State Mandated Retirement Programs — Are You Ready?
State retirement savings mandates are a growing trend. Your business may soon be required to offer an employee retirement savings option. Should you participate in a state-run IRA or offer your employees a 401(k) plan? With a 401(k) plan, you could potentially get up to $16,500 in small business tax credits and an additional $1,000 per year with employer contributions1. See what your state requires, then compare your options.
What’s Happening in Your State?
Every state is different when it comes to retirement savings mandates. Please note: if you have employees working out of state, you may need to consider that state’s requirements as well as your own. Click on a state to see what’s required.
State IRA or 401(k) Plan — Which Is Better for Your Business?
When employees participate in a retirement plan at work, they are 15 times more likely to save for retirement1. That said, not all retirement plans are created equal. A 401(k) plan from a private provider may be a better way to save for both you and your employees.
IRA vs. Paychex 401(k) Plan
State - IRA
401(k) Plan (Offered with Paychex)
$6,500
$22,500
No
Yes, at employer's discretion
Not available
Potential tax credits of up to $5,500 per year for the first 3 years.
Potential employer contribution credit of $1,000 (maximum) per employee 2
Employer processes payroll contributions, updates contribution rates, adds newly eligible, etc.
Paychex makes administration simpler as your recordkeeper
Paychex 401(k): A More Powerful Option
A state-facilitated IRA has lower employee contribution limits, more administration, and is not eligible for SECURE Act 2.0 small business tax credits. By contrast, a Paychex 401(k) plan:
- Fulfills the state retirement mandate
- Includes help with plan set up and administration
- Has more than three times the annual employee contribution limit of an IRA, so employees can save more, faster
- Offers employer tax savings opportunities, including potential tax credits
- Integrates your 401(k) plan with Paychex payroll—one platform, one provider
- Provides the support and experience of the nation’s largest 401(k) plan provider3
How a California Plumbing Business Made Retirement a Fixture
With the state of California requiring most employers to offer an employee retirement option, Plumbing M.D. embraced the opportunity and turned to Paychex. The business saw some surprising results: 100 percent participation in their Paychex 401(k) plan, and employees under the age of 30 who are enthusiastic about the plan.
Reduce Your Business Taxes with SECURE Act 2.0 Tax Credits
The SECURE Act 2.0 offers businesses the ability to establish a 401(k) retirement plan and lower their tax liability. Your business may be eligible to have 100% of your startup costs covered by small business tax credits. That’s a savings of up to $16,500 over 3 years for starting a plan. There is also the possibility of an additional $1,000 credit per employee with employer contributions2.
The Importance of Offering a Retirement Plan
A large percentage of Americans are not building up sufficient assets needed to maintain their standard of living in retirement, and the problem is only getting worse for younger generations.
Nearly
1/4
Without Retirement Savings
About 1/4 of non-retired adults in the U.S. do not have any retirement savings2
$93,000
Household Retirement Assets
The median of total household retirement savings among all workers in 20204
13 years
When Social Security will run out
Social Security will run out of funds in 13 years. It is only funded through 20355
94%
Employees interested in a 401(k) plan
94% of employees are interested in a 401(k) plan, second only to health insurance6
The Simpler Employee 401(k) Plan
Offering a 401(k) plan to your employees doesn’t have to be complicated. As the provider for the largest number of 401(k) plans in the country3, Paychex has 401(k) administration down to a science. Our integrated payroll and benefits solution streamlines plan management and controls costs. With online enrollment, cloud-based account access, and support from retirement specialists, you and your employees can start saving today.
Retirement Insights
State Retirement Savings Programs are a growing trend across the nation. Their goal is to encourage businesses to offer employee retirement plans—either from the state’s own program or a private provider. What does this mean for your business? We’ll tell you in this webinar. Learn what states have retirement programs enacted or pending, the risks of non-compliance, and what your options are.
What is a state-sponsored retirement plan?
