[Update] Illinois Secure Choice Retirement Plan Pilot Has Success, Businesses Begin Registering

Employers have begun registering for the Illinois Secure Choice Retirement Savings Program (Secure Choice) after the pilot program in 2018 experienced some success.

The program encountered several challenges, including an amendatory veto in August 2018 by the governor that would have made participation optional for businesses. However, that veto was not approved by the Illinois Legislature and the program is in full effect.

Secure Choice continues to conduct a gradual phase-in. Oregon and California also have been phasing in plans.

Here are what businesses need to know about Secure Choice so they can be prepared.

What is Secure Choice?

Secure Choice is a Roth individual retirement account (IRA) intended to help the 1.2 million workers in the Prairie State who lack access to employer-sponsored retirement plans. Under Secure Choice, businesses with 25 or more employees operating in the state for at least two years, and that don’t offer workers a qualified* savings plan, would:

• Automatically enroll eligible employees. However, an employer that does not want to participate in Secure Choice can choose to offer its workers another qualified retirement savings plan;
• Be responsible for distributing information about the program to all employees, facilitate enrollment, set up the payroll deduction mechanism, and ensure prompt transfer of employee contributions to the Secure Choice plan;
• Not be able to make employer contributions to the plan
• Not incur any costs to the employer.

*A qualified retirement plan includes a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b).

Employees have 30 days to opt out of the program, but if they do not opt out they automatically will be enrolled at a contribution rate of five (5) percent. They also have 30 days to elect a deferral percentage (other than five percent).

Program designers expect the program to be self-sustaining, with no additional costs to the state outside of startup administrative funds.

Employer requirements, registration deadlines, and penalties

The pilot program kicked off in May 2018 with eight companies allowing 196 employees to secure a Roth IRA. Employees invested more than $77,000 during the pilot, and since the November 1, 2018, implementation, nearly 70 employers have enrolled. The immediate result was more than 1,200 employees contributed a total of nearly $175,000 to retirement.

Employers are automatically required to withhold five (5) percent of an employee’s compensation (up to the annual maximum allowed for IRA contributions each year as provided by the IRS), unless the employee elects a different amount or opts out of the program entirely, and must remit those contributions to the Secure Choice program.

Deadlines for registering employees for Illinois Secure Choice rolled out in phases, with the deadline for employers of 500 or more employees (November 2018) already passed. Upcoming employer deadlines to remain compliant are:

• July 2019 for employers with 100 to 499 employees
• November 2019 for employers with 25 to 99 employees

The program will notify employers before their scheduled start time to allow them time to register.

Employers who do not comply with the Illinois Secure Choice Savings Program Act could face a penalty of $250 per employee for each calendar year or a portion of a calendar year when the employee was not enrolled or did not opt out of the program. The program has noted that it would like to work with employers to avoid penalties for non-compliance, and that any penalties would likely not be enforced until the end of 2019 when Secure Choice is rolled out to all employers.

Why are Illinois and other states sponsoring their own retirement plans?

America faces a retirement crisis, as many people find themselves financially unprepared for their non-working retirement years. In response, states such as Illinois have begun establishing their own retirement plans.

In a 2015 report, the National Institute on Retirement Security (NIRS) found that the average working U.S. household has virtually no retirement savings. NIRS research reveals a median retirement account balance of $2,500 for all working-age households and $14,500 for near-retirement households. In addition, 62 percent of households age 55-64 hold less than a year's worth of income, far below what's needed to maintain their standard of living in nonworking years. Financial experts recommend that by age 67, a worker should have between five and eight times their annual salary saved for retirement.

What are the retirement savings options for Illinois businesses?

Registering for the Illinois Secure Choice program is only one way to fulfill the requirement that every qualified employee in Illinois have access to a retirement plan. As a compliant alternative, businesses can also establish their own employee retirement plan, such as a 401(k) or SIMPLE IRA, to satisfy this requirement. You should consider all available options before making a decision.

What are the differences among state-run IRAs, SIMPLE IRAs and 401(k) plans?

A state-run sponsored IRA is one way to satisfy requirements and help employees save for retirement. However, it's in businesses’ best interest to compare it with other financial options and decide which option best fits their needs and those of their employees.

The chart below shows key characteristics of a state-run IRA compared to a SIMPLE IRA and 401(k) plan, both of which Paychex offers. The biggest differences are the option for a company to match a portion of savers' contributions, and the maximum amount employees can contribute.