LAST REVIEWED Apr 26 2022 10 MIN READ
By The Human Interest Team
While the state of Hawaii initially introduced state-sponsored retirement legislation in 2019, it did not pass.
In early 2022, legislation was introduced to reconsider the legislative task force recommendation to create a retirement savings program.
SB3289 aims to create the Hawaii retirement savings program, which would oversee a state-facilitated, payroll-deduction individual retirement savings plan.
Throughout the United States, more states are addressing the retirement crisis head-on with a state-sponsored plan that covers workers without access to workplace retirement. It’s estimated that nearly half of Hawaii’s private-sector employees (roughly 216,000) work for an employer that doesn’t offer a retirement plan. What’s more, nearly two-thirds of small business owners in Hawaii who responded to an AARP survey said they don’t offer a retirement savings plan and agreed that the state should do more to encourage residents to save for retirement.
The road to introducing and passing legislation to address low retirement savings has been bumpy for Hawaii. For example, initial legislation proposing a state-provided retirement program was defeated in 2019 due to a legislative stalemate. However, recent action indicates a promising future for the Hawaii Retirement Savings Program. In early 2022, Senate Bill 3289 was introduced to reconsider the legislative task force recommendation that would help create a retirement savings program for the Aloha state.
Where Hawaii’s state-sponsored retirement plan stands in 2022
Two pieces of legislation, SB1374 and HB1189, were originally introduced by Hawaii’s Senate and House of Representatives in 2019. The overall plan was known as Hawaii Saves Retirement Savings Program, but was more commonly referred to as “Hawaii Saves” because it was modeled after OregonSaves, the state-sponsored savings program from the State of Oregon. SB1374, and by extension HB1189, were defeated in the 2019 due to insufficient time provided for the House and Senate to reconcile their respective versions of the bill.
The Hawaii Retirement Savings Task Force delivered a report to state legislation in December 2021, which included the recommendation of reconsidering an auto-IRA program. SB3289 SD2 HD2 was introduced in early 2022 to establish the Hawaii retirement savings program. Administered by the Hawaii retirement savings board, the program would establish a state-facilitated, payroll-deduction individual retirement savings plan to private-sector employees who lack access to employer-sponsored plans. Implementation date is yet to be announced, although the program would authorize an evaluation study, strategy, and timeline for rollout.
While many details are yet to be determined, the current bill outlines the goal to establish a Hawaii retirement savings board that will implement and administer a state-facilitated payroll-deduction retirement savings program. As drafted, the program will establish a Roth IRA for employees, although the board may add a traditional IRA option as well. The board has the ability and duty to design, establish, implement, and maintain a program that:
Is in accordance with best practices for retirement savings vehicles;
Encourages participation, saving, sound investment practices, and appropriate selection of default investments;
Maximizes simplicity and ease of administration for employers;
Minimizes costs, including by collective investment and other measures to achieve economies of scale and other efficiencies in program design and administration;
Promotes portability of benefits; and
Avoids preemption of the program by federal law
What is the future of retirement in Hawaii?
Support for a state-sponsored option appears to remain strong. According to an AARP survey from 2021, 73% of Hawaii small business owners think more should be done to encourage state residents to save for retirement—with nearly half saying “a lot more should be done.” 63% are concerned about their employees not having enough money to cover health care or living expenses when they retire. To that extent, 83% of respondents believed that lawmakers should support a state-provided savings option, and 82% support a Hawaii retirement.
Alternative retirement options for small business owners in the state of Hawaii
Hawaii currently doesn’t offer a state-sponsored saving plan for employees without access to them through an employer—including part-time employees, other nontraditional employees, and those who are unemployed. However, there are other options for small business owners that want to offer retirement plans but don’t want to wait for the state to pass legislation.
Solo 401(k) Plan
Solo 401(k) plans allow self-employed individuals or business owners with no employees to save for retirement using tax-deferred dollars. While the IRS requirements state participants may not have employees, it makes an exception for spouses. The IRS considers an individual with a Solo plan both an employer and an employee, so it allows higher savings rates than other non-traditional retirement savings options.
Allowable annual contributions are $20,500 in 2022 ($19,500 in 2020 and 2021), or $27,000 in 2022 ($26,000 in 2020 and 2021) if age 50 or over.
Additionally, as an employer, a participant may make nonelective contributions up to 25% of compensation as defined by the plan, and as an employee can make them subject to a special computation.
While some small business owners favor these higher limits, the eligibility requirements are prohibitive for most small businesses and even many of the self-employed individuals the plans are designed to serve.
A SEP-IRA offers a retirement solution for businesses of any size, including sole proprietors, partnerships, and corporations, and even the self-employed. Employees are eligible if they are age 21 or older and have worked for you in three of the last five years and have earned at least $650 in 2021 or 2022 ($600 in 2019 and 2020).
As an employer, you can contribute up to 25% of compensation annually or a maximum set by the IRS (whichever amount is less) of $61,000 for 2022 ($58,000 for 2021 and $57,000 for 2020).
Employees are immediately 100% vested in all contributions.
Some employers like the SEP-IRA because there are no administrative requirements beyond completing Form 5305 SEP and providing it to all employees as they become eligible for participation. One drawback to these plans is the length of time required for employees to become eligible, especially with the Bureau of Labor Statistics reporting the average American holds a job for 4.1 years.
The SIMPLE IRA is a relatively flexible and low-cost traditional IRA for businesses with fewer than 100 employees. Employers can offer either a matching contribution to their employee’s retirement account or make nonelective contributions. Employees may also choose to make salary reduction contributions to their own accounts.
Employees can contribute up to $14,000 in 2022 ($13,500 in 2021)
If permitted by the SIMPLE IRA plan, participants who are age 50 or over can also make catch-up contributions up to $3,000 a year
Pros of the SIMPLE IRA include immediate employee vesting, low cost to start, and tax benefits associated with employer contributions, while cons include lower contribution limits and higher withdrawal penalties.
A 401(k) designed for small businesses
The Solo 401(k), SEP-IRA, and SIMPLE IRA cover only a fraction of the 216,000 Hawaiian workers without access to a retirement savings plan through their employer, and IRAs lack the matching incentives employers are able to offer through 401(k)s. There are other opportunities for small business owners to offer affordable retirement plans to their employees.
Small business owners in Hawaii looking to find ways of offering a retirement plan to their team right now should consider a 401(k) with Human Interest. While traditional 401(k) plans often overlook small businesses and their employees, modern 401(k) solutions such as ours take significant administrative and manual work off the plate. Plus, with Human Interest’s flexible plan design, you can find a solution that fits your needs.
The bottom line: Stay informed and shop around for alternatives
We may see a future in which Hawaii reintroduces a state-provided retirement program for approval. But if you’re looking forward to start a state-sponsored plan in the near future, you’ll need to explore other options. Take action now and start shopping around for ways to provide a much-needed retirement saving option for your employees.
Does your Hawaii business qualify for 401(k) tax credits?
Learn if starting a plan comes with tax incentives.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.