A state-sponsored retirement plan is a financial vehicle for individuals who don't have access to an employer-sponsored retirement savings program, such as a pension, a 401(k) plan, or a 403(b) plan. Most state-sponsored programs adopt one of three structures:
- A traditional individual retirement account (IRA), which allows individuals to direct pretax income toward investments that grow tax-deferred;
- A Roth IRA, similar to a traditional IRA, but is funded by after-tax dollars. However, when the investor reaches retirement age, he or she withdraws funds tax-free (earnings may be subject to taxes).
- An open marketplace for private employers to choose a defined contribution plan, in which both the employee and employer can make contributions toward an investment retirement account for each employee’s benefit.
In general, state-sponsored retirement plans establish a mandatory system of payroll deposit for qualifying businesses that don't offer a workplace retirement plan. Some state plans require companies to automatically defer IRA contributions from wages (usually 3 percent) from all workers' paychecks. Other state plans permit employers to make voluntary contributions to their workers' IRA accounts;
Why were they implemented?
More than half of American workers — about 55 million — lack access to an employer-based retirement savings plan, particularly those who work for small companies, as well as younger workers, minorities, and low to moderate-income earners.
State-sponsored retirement plans are intended to help these individuals put aside money for their retirement years. Statistics show that Americans need encouragement: 69 percent have less than $1,000 in savings, and about one-third wonder whether they'll be able to cover basic living costs when they retire. Although many U.S. workers report feeling stressed about retirement, only six in 10 say they have saved for that goal, and only four in 10 have tried to determine how much money they'll need.
Which states have these plans?
Oregon is the furthest along with its program, OregonSaves, which has already begun this summer, with a gradual plan implementation through 2020. It is one of nine states that have established or are in the process of establishing retirement plans for private-sector employees who don't have a savings program at work.
California, Connecticut, and Illinois have passed legislation to create state-run retirement plans for private-sector workers, all of which are currently expected to be available over the next few years. Maryland, Massachusetts, Washington, Vermont, and New Jersey also have plans to implement state-run retirement plans in the upcoming years.
What are the benefits?
State-sponsored retirement plans allow people to save for their nonworking years, even if they lack access to an employer-sponsored retirement savings plan. Their contributions grow in professionally managed investment accounts.
State-sponsored retirement plans allow employees to make voluntary contributions to their accounts through payroll deductions. Employees can opt out of automatic enrollment in state-sponsored retirement plans.
What's the difference between a 401(k) plan and a state-sponsored retirement plan?
Traditional 401(k) retirement savings plans sponsored by the employer are established at a company's discretion. They offer investment vehicles chosen by the firm’s leaders.
Employer-sponsored plans have a number of advantages over state-sponsored retirement savings plans, particularly the company match and the max amount employees can contribute (see below). For more information, please see What’s the Difference? State-Sponsored Retirement Plan vs. Employer-Sponsored 401(k).
Which plan can help me address my employees’ retirement concerns?
Given the retirement crisis that looms over America today, the development of state-sponsored savings plans represents a move in the right direction. Any way to encourage people to save is laudable, when:
- One out of every three Americans has no savings at all;
- One in four 65-year-olds today will live past age 90; and
- An average healthy couple can expect to spend about $377,000 on health care during retirement.
But state-sponsored savings plans are not adequate to prepare people for retirement. They are not comprehensive enough, generous enough, or safe enough. Employers hold the key. By acknowledging their responsibility for the well-being of their employees, U.S. businesses can help turn the retirement emergency into retirement opportunity.
Employer-sponsored 401(k) plans:
- Help attract and retain talent, because employees put a high value on a workplace 401(k);
- Allow participants much higher annual contribution levels than state-sponsored retirement plans — $18,000 vs. $5,500; and
- May be coordinated with employer-sponsored health savings accounts (HSAs) to maximize the power of participants’ contributed funds.
Regardless of whether your state decides to mandate a retirement plan, employers who don’t offer a workplace retirement program may want to consider doing so, given many workers’ uncertainties about their financial preparedness for retirement.
By the end of 2022, nine states have enacted legislation for state-sponsored retirement plans while five have fully implemented their plans. These plans, all but one is mandatory, will allow employees to save for their nonworking years if they lack access to an employer-sponsored retirement savings plan.
