State-mandated retirement plans result from legislation requiring employers to provide their employees with retirement savings opportunities. Businesses can comply with these laws by enrolling their employees into a state-sponsored program or sponsoring their retirement savings plan.
While only some states have mandated retirement plans, many are considering moving toward this legislation. State-mandated retirement plans for businesses and their employees include California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Vermont, Virginia, and Washington State. Also, some local governments are mandating retirement savings plans, such as New York City and Seattle, WA.
It is important to note that businesses with multiple locations in more than one state or jurisdiction must follow the mandated legislation for each physical location. There are numerous reasons why states and local governments are mandating a retirement savings plan for employees, such as:
- 79% of workers save for retirement through a sponsored retirement savings plan.
- Only 30% of employees strongly agree they are building a sufficient retirement savings nest egg.
- The total estimated median in household retirement savings accounts is $65,000.
- Only 32% have a financial strategy for retirement in the form of a written plan.
- Source: 22nd Annual Transamerica Retirement Survey, June 2022.
Many mandates hope to help close the retirement savings shortfall gap many employees may experience in retirement. Even though these retirement savings programs are mandatory, business owners have the option to adopt their qualified retirement plan that exempts them from participation.
What to know about state-sponsored retirement plans
Many state-sponsored retirement plans are Roth IRAs, and employee contributions deduct from post-tax income and tax-free at the withdrawal time. Employees cannot earn more than the IRS maximum to participate in states that sponsor Roth IRAs in their retirement savings plan.
State-mandated retirement savings plans are administered through payroll deductions that the employer coordinates and submits relevant payroll reports to the state. These mandated plans require that the employer automatically enrolls employees, but employees can opt out or change contribution amounts at any time.
Employers are usually prohibited from contributing to the state retirement savings plans on behalf of the employee, meaning there are no employer-matching contributions. These retirement plans are designed for low to moderate-income wage earners who work for small and mid-sized businesses. Some of the factors that determine if a business needs to comply with its state's mandate include:
- Number of employees
- Length of time in business
- Current retirement program (if applicable)
It is important to note that each state has requirements for its mandated retirement plan. Even if the business doesn't meet the criteria for participation in the mandated retirement plan, there may be forms to submit to opt-out. Therefore, business owners should consult a financial professional or tax advisor for details and how it may impact their business's situation.
Why business owners and employers may want their retirement plan
When employees are considering switching jobs, they think of employee benefits. If the business has a retirement savings plan, it may help to attract and retain employees. Here are some more reasons why business owners and employers may want their retirement plan versus using their state's mandated retirement plan:
- State-mandated IRAs are not eligible for tax credits to the business.
- State-mandated plan contribution limits are lower than 401(k)s.
- Many state programs require the employer to do their plan administration, including filing, reporting, adjusting contributions limits, etc.
- With state-mandated plans, neither the business nor employees can select the plan's investments.
- Employees enrolled in a state-mandated plan do not have access to a financial professional
- Employers cannot provide an employee match in state-mandated plans.
- State-mandated plans are not an employee benefit.
The reason for offering employees access to a retirement savings plan is simple – to help them build a more financially confident retirement. If you are a business owner or employer in a state with a mandated program, consider consulting with a financial professional to help you determine which retirement savings plans are suitable for your situation.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
LPL Tracking #1-05341787