The retirement landscape is changing. As pensions continue to disappear from the private sector and Social Security seems fragile, saving for retirement is becoming more and more important. This is especially true for employees at small and medium-sized businesses.
To adapt to these changes, states across the country are passing retirement legislation requiring businesses to offer retirement options for their employees. As of May 2023, 46 states have implemented a state-based retirement savings program, studied program options, or considered legislation. Today, there are nine states with active legislation and deadlines, including Colorado.
In 2020, Colorado introduced a retirement savings plan to help workers who don't have access to one through their employer.
The program offers a Roth Individual Retirement Account (IRA) to employees, but employers can opt for a qualified retirement plan like a 401(k) to meet state requirements instead. Deadlines for choosing one of these options are staggered based on a business's number of employees:
- Employers with 5-14 employees: June 30, 2023
- Employers with 50+ employees: March 15, 2023
- Employers with 15-49 employees: May 15, 2023
Colorado SecureSavings affects private-sector businesses with five or more employees that have been in business for at least two years. Businesses that already offer a qualified retirement plan are exempt from the program and can certify their exemption here.
Colorado SecureSavings offers an auto-enrollment Roth IRA(Auto-IRA). Employees will be automatically enrolled by their employers at a default contribution rate and have 30 days to opt out of the plan. Employees are able to log in and adjust their contribution rates as well as modify their investment choices once enrolled.
While there is no cost to employers for offering the plan, Colorado SecureSavings has an annual asset-based fee of approximately 0.32% for program users. Additionally, there is a $22 annual account fee charged ($5.50 per quarter) to the employee.3
Because Colorado SecureSavings is a Roth plan, taxes are taken out before they are added to the account, meaning contributions are not tax deductible. But distributions are tax-free if the distribution is considered qualified (the participant has reached age 59 ½ and has contributed to the Roth account for at least five years).4
State plan vs 401(k)
Businesses in states with retirement mandates have the option to exempt themselves from the state’s plan by offering another type of qualifying retirement plan.
According to the Colorado SecureSavings website:
“An employer-sponsored retirement plan includes a plan qualified under Internal Revenue Code sections 401(a) (including a 401(k) plan), qualified annuity plan under section 403(a), tax-sheltered annuity plan under section 403(b), Simplified Employee Pension plan under section 408(k), a SIMPLE IRA plan under section 408(p), or governmental deferred compensation plan under section 457(b). It does not include payroll deduction IRAs.”3
- Employee savings: In 2023, the IRS contribution limit for an IRA is only $6,500 ($7,500 if age 50 or over), while the limit for 401(k) deferrals is $22,500 ($30,000 if age 50 or over). This means employees aren’t able to save as much toward financial freedom with the state-run option.5
- Administrative responsibilities: State-run plans require employers to handle many administrative responsibilities, including manually sending employees’ contributions to the plan with each round of payroll. Private plans offer payroll integrations that automate the process for you as well as handle other administrative and compliance-related tasks.
- Cost: Colorado SecureSavings costs nothing for employers who offer the plan. While it may be free to run, the many administrative tasks that come with managing the plan can turn into a financial burden in terms of administrative man-hours.
What happens if businesses don’t comply?
Employers who fail to comply will face fines of up to $100 per eligible employee per year of noncompliance. These fines are capped at a maximum of $5,000 in a calendar year.2
Human Interest is here to help businesses across the country stay up-to-date and compliant with impending and current state-mandated legislation. Chat with our team about state mandates or other retirement topics.
Human Interest Inc. is an affordable, full-service 401(k) and 403(b) provider that seeks to make it easy for small and medium-sized businesses to assist their employees with investing for retirement. For more information, please visit humaninterest.com.
This content has been prepared for informational purposes only, and should not be construed as tax, legal, or individualized investment advice. Human Interest Inc. does not provide tax, legal, or individualized investment advice. Consult an appropriate professional regarding your situation. The views expressed are subject to change. In the event third-party data and/or statistics are used, they have been obtained from sources believed to be reliable; however, we cannot guarantee their accuracy or completeness.