State-sponsored retirement plans aim to stop the impending avalanche of impoverished senior citizens. More than half of American workers — in fact about 55 million — don't have an employer-based retirement savings plan, particularly those who work for small companies, as well as many younger workers, minorities, and low- to moderate-income earners. Sixty-nine percent have less than $1,000 in savings, and about one-third wonder whether they'll be able to cover basic living costs when they retire. Although many U.S. workers report feeling stressed about retirement, only six in 10 say they have saved for that goal, and only four in 10 have tried to determine how much money they'll need.
How do state-sponsored retirement plans compare with employer-sponsored 401(k) plans? If you run a small business and don't offer your staff a way to save for retirement, should you try to establish a 401(k) benefit? If you don't operate in a state that soon will provide a state-sponsored retirement plan, is it best to wait for that option to materialize?
Knowing the differences between the two types of retirement plans can help you decide.
401(k) plans at employer discretion
In general, 401(k) plans backed by businesses:
- Are established at an employer's discretion;
- Offer investment vehicles chosen by the employer;
- Allow employees to opt out of making contributions;
- Permit workers to choose among a range of investment funds at various levels of risk; and
- Don't require employers to make contributions of any amount to workers' accounts.
Many small-business owners think that 401(k) plans are prohibitively expensive, but that's not true. On the contrary, many plans are now tailored for smaller companies. In addition, the Internal Revenue Service (IRS) gives tax credits to firms with fewer than 100 employees for some of the ordinary and necessary costs of starting a qualified retirement plan.
Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, qualified businesses might be eligible for tax credits for establishing a workplace retirement plan for employees. There are up to $16,500 in credits available ($5,000 per year, with an additional $500 per year for implementing auto-enrollment) for the first three years. Under SECURE Act 2.0, which was signed into law in December 2022, additional credits became available, including the employer contribution credit. This credit is generally a percentage of the amount contributed by the employer, up to $1,000 per employee. It is limited to employers with 50 or fewer employees and reduced for employers with between 51 and 100 employees.
There are other good reasons to sponsor a 401(k) plan:
- It increases your company's attractiveness in the job market;
- It offers additional opportunities for tax savings if you offer a company match to participating employees. Your contributions are tax-deductible up to applicable IRS limits;
- It helps your firm retain valuable staff; and
- You and other company leaders can participate.
If you work with a payroll services provider, the software can automatically transfer participants' contributions into the 401(k), making the procedure effortless.
Clearly, adding a 401(k) to your company's benefits package has strategic advantages.
State-sponsored retirement plans mandatory
By not providing your workforce with a retirement plan, you risk having your state impose one. This is done for the benefit of workers' retirement years, but it removes control from employers.
State-sponsored retirement plans:
- Are mandated for businesses of a certain size if they don't offer a retirement plan for their employees;
- Use investment firms chosen by the state;
- Use either a pre-tax, traditional IRA or a Roth IRA as the investment vehicle;
- Require participating companies to set aside a percentage of every worker's salary each month for the retirement fund;
- Allow workers to opt out of contributing via payroll deduction (although the employer makes monthly contributions on each employee's behalf);
- Lower investment and administrative fees; and
- Improve retirement for people with limited savings options.
See the table below for a detailed comparison of the two types of retirement plans.
State-sponsored retirement plan vs. employer-sponsored 401(k) plan
|
State-sponsored retirement plan |
Employer-sponsored 401(k) plan |
|
|
Investment structure |
Most are proposing a Roth IRA, which is an individual retirement account allowing participants to set aside after-tax income up to a specified amount each year. Earnings on the account and withdrawals after age 59½ are tax-free. |
A defined contribution plan allowing an employee to make contributions from his/her paycheck either before or after-tax, depending on plan options |
|
Investment options |
Investment firm chosen by state-selected board |
Wide range of investment firms offering numerous funds at various levels of risk chosen by employer or by an advisor. Employee may direct their own investments. |
|
Plan established at employer’s discretion |
No; mandatory based on your state’s guidelines if no other retirement plan is in place |
Yes |
|
Auto-Enroll |
Yes, typically set at 3% for most proposed plans |
At employer’s discretion |
|
Employees can opt out of making contributions |
Yes |
Yes |
|
Annual Salary Deferral Limit |
$6,500 |
$22,500 |
|
Catch-up Contribution for participants age 50+ |
$1,000 |
$7,500 |
|
Employer contributions |
Not permitted |
At employer’s discretion |
|
Employer contributions tax deductible |
N/A |
Yes |
|
Subject to ERISA* regulations and protections |
YES |
Yes |
|
Federal tax credits for employer |
No |
Yes, for start-up and administration costs, employee education about the plan, and for matching part or all of employees’ contributions** |
|
Employer fiduciary responsibility |
Yes |
Yes |
|
Cost to the employer |
None |
Fees for plan set-up, administration, record-keeping, consultation** |
*Employee Retirement Income Security Act of 1974
** New plans can receive a tax credit of up to $16,500 total for the first 3 years to offset set-up costs under the SECURE Act and under SECURE 2.0 there is an contribution credit of up to $1,000 for eligible employers.
