Following the path of state governments such as California, Oregon, and Illinois, Connecticut has enacted the Connecticut Retirement Security Program to help address the challenges surrounding retirement savings of workers in the state.
Connecticut announced, in January 2019, that it will start requiring all private-sector employers without work-provided retirement plans to enroll their employees in state-sponsored IRAs (Individual Retirement Accounts).
The new state-mandated program, overseen by the Connecticut Retirement Security Authority (CRSA), stems from legislation that was enacted back in 2016 with the intent of helping more employees save for their retirement.
How the program started, and why
First created through Public Act 14-217 in July 2014, the Connecticut Retirement Security Board (CRSB) conducted a two-year-long study analyzing the feasibility of a state-sponsored retirement savings program for Connecticut employees. Based on their findings, it was concluded that, with the use of traditional and Roth IRA accounts, a 6% default contribution rate and auto-enrollment would be financially feasible for most workers.
Critics of the program point out that workers can open an IRA at any time, without the help of their employers, however, there are two main reasons why auto-enrollment and automatic paycheck deductions could greatly benefit Connecticut workers. First, it was found that only 59% of employers in Connecticut offer a retirement plan. Given this, the Connecticut Retirement Security Program hopes to help the four out of ten employees currently without an employed-sponsored way to save for retirement.
Second, an additional study found that an estimated two out of three non-saving employees say they would be happy to save for retirement if automatic paycheck deductions were used by their employer – with the option of changing or stopping them, at either 3 percent or 6 percent of their salary. By implementing this mandated retirement plan to employers with five or more employees, the State of Connecticut hopes to boost retirement savings for across the board.
The new program will be implemented in phases, much like the state-run IRA program ‘OregonSaves.’ The State of Oregon is phasing in their retirement program starting with the states’ largest employers. Connecticut has not disclosed the details of how their phase-in plan will be structured.
New requirements for employers
Under the new Connecticut state-run program, eligible workers who do not receive 401(k) plans or pensions offered from their employers will be automatically enrolled in the new state plan. The employers affected are those that, on October 1st of the prior calendar year, employed five or more employees in the state and paid each of these persons a minimum of $5,000 in taxable wages in the prior calendar year.
Employers must provide a newly-hired employee with informational materials regarding the Connecticut Retirement Security Program within 30 days of starting employment. By no later than 60 days, the employer will be required to enroll the employee in the state-run IRA program (at whichever contribution level the employee has chosen). If an employee does not choose a contribution level, it will automatically be set at 3 percent of the employee’s taxable wages. If an employee is already covered by a retirement plan, they may opt out of the program by choosing a contribution level of zero.
The wages that are deducted from an employee’s wages are then remitted to the Connecticut Retirement Security Authority (CRSA) for investment in an IRA maintained on behalf of the employee. The CRSA will be required to invest each employee’s funds in an age-appropriate target date fund with the vendor selected by the employee, or in an age-appropriate target date fund that matches the participant’s normal retirement age most closely if the participant does not select a specific vendor.
If an employer already offers a retirement program, then they will be exempt from Connecticut’s mandated plan. These employers will not be required to provide any materials to their employees regarding the program.
Participating employers are not required to match their employee’s contributions under the new program. On the contrary, employers are prohibited from making any contributions to the program on behalf of their employees. Employers with four or fewer employees may voluntarily offer the program to their employees; however, it is not mandatory.
Stipulations and penalties
If an employer fails to enroll an employee in the state-mandated program, they may face litigation by the employee or the Labor Commissioner acting on behalf of said employee. The employer will then be required to enroll the employee and pay for all litigation costs and attorney fees.
If an employer fails to contribute funds to the program in the specified amount of time (no later than the tenth business day after the contribution was withheld), the employer will be subject to civil and possibly criminal penalties.
Next steps for employersEmployers should start considering the next few steps to help ensure compliance with Connecticut’s new, state-run, mandated IRA program once it has been implemented:
- Provide and document the distribution of program materials to employees in a timely manner.
- Deduct and remit employee retirement contributions correctly and promptly.
- Be clear to employees that you, as an employer, do not recommend or endorse any specific vendors offered in the program.