State-mandated retirement plans

State-mandated retirement plans are the result of legislation requiring small businesses to provide retirement benefits to their employees. These employers now have the added responsibility of choosing a plan that’s right for their business and performing various administrative tasks to comply with the laws. Their employees must also find the plan beneficial – a critical aspect to retaining top talent.

What are state-mandated retirement plans?

When states require employers to provide their employees with retirement savings opportunities, it’s known as a state-mandated retirement. Businesses generally have two ways to comply with these laws – enroll their employees into a state-sponsored retirement program or sponsor a plan of their own through the private market, such as those offered by ADP.

Why are states mandating these retirement plans?

Some states have begun mandating retirement plans as a way to address the retirement savings gap in this country. Their response is based on research that shows:

• The average working household has virtually no retirement savings¹
• Employees are more likely to save when they have access to a 401(k) or similar plan by their employer²
• Only four in 10 businesses with less than 100 employees offer retirement benefits³

What type of retirement plans are these?

State-sponsored retirement plans are commonly Roth individual retirement accounts (IRA). With this type of savings, employee contributions are deducted from post-tax income, which means their money is generally tax free at the time of withdrawal. In comparison, a traditional IRA is funded with pretax payroll deductions, thereby lowering the employee’s taxable income. When the individual draws from the account, however, the money is subject to taxes.

Who are these retirement plans for?

State-mandated retirement plans are designed for low to moderate income wage earners who work for small and midsized businesses in the public sector. These plans are entirely separate from the state-funded retirement programs for public employees.

What are the requirements for employers and employees?

The requirements for state-mandated retirement benefits largely depend on individual jurisdictions, the size of the organization and how long it has been in business. Generally, employers must enroll their employees in the state-sponsored program if they don’t offer another retirement plan and perform the detailed administrative and reporting work necessary under state law. These tasks can be daunting, which is why many employers choose one of ADP’s easy-to-manage plans instead.

Employee requirements also may vary. In states that sponsor Roth IRAs, participants must not earn more than the IRS maximum to be eligible for such plans.

How do state-mandated retirement plans work?

The inner workings of mandatory retirement plans depend on the state, but there are some commonalities. Typically, plans are administered through payroll deductions and employees are automatically enrolled, but can opt out or change how much they contribute. Employers themselves are usually prohibited from contributing to the plans.

There are, however, some exceptions to these general guidelines. For instance, Massachusetts permits Safe Harbor matching contributions by employers. Business owners should check with local authorities for specific information on how their state-sponsored retirement plan works.

Which states have mandatory retirement plans?

More than 30 states have considered enacting state-mandated retirement plan legislation. Of them, 14 have actually signed such programs into law. These states are highlighted on the map below:

Retirement legislation state by state

Active state-sponsored retirement plans

Legislation passed, implementation scheduled

Legislation passed, implementation not scheduled

Legislation pending

State-mandated retirement legislation continues to evolve across the country. Employers should check with their local representatives for the latest updates.

What do employers need to know about state-sponsored retirement plans?

State-sponsored retirement plans have pros and cons, which business owners must carefully weigh. On one hand, government-run programs are generally a low-cost solution with few fiduciary responsibilities for employers. On the other, these plans tend to have inflexible, one-size-fits-all designs and businesses that miss registration deadlines may be penalized. Ultimately, whether employers choose to participate in the state-sponsored plan or offer their own through the private market, the important thing to remember is that retirement benefits are a valued commodity among employees and can help improve recruitment and retention.

Frequently asked questions about state-mandated retirement plans

Are employers required to offer retirement plans?

Employers generally are not required to offer their employees retirement benefits. However, some states have government-sponsored retirement plans with mandatory participation. In these jurisdictions, eligible employers must either enroll their employees in the state program or provide retirement benefits on their own.

What is the Secure Choice Retirement Savings Act?

Secure Choice is the name of state-sponsored retirement savings programs in Illinois, New Jersey and New York. Although they have similar naming conventions, these plans are not one in the same. Each has its own requirements and participation rules.

Are there penalties for not abiding by the mandates?

Employers in jurisdictions with state-mandated retirement programs who don’t comply with the requirements or miss enrollment deadlines may be penalized. The exact monetary amount of the penalty varies by state.

This information is intended to be used as a starting point in analyzing state-mandated retirement plans and is not a comprehensive resource of all requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.

Unless otherwise agreed in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. All ADP companies identified are affiliated companies.

ADP, Inc. is affiliated with ADP Broker-Dealer, Inc. (“ADP BD”), a limited purpose broker dealer registered with the Financial Industry Regulatory Authority (“FINRA”), and operating pursuant to Securities and Exchange Commission (“SEC”) Rule 15c3-3(k)(2)(i), approved by FINRA to offer 401(k) and SEP/ SIMPLE IRAs, and related retirement plans (the “Retirement Products”) on a payroll deduction basis.

¹ National Institute on Retirement Security
² TransAmerica Center for Retirement Studies
³ LIMRA
⁴ Voluntary Marketplace