No one wants the United States burdened by a huge population of impoverished retirees. Studies have found that most retirement saving occurs in the workplace via employer-sponsored savings plans. As noted in a report by the Pew Charitable Trusts, "The failure to save enough — or save at all — has an impact on Americans in their working years and later in life. With life expectancy on the rise, workers' efforts to prepare for retirement face threats from inadequate investment returns, large or unexpected expenses, and inflation. These risks affect all Americans, but those who have saved for retirement have a real advantage."
Paychex will continue to monitor this issue and keep you up to date on developments as they happen.
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State Retirement Plan FAQs
-
What is a state-mandated retirement program?
What is a state-mandated retirement program?
Many states are requiring businesses to participate in a state retirement savings program if they don’t currently offer an employee retirement plan. Businesses that don’t comply and register with their state’s retirement savings program timely could potentially incur state penalties. However, this varies depending on the business size and the state.
-
Why are states requiring employers to offer workplace retirement plans?
Why are states requiring employers to offer workplace retirement plans?
Across America, many states are experiencing a retirement savings crisis. The Federal Reserve reports that roughly a quarter of non-retired adults have no retirement savings3. To deal with this crisis, many states and some cities have enacted legislation to help employees save for retirement through their employer.
-
What type of retirement savings program is offered by the state?
What type of retirement savings program is offered by the state?
Most states offer Roth individual retirement accounts (IRAs), which:
- May require employers to automatically enroll employees at a contribution of three to five percent of payroll wages
- Allow employees to opt out of contributing or change their contribution amount.
- May require employers to do some administration work
- Have an investment line-up selected by the state’s board.
-
Does my business have to participate in a state-sponsored retirement savings program?
Does my business have to participate in a state-sponsored retirement savings program?
No. As an alternative, employers may choose to sponsor a private-sector retirement plan (I.e. 401k plan) to satisfy the state’s requirements.
-
Why should I consider a private-sector 401(k) plan versus a state IRA?
Why should I consider a private-sector 401(k) plan versus a state IRA?
A 401(k) plan has substantially higher employee contribution limits than an IRA, so your employees can save more, faster. You may want to consider a plan that requires reduced time, staff, and cost to manage, like a Pooled Employer 401(k) Plan (PEP). And, employers starting a new 401(k) plan may be eligible for SECURE Act 2.0 tax credits2, which are not available with a state-sponsored IRA. Also, 401(k) plans tend to be popular with employees and may give you an edge in recruiting. Which plan you choose depends on your business needs and the savings goals of your employees.
-
What are the penalties if I don’t comply with state requirements?
What are the penalties if I don’t comply with state requirements?
Penalties for employer non-compliance vary by state, but some can be steep. For example, California’s CalSavers program fines $250 per eligible employee not covered by a retirement program after 90 days of noncompliance, and $500 after 180 days. Even if you have a small number of employees, that could add up.
-
What if I already offer an employee retirement plan?
What if I already offer an employee retirement plan?
You may register your business for an exemption from the state’s IRA program. Check with your state for instructions on this process.
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How do I stay up to date on my state’s retirement mandate laws?
How do I stay up to date on my state’s retirement mandate laws?
Many laws are still in the proposal stage or haven’t been implemented yet. Check back here periodically and click on our map to see the status of mandatory retirement in your state.