Are small business owners required to offer retirement plans?

Note: We update this article on an ongoing basis as major updates happen for each of the states listed.

America is facing a retirement savings crisis and states are looking to small business owners to help stave off the feared result: a severe drain on their coffers as more people access state social services and negatively impact the economy.

Small businesses typically have had to pay relatively more for traditional 401(k) retirement savings plans than larger companies have, and most shy away from the plans as too costly and complicated.

Yet workers are much more likely to save if they can use work-based plans to do so, according to data cited by AARP. That’s a big reason some states are set to require all but their smallest businesses that don’t already offer a qualified plan to enroll their workers in new state-sponsored IRA (individual retirement account) plans.

Here’s how it would work: Employers would not have to pay for the state-sponsored IRA plans, which will be relatively bare-bones. Employers will have to act as the middlemen: They give their workers state-supplied IRA information and automatically enroll their workers in the state plans. Workers can opt out if they want. If they don’t, a certain amount — some states favor 3% to 5% — would be deducted from each of their paychecks and deposited into their state-sponsored IRAs. That money would be managed by a private investment company chosen by the state. Allowable investments would be pre-approved and considered low-risk. Fees charged on the workers’ accounts would fund the program.

The proposed state plans were given a green light by the Labor Department in August 2016. And in December 2016, the department issued rules that okayed these automatic-IRAs for large cities, too. The rules clarify that employers and the states or cities that offered the automatic-enrollment IRA plans would not be considered fiduciaries under the 1974 federal law — the Employee Retirement Income Security Act — that regulates retirement plans.

Learn more about starting a 401(k) plan for your business:

• Use our calculator to see how much a 401(k) would cost with SECURE Act tax credits applied.

• Read more about the fees associated with launching and maintaining a 401(k) plan for your business.

• Read our guide on setting up a small business 401(k).

Objections and recent political developments

The financial services industry: The state IRA plans have been strongly opposed by some in the financial services industry, including the Investment Company Institute, which, according to some plan backers considers them unfair competition. The ICI has called the plans risky and expensive.

Small business advocates/organizations: The National Federation of Independent Business, has also criticized the plans, saying they are an unnecessary burden on the mostly small businesses that will fall under the mandatory programs.

Government updates: Starting in March 2017, both the U.S. House of Representatives and the Senate had fast-tracked resolutions to strike down the Obama-era rules that cleared the way for the new state-chartered IRA savings plans. President Trump was expected to sign off on Congressional efforts to kill the state programs if the joint resolutions are approved and sent to his desk. Due to heavy opposition, this effort waned off. Still, it did have effects on some states supporting resolutions to strike down the Obama-era rules.

Decreases to the maximum 401(k) contribution limits: There was talk of steeply decreasing the $18,500 limit (in 2018) to $2,500. The final version of the Tax Cuts and Jobs Act didn’t reduce the maximum amount that plan holders can contribute to their 401(k)s, but the Act did include five important changes affecting 401(k) plans and other types of retirement plans. You can read more about the Republican tax bill here.

State-specific updates

So far, the states with plans underway haven’t called a halt to their programs even though it is unclear whether the measures will be derailed by Congress or by potential legal challenges now that the Labor Department’s safe harbor rules are in question. Those states include California, Connecticut, Illinois, Maryland, and Oregon (as well as the city of Seattle).

Lawmakers in at least one state, Colorado, have already introduced measures this year to establish similar state-sponsored IRA savings plans. New Jersey and Washington are setting up online marketplaces where small businesses, freelancers, and others can shop for retirement savings plans vetted by the states.

Here’s an alphabetical look at states with recent developments:

California: In California, where the worker IRA program called CalSavers (formerly known as California SecureChoice would eventually apply to businesses with five or more employees that don’t offer a retirement plan at work, the implementation date had already been pushed out at least two years, even before recent efforts to kill the programs.

The roll-out to employers is mid-way through. California-based employers with at least 100 employees had to register (or offer an alternative work-based retirement plan) by September 30, 2020, and those with 50+ employees will be required to do so by June 30, 2021. The final phase of the CalSavers roll-out is scheduled to be complete by June 30, 2022, by which date employers with 5 or more employees will be required to offer a retirement plan (CalSavers or otherwise).

State Treasurer John Chiang and other members of the state’s Secure Choice Retirement Savings Board discussed in a 2018 meeting that new state legislation would likely be needed to continue the program since the existing law was explicitly tied to the 2016 Labor Dept. rulings. They also discussed a 1975 safe-harbor ERISA provision that could support the Secure Choice program because it exempts employers from fiduciary duty if they offer their workers an IRA saving plan.

Colorado: The Colorado Secure Savings Plan will require private-sector businesses to offer a retirement plan to employees in the coming years. If they already offer a program, they can keep their retirement plan. If they do not offer a retirement plan, the state plan will automatically enroll employees into an IRA funded by automatic payroll deductions, starting with a 5% deferral rate. It will affect employees who are 18 years of age or older, have been employed by a Colorado employer for at least 180 days, and who earn taxable wages in Colorado. The roll-out will be staggered, ultimately affecting every private-sector business with five or more employees. 

