LAST REVIEWED Feb 18 2022 6 MIN READ
By The Human Interest Team
Deadlines for employers with 25+ employees to offer Illinois Secure Choice have passed—businesses of these sizes should act now to avoid penalties
Employers face penalties of up to $500/employee (e.g, an employer with 25 employees could be fined $6,000+ the first year found out of compliance¹)
The next deadline is for employers with 16-24 employees on November 1, 2022—although a Human Interest 401(k) plan can be an easy, affordable way to meet requirements today
What is the Illinois Secure Choice Act?
Originally launched in 2018, the Illinois Secure Choice Savings Program Act aims to increase retirement savings access to private-sector employees. Approved by the state in July 2021, H.B. 0117 requires employers with at least five employees to:
Automatically enroll each employee who has not opted out of participation in the program
Provide payroll deduction arrangements and deposit funds into the program on behalf of those employees
Create automatic, annual increases to contribution rates up to a maximum of 10% of a participant’s wages
The Illinois Secure Choice is a mandatory state-sponsored retirement savings program! Employers that do not comply face penalties of $250 per employee for the first year and $500 per employee for each subsequent year.
Example: An Illinois company with 25 employees can face a $6,250 fine the first year it does not comply with Illinois Secure Choice—and up to a $12,500 fine each subsequent year it’s found out of compliance¹.
Overview of Illinois Secure Choice Savings Program legislation (updated July 2021)
The Illinois Secure Choice Savings Program Act became effective on June 1, 2015, and mandated that a state-sponsored retirement savings plan be implemented within 24 months. Illinois Secure Choice went through several updates in 2018 and 2019:
The Board updated the figure of potential workers enrolling in the program from 1.2 million to roughly 2.5 million,
The program’s launch date was delayed until November 1, 2018, and
The plan’s annual fees dropped to approximately 0.75% per account balance.
Furthermore, the final version of the law passed in July 2021 and included several notable changes:
The program applies to employers with at least five employees in Illinois
The program includes annual, automatic increases to contribution rates (up to a maximum of 10% of an enrollee’s wages)
The $500 noncompliance penalty can be applied to companies found in non-consecutive years of non-compliance
Employers have 120 days to file a protest with the department after issuing a notice of proposed penalty assessment for noncompliance
Notices may be provided electronically (rather than only by first class mail)
Who is required to provide a plan?
The first version of the program applied to Illinois employers with 25 or more full-time and part-time employees. However, the approved version of the bill broadens the definition of “small business.” Employers that meet the following criteria must offer a qualified plan:
At least five employees
Have been in business at least two years
Do not offer a qualified savings plan such as a 401(k), SEP-IRA, or Simple IRA
Businesses that meet these criteria are required to provide a qualified retirement plan—such as a 401(k), 403(b), or more—or enroll employees into the Secure Choice Program. Secure Choice participants are enrolled in a target date Roth IRA with a default 5% payroll contribution. Participants can change contribution levels or fund options, and may choose to opt-out of the program.
Is Illinois Secure Choice legally mandatory?
Yes! Employers who don’t comply with the Illinois Secure Choice Savings Program Act may be subject to penalties as described in the act (820 ILCS 80/85):
$250 fine for each employee for the full or portion of the first calendar year in which the employee isn’t enrolled or didn’t opt out of the plan
$500 fine for each employee for the full or portion of the second calendar year in which the employee isn’t enrolled or didn’t opt out of the plan
However, according to Sec. 70 (820 ILCS 80/70) of the act, the Illinois Secure Choice Act assigns no fiduciary risk to employers, doesn’t consider employers to be plan managers, doesn’t force employers to match any funds or guarantee any investment performance, and doesn’t make employers subject to the same administrative requirements as with employer-sponsored retirement plans.
Illinois Secure Choice: Registration deadlines for employers
Deadlines have rolled out in waves, starting in November 2018, when employers with 500+ employees were required to offer the program (or another employer-sponsored retirement plan). Employers with 100-499 employees were required to register by July 2019, while those with 25-99 employees faced a November 2019 deadline. Businesses of these sizes that haven't registered should do so now to avoid penalties.
The approved proposal in July 2021 added deadlines for newly classified "small businesses." This means that state law now requires every Illinois employer with five or more employers to meet Secure Choice or offer their own retirement program. Registration is currently open, but businesses must meet the following deadlines:
Employers with 16-24 employees: Deadline to register is November 1, 2022
Employers with 5-15 employees: Deadline to register is November 1, 2023
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Are there contribution and income limitations?
Yes, because the standard Illinois Secure Act account option is a Roth IRA, there are limitations set by the federal government. Total annual contributions to traditional and Roth IRAs in 2022 cannot exceed $6,000 (under age 50) or $7,000 (age 50 or older) as mandated by the IRS. Additionally, there are maximum income limits. In 2022, these limits are:
$140,000 for a single tax filer
$208,000 for married taxpayers filing jointly.
However, Illinois Secure Choice does offer a Traditional IRA option to participants who aren’t eligible to contribute to a Roth IRA and must recharacterize prior year contributions. Traditional IRAs do not have an income limit.
How are employee contributions treated?
Unless an employee opt outs within the 30-day grace period, Illinois employers automatically enroll them in Illinois Secure Choice, start deducting a default 5% of every paycheck, and contribute that amount to a Roth IRA under the employee’s name. Once enrolled, employees can increase or decrease their withholding as a percentage or dollar amount.
By default, all employee contributions are deposited in an age-based target-date fund designed to end in the year closest to when the participant turns 65 (or plans to retire). To minimize investment fees, the Illinois Secure Choice Board chooses funds that are passively managed. Additionally, the Board offers these other funds, too:
A capital preservation fund: This option seeks to preserve a participant’s capital by investing in money market U.S. securities
A conservative fund: An index fund that tracks the total return of the U.S. investment-grade bond market
A growth fund: An index fund that tracks the S&P 500
Given the focus on passively managed funds, Illinois Secure Choice is able to offer low annual expense fees compared to other current state-sponsored retirement plans. The plan’s annual expense ratio is approximately 0.75%. This means that the average full-time uncovered worker eligible for Illinois Secure Choice making $38,000 and contributing the default 5% to his Roth IRA would contribute $1,900 and pay $14.25 in investment fees per year. The fund charges no fees for making withdrawals, changing contribution percentages, or moving monies between investment funds. Individuals making withdrawals before age 59 ½ are subject to applicable penalties, such as the 10% early distribution penalty from the IRS. However, there are specific early distribution penalty exceptions that allow participants to avoid the penalty tax if they withdraw before age 59 ½, including:
Substantially equal periodic payments
Certain medical expenses
Health insurance (if unemployed)
Birth or adoption of a child
First time homebuyer
Qualified reservist status
What happens if your company already offers a 401(k)?
If your company already offers a 401(k) or other plans qualified under sections 401(a), 403(a), 403(b), 408(k), 408(p), or 457(b) of the IRS, you are exempt and don’t need to enroll your employees in Illinois Secure Choice. To verify or certify your exemption, visit the Illinois Secure Choice website and enter your EIN/TIN.
If you are an employee that wishes to opt out of an employer-provided Illinois Secure Choice IRA plan, you can do so by following these steps:
Visit saver.ilsecurechoice.com and click, “Set up your account.” If you choose to opt out and have received notification within the past 30 days, you won’t need to set up a username and password. Beyond 30 days, you will need to set a username and password to complete your opt out.
Contact client services by emailing [email protected] or by phone (855) 650-6913 Monday through Friday between 8am and 8pm CST to complete your opt out.
Four financial downsides of Illinois Secure Choice
The objective of facilitating that 2.5 million Illinoisans save for retirement is very positive. However, the Illinois Secure Choice state retirement plan has four major weaknesses.
1. The 0.75% annual expense ratio could increase
According to the feasibility study from Boston College, with a 0.75% investment fee, the plan would become cash-flow positive within ten years. The finding of the study indicates that the Board would need to increase the default 3% contribution or increase the 0.75% investment fee to accelerate the plan’s break-even point. To avoid increasing the annual fee, the Board chose to increase the default contribution rate to 5%.
Ultimately paying a 0.75% annual expenses ratio for your retirement account can be high. For example, a Human Interest 401(k) plan has a provider fee of just 0.50% per year and an average fund fee of 0.07%, for a total average fee of 0.57%. By offering lower fees, this can help your employees maximize their retirement savings.
2. IRAs aren’t effective for high-income retirement savers and those close to retirement age
As presented above, a single tax filer making more than $140,000 (and joint married tax filers making more than $208,000) can make limited contributions to a Roth IRA. Even when able to contribute more, Roth IRA holders can only contribute up to $6,000 ($7,000 if age 50 and over) per year in 2021 and 2022. These contribution limits also apply to traditional IRA holders.
Even though legislators are discussing the possibility of offering a traditional IRA for high-income earners, the latter wouldn’t be able to take full advantage of their pre-tax deductions. High-earning individuals and those close to retirement age are much better served by a 401(k), which allows them to contribute more than they can in an IRA. In 2022, 401(k) contribution levels are $20,500 and an additional $6,500 for those aged 50 and over—for a total of $27,000.
3. Lack of employer match
While the lack of an employer match might sound attractive for employers, the reality is that employers are generally better off providing a match to employer contributions. Vanguard reported that 96% of its 401(k) plans provided employer contributions in 2019. Employer contributions to 401(k) plans are tax deductible as long as they don’t exceed limits set by the IRS. What’s more, some 401(k) plan administrative fees are also tax-deductible.
In addition, lower-income workers also may feel better served by an employer-sponsored 401(k) with an employer match than a Roth IRA. The Boston College study raised the concern that increasing the default contribution rate of the plan could pinch the budgets of lower-wage workers. With many employers offering retirement plans with a full employer match with as little as a 6% employee contribution, low-income earners may feel that a 401(k) with an employer match provides a better bang for their contribution dollars.
4. Target-date funds are underperforming
While the Board provides additional investment options, age-based target-date funds are the default option. While target-date funds provide investors with diversification and rebalancing capabilities, research has found that, in some cases, target-date funds may underperform and investors pay multiple layers of fees.
Here is a full review of target-date funds, which help you determine whether or not they would be a suitable investment for you.
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The bottom line: Research all of your retirement saving options
If you’re an employee uncovered by a state retirement plan in Illinois, you should have already had to take action with the rollout of Illinois Secure Choice. Keep on top of the latest developments of this state-sponsored plan by reviewing the materials from past and upcoming meetings from the Illinois Secure Choice Board.
Take the time to investigate all of your available options, including a 401(k) with Human Interest. We can offer you a flat fee of 0.50% of your account balance, covering fiduciary, custodial, and advisory fees, access to many low-cost funds with average fund fee of 0.07%, and a higher annual contribution limit.
Need help reviewing your retirement saving options? Check out these useful resources:
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 education, and integration with leading payroll providers.