Why It’s Time to Learn About State-Mandated Retirement Plans

Many small businesses find that providing access to a retirement savings plan is an effective way to attract and retain