Connecticut: The state’s plan, called The Connecticut Retirement Security Program (CRSP), would have exempted businesses with fewer than five employees, but it faced strong opposition on many ends. The approval process was longer than expected and the Connecticut Retirement Security Board (CRSB) that would have designed the final plan was waiting for the governor to name his four appointees to complete the board membership. Even though the CRSB was disbanded on July 1, 2016, through Public Act 16-29, there are still some policymakers trying to revive the effort.

Illinois: In 2018, Illinois launched its Roth IRA workplace program, called Illinois Secure Choice. The program affects businesses with 25 or more employees that have been in operation for at least two years. Its pilot program started in May 2018. Actual worker enrollments for companies employing at least 500 employees began in November 2018 and have since been rolled out to smaller companies: Enrollment deadlines were July 2019 for 100-499 employees and November 2019 for 25-99 employees.

Maryland: The Maryland plan, which applies to businesses in operation for two years that pay employees through a payroll system or service, is being set up and is expected to be implemented by 2018. The board created to set up the plan recently elected a chair, and while it is disappointed about the Congressional resolutions, a spokeswoman said, their passage will not stop the state’s program. The Program is intended to "be self-financing from fees collected on the funds invested in the IRAs."

New Jersey: The New Jersey Secure Choice program will automatically deduct 3% of workers’ wages to put in IRA style accounts for them. Employers that already offer retirement savings, through a 401(k) for example, will be exempted, as well as those in business less than two years. To read more about the New Jersey "Secure Choice" program, see our blog here. The bill was signed into law in early 2019 and roll-out details are still pending. 

New Mexico: One of the most recent legislations, New Mexico plans to create both a state-run retirement savings program, affecting both private-sector and nonprofit employers, as well as a retirement marketplace. The marketplace is slated to begin July 1, 2021, and the savings program is expected to launch roughly at the end of 2021. The savings plan, a Roth IRA, is slated to affect full- and part-time workers as well as self-employed individuals, and participation will be voluntary.

Oregon: Oregon is one of the first states to fully launch a program. The OregonSaves program started in July 2017 with a pilot group of volunteer employers and is currently available to all employees in the state.

Oregon’s state treasurer has said the actions by Congress won’t derail his state’s IRA program, but acknowledged that overturning the safe harbor rules does add uncertainty as the state is working to set up its plan.

Washington:  The state was supposed to open its online portal on January 1, 2017 but has pushed that back and now anticipates an introductory launch in mid-2017.

The delay was caused by several factors, including the time required to vet plans that vendors want to sell on the portal. Also, other states have expressed interest in a similar program, and talks are underway about making criteria and fees consistent among future state marketplaces.

How far have the state-sponsored plans spread? In at least 16 other states, including Utah, laws have been introduced in the past two years that require savings plans or feasibility studies but so far they have failed to pass. Still, advocates expect momentum for these bare-bones plans to continue to build, so small business owners need to stay informed.

How this affects employees

Employees will be able to opt out of these automated-IRA workplace plans, which typically will create a Roth IRA for each worker and start with a 3%-5% payroll deduction. Contributions to a Roth IRA are made with after-tax money and grow tax free. Qualified withdrawals are also tax free. For a worker earning, say, $12 an hour, the 3% deduction would be $14.40 for a 40-hour week or about $750 a year. 2024 IRA rules cap annual contributions to $7,000 unless a person is over age 50, in which case the limit is $8,000.

How this affects employers

Plans are meant to minimize the cost and risk for employers. A business won’t have fiduciary responsibility for the plan, nor will taxpayers, policymakers say. A state-appointed board and the state-picked investment company will. Businesses won’t be on the hook if the investment company plan loses money. And they won’t be expected to serve as financial advisers for their workers. Opponents of these plans, though, warn that the state plans will operate in uncharted territory and states can’t guarantee a business won’t be exposed to unknown costs or liabilities.

At a minimum, a business owner will be required to distribute state-supplied plan information and enroll its workers. It will have to process any employee opt-out forms. And probably once a month it will have to send the payroll deductions to the investment company picked by the state.

Details will be clearer once all states finalize their programs for the automatic-IRAs or online marketplaces and start to communicate with the affected small businesses.

What steps can a small business owner take now? Here are a few that make sense at this early stage.

Keep up to date on developments: Some individual states, including Washington, let you sign up for email updates on their progress designing and implementing the new rules. Or, you can track the bigger picture on websites including Georgetown University’s Center for Retirement Initiatives and AARP. These have good overall info but may not be completely up-to-date for each state.

Look into an online payroll system: If you don’t have an electronic payroll system yet, either in-house or through an outside company, now might be a good time to set one up. That will make it easier to comply with the plan rules and to transfer employees’ payroll deductions. Read more about How to Set Up and Choose a Small Business Payroll System

Get ahead of the curve and offer a retirement plan now: You might also consider shopping for and offering a retirement savings plan for your workers, in advance. That can be daunting, which is why many smaller companies don’t offer them. But you can deduct part of the cost of setting it up and it could be a competitive advantage — offering a beefier retirement saving plan with more options— when recruiting workers now that more of your competitors will be required to offer at least the minimal state-run plans. For some introductory information on the most common retirement plan offering in the United States, read 401(k) Basics for Employers.