are designed as Roth individual retirement accounts (IRAs)
- May be mandated for businesses of a certain size
- Use investment firms and investments chosen by the state
- May require employers to automatically enroll employees at a contribution of three to five percent of each employee’s payroll wages
- Allow workers to opt out of contributing via payroll deduction
- May require employers to do some administration
One thing to consider is that unlike 401(k) plans, state-facilitated IRAS are not eligible for SECURE1 Act tax credits. Their contribution limits are not as high as 401(k)s. Many state programs also require the employer to do their own plan administration—filing, reporting, adjusting contributions limits, and more. This can be burdensome to smaller businesses that don’t have the time or staff to do complex plan management.
Update on the States
Here is a brief update on the enacted state-facilitated retirement programs as of January 2022.
The CalSavers program offers a traditional IRA in addition to a Roth IRA, and has oversight from a public board of directors. By June 30, 2021, businesses with 50-plus employees had to be registered if they were not exempt. By June 30, 2022, employers with five or more workers must do the same. CalSavers also plans to start imposing penalties for noncompliant employers in 2022.
The Colorado Secure Savings Program requires businesses with at least five employees to offer a workplace retirement program. The state plans to launch a pilot program in October 2022 with enrollment scheduled to take place in early 2023.
Connecticut launched the MyCTSavings retirement savings program in early 2022 and established deadlines for businesses to register their employees. This program requires businesses with five or more employees and no retirement plan to participate in a state-facilitated IRA program. Noncompliant employers may be subject to civil action and court fees if they fail to enroll an employee in a timely fashion.
The Illinois Secure Choice Retirement Program is a mandatory state-facilitated Roth IRA savings program that plans to send enforcement notices to noncompliant employers starting in the next few months of 2022. Employers that do not comply may face penalties of $250 per employee for the first year, and $500 per employee for each subsequent year depending on business size. Two more waves of implementation are also planned: employers with 16-24 employees must register by November 2022, and those with 5-15 employees must register by November 2023.
Tentatively scheduled for April 1, 2023, employers with 25 or more employees and no retirement plan may be required to participate in the the Maine Retirement Savings Program unless they register for exemption. The program plans to be implemented in three phases. It will continue through April 1, 2024 and end with the final phase--businesses of 5 to 14 employees. Details on how the program will be run are still being developed, and self-employed and individual contractors are expected to participate.
The Maryland Small Business Retirement Savings Program requires businesses of all sizes to offer employees automatic enrollment in a payroll-deduction IRA. The Maryland $aves program is expected to offer a pilot mid-2022 with the hopes of a scheduled launch in the fall of 2022.
Massachusetts legislation differs from other states in that it applies only to the non-profit sector. The Massachusetts CORE Plan is voluntary and allows non-profit organizations with 20 or fewer employees to participate in the 401(k) multiple employer plan (MEP) administered by the state.
The New Jersey Secure Choice Savings Program requires employers with 25 or more employees who have been in business for at least two years to offer a retirement plan. Smaller or newer employers can join voluntarily.
In July 2024, New Mexico is planning to launch a voluntary program that offers a Hybrid Roth IRA and Marketplace plan. The program will have auto-enrollment and give employees the choice of opting out. Since the program is voluntary, there will be no penalties imposed for non-compliance.
The New York State Secure Choice Savings Program was originally voluntary, but legislation has been passed to mandate participation in the program for businesses with 10 or more employees. Eligible employers had to have been in business for at least two years and without a qualified retirement plan for the two years prior.
The OregonSaves program has made great strides in helping private-sector workers who don’t have access to workplace retirement plans. Employers with five or more employees are currently required to automatically enroll employees in the IRA savings program if they do not offer their employees a retirement savings plan. Businesses with four or less employees are expected to register for the program by late 2022 or they can begin participating now. The employer penalty for non-compliance is $100 an employee, up to $5,000 a year.
The state began planning to implement the Green Mountain Secure Retirement Plan in 2017, a voluntary multiple employer plan (MEP) designed for employers with up to 50 employees. Self-employed business owners can also participate. Implementation of the program has been postponed and no launch date has been announced.
Tentatively scheduled to be launched July 2023, VirginiaSaves requires employers with 25 or more employees to participate if they don’t offer an employee retirement plan. The goal is to offer nearly 800,000 private-sector employees a chance to start saving for retirement. The exact timetable for implementation has yet to be established by the Virginia College Savings Plan Board, which oversees the program and its policies.
About 131,000 Washington State businesses don’t offer workplace retirement plans. That translates to roughly 2 million employees with no retirement savings. In response to this crisis, the state has established its Retirement Small Business Marketplace to help small companies adopt retirement savings programs for their workforces. Participating financial service providers offer low-cost plans to employers with fewer than 100 employees, including sole proprietors and the self-employed.
The marketplace currently offers SIMPLE, Roth, traditional IRAs, and 401(k) plans to choose from, based on the type of business and the individual’s financial planning goals.
Regardless of Your State, You Do Have Choices
Some of the state retirement savings programs may be “mandatory”, but employers have the option to adopt a qualified retirement plan that exempts them from participating in the state program. In some cases, a state-run IRA may not be the best fit for your business. For example, you may prefer a traditional 401(k) plan that has higher contribution limits for employees. Or you may prefer a plan that requires less time, staff, and cost to manage, like the Pooled Employer Plan (PEP). It all depends on your business needs and the savings goals of your employees. When in doubt—be sure to compare your options.
1Setting Every Community Up for Retirement Enhancement. Under the SECURE Act, eligible new plans can potentially get up to $15,000 in tax credits.