Small Business Owners Required to Offer Retirement Plans Under New State Laws
Note: We wrote this article in late 2016 but will update it on a regular basis, even in 2017, 2018, and 2019 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.
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: As of March 2017, both the U.S. House of Representatives and the Senate have fast-tracked resolutions to strike down the Obama-era rules that cleared the way for the new state-chartered IRA savings plans. President Trump is 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 to $2,500 in 2018. 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.
So far, the five 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.
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.
Now, 2019 is the earliest the first phase, which is aimed at larger employers, would begin. On July 1, 2019, registration will begin for employers of at least 100 California-based employers. The program will then be phased in over three years, with the smaller businesses to be included five years from now, in 2022.
State Treasurer John Chiang and other members of the state’s Secure Choice Retirement Savings Board discussed in a February 26 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: In March 2017, Colorado legislators re-introduced a bill to create the Colorado Secure Savings Plan that would cover businesses in operation at least two years. If approved, the plan would be rolled out over three years. Year One would apply to businesses with 100 or more employees. Year Two would cover firms with 50 or more workers. Year Three would include small businesses with five or more workers. A similar bill died in committee last year.
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 announced a new implementation schedule for 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. Enrollment deadlines for smaller companies are scheduled for July (499-100 employees) and November (99-25 employees) 2019.
The state treasurer has called on the Senate to support the program but has not said yet what the state will do if Congress overturns the safe harbor rules.
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.
New Jersey: The state was most recently taking requests for information that can be found here.
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. 2019 IRA rules cap annual contributions to $5,500 unless a person is over age 50.
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 adviser 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.
If you’re looking for a great 401(k) for your employees, click here to request more information about Human Interest.
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