If you live in California or Illinois, you might be very familiar with state-sponsored retirement plans. In fact, many other states have also implemented these programs and several others are contemplating jumping on the bandwagon. Why do these programs exist? Why are they growing in popularity? What other options do employers have for retirement plans? We’ll discuss these questions and more below.
How did we get here?
It’s a growing concern: a majority of Americans are not saving nearly enough for retirement, if they’re saving at all. However, there’s good news too. Studies show that employees are much more likely to contribute to a 401(k) plan if it’s provided as a benefit from their employer. Yet, many employers do not offer a retirement plan. In fact, according to the US Bureau of Labor Statistics, only 4 in 10 employers with 100 or fewer employees provide this benefit.
State-sponsored plans to the rescue!
Due to these statistics and what some are calling a “retirement crisis,” states are stepping in and sponsoring their own retirement plans. In several states, these plans are mandatory. This means they must be adopted by employers with a certain number of employees if the employer doesn’t offer a plan already. Additionally, a few other states have implemented voluntary state-sponsored plans, and many are currently considering this legislation.
As of December 2020, the states with mandatory programs include: California, Colorado, Connecticut, Illinois, Maryland, New Jersey, and Oregon.
As of December 2020, the states with voluntary programs include: Massachusetts, New Mexico, New York, Vermont, Washington.
What do state-sponsored retirement plans entail?
While each state has different plan details, these programs have a few similarities:
- Employee contributes to a Roth IRA
- Employee contributions are automatic (employee can opt out)
- Investment options are chosen by the state
Let’s review one of the mandatory programs: California’s CalSavers.
A mandatory state-sponsored retirement plan: CalSavers
California’s state-mandated retirement program, CalSavers, requires that employers with at least 5 employees offer a retirement savings plan. If they don’t offer their own plan, they must join the state’s program, where employees contribute to a Roth IRA. That’s right, Roth – which means the employee contributions are made with after-tax monies.
Employers must set up their own plan or register for CalSavers by the following deadlines:
Size of Business Deadline
- Over 100 employees September 30, 2020 (passed)
- Over 50 employees June 30, 2021
- 5 or more employees June 30, 2022
CalSavers sets the default savings rate for employees at 5 percent, with an auto-escalation of 1 percent each year, up to 8 percent. However, employees can opt out of the program or change their savings rate at any time. In addition, employer contributions are not allowed. When participating in CalSavers, all employees who have reached age 18 and have been on W-2 payroll for 30 days must be automatically enrolled. Owners and those making over a certain income level (AGI threshold) will not be able to participate in CalSavers.
Employers are expected to receive annual penalties of up to $750 per eligible employee for not timely complying with CalSavers.
More (and potentially better) retirement plan options
Employers may want to look into sponsoring their own plan versus adopting a state’s program for several reasons. These options can provide more flexibility and help meet an employer’s specific goals. Also, employers who start a new plan may be eligible for a new federal tax credit up to $5,000, every year for the first three years. Below are even more benefits:
- Tax deductible contributions
- Higher contribution limits
- Eligibility requirement options (more stringent than CalSavers, which is at age 18 and after 30 days of employment)
- Owners and highly compensated employees can contribute
- And more!
If you live in a state with one of these mandated programs, it’s important to let business owners know their options. In addition, as more states are considering adding similar legislation, employers can take advantage of the benefits above and start their own plan now.
At EGPS, we specialize in helping find the perfect retirement plan solution to fit our clients’ needs. We’re available and ready to discuss the various plan options with you, your clients, and prospects. Fill out the form below and we’ll reach out with more information on these state-sponsored plans and the different options available.