Your guide to the VirginiaSaves state-sponsored retirement program

Approximately 45% of private-sector workers in Virginia lack access to a retirement plan through their job, outpacing the national rate in 2020 of 33% by a wide margin. Following in the footsteps of states like Oregon, California, and Illinois, however, the commonwealth has passed legislation to establish a state-sponsored retirement program for many of these Virginians through their place of employment.

In January 2021, Del. Luke Torian introduced HB 2174, which would establish VirginiaSaves, an automatic-enrollment, paycheck-reduction individual retirement account (IRA) through the Virginia College Savings Plan, Virginia 529. Virginia Governor Ralph Northam signed the bill into law on April 15 of that year after unsuccessfully lobbying for the removal of a provision limiting eligibility to employees working a minimum of 30 hours a week. 

An amendment to the bill stipulates that the governing board of the Virginia College Savings plan will appoint a Program Advisory Committee to determine an implementation schedule, default contribution rates, and program procedures. 

The law went into effect July 1, 2021, and employer enrollment is expected to begin on or shortly after July 1, 2023.

How VirginiaSaves works for employers

Employers that meet the following qualifications would be required to participate in VirginiaSaves: 

• Have 25 or more employees in the previous year, 

• Have been in operation at least two years 

• Do not already offer a qualified plan (such as a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b)) 

As with other state plans in effect—and by design—employer requirements would be minimal. Employers subject to the mandate would need only to register by the deadline (still TBD as of January 2022) or present proof of an alternative qualified plan (see above), set up a payroll deduction for each eligible employee, and hold an annual open enrollment period. 

With most administration tasks handled by the Virginia College Savings board, the program is designed to be of low to no cost to employers and to remove any liability, meaning employers will have no legal responsibility for employees opting in or out, nor for any investment decisions. The board is also required to explore the possibility of a grant program to help with implementation costs (if any), as well as provide financial incentives for small businesses. In keeping with IRS restrictions on payroll deduction IRAs, employers are prohibited from making contributions, such as matching funds.

Which employees qualify for VirginiaSaves?

Employees who are at least 18 years of age or older and those who work a minimum of 30 hours a week (part-time workers are not eligible for the program) would be automatically enrolled in VirginiaSaves. However, all qualified employees may opt out of the program at any time. Self-employed individuals are also eligible to participate as long as they have taxable Virginia income.

As explained in HB 2174, the goal of the bill is, “To promote greater voluntary retirement savings for private-sector workers in a convenient and portable manner,” which suggests that plans will be portable. This means employees could transfer them to their next employer should they become eligible for a traditional employer-sponsored retirement plan. 

Learn more about VirginiaSaves alternatives:

• 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).

The state of retirement saving in the commonwealth of Virginia

Lack of access to an employer-sponsored retirement plan is a problem that affects not only individuals, but also the states in which they reside. Research shows that workers with a retirement plan available through their employer are 15x more likely to save for retirement. And although many people without an employer plan are eligible for IRAs, very few of them establish or contribute to one. According to AARP, fewer than 5% of workers earning between $30,000 and $50,000 without an employer plan contributed to an IRA. On a broader scale, retirement shortfalls cost states money because they often cause more demand for public programs such as Medicaid.

Approximately 1.2 million private sector workers in Virginia don’t have access to an employer-sponsored retirement savings plan. While this cuts across all education levels, workers employed by small businesses (fewer than 100 employees) are far less likely to have a plan than their counterparts at larger companies.

The issue disproportionately impacts minorities: A recent state study found that nearly a third of private-sector employees not covered by a retirement plan are Black, Asian, or Hispanic. With Virginia becoming increasingly racially diverse (in 2020, people of color made up 41% of the state’s population, compared with 35% a decade prior), the potential burden on public programs from retirement-age individuals with insufficient savings is only set to grow.

How VirginiaSaves benefits employers & employees

Historical lack of retirement access and portability is a widely acknowledged barrier to amassing sufficient retirement savings for many Americans. These workers may lack the ability or incentive to participate in alternative options—and may face the temptation to simply cash out their 401(k) when they lose a retirement plan.

VirginiaSaves not only gives employers a low-overhead option for providing their workers a critically necessary retirement plan, but it gives their employees a tool that could make it more than 10 times likelier that they will save for their future, while allowing  them to take their savings to another employer-provided plan (which could help them continue saving). 

And finally, VirginiaSaves helps address the savings disparities among different racial and socio-economic groups by extending access to the equivalent of an employer retirement plan to more types of workers.

“This is an opportunity for more Virginia workers to build long-term savings not tied to a single employer, said Del. Torian in a statement. “VirginiaSaves will be a crucial wealth-building mechanism.”

Explore your options with a 401(k) for your Virginia business

While VirginiaSaves could start offering an IRA in 2023, you can establish a 401(k) sooner rather than later. There are a couple key differences between IRAs and 401(k)s:

• 401(k)s allow employers to provide matching contributions, which is a powerful incentive for attracting and retaining employees. Employer matching could make a difference of about several thousand dollars per employee by the time they decide to retire.

• 401(k)s have higher contribution limits compared to IRAs ($22,500 vs. $6,500, respectively, in 2023), which may be attractive to workers wishing to catch up on their retirement savings.

If you’re interested in exploring your options for establishing a 401(k)—to either get ahead of the proposed 2023 Virginia requirement, or just to give your employees a jump start on saving—you should know that small businesses have options, with plans for varying budgets. Learn more about your retirement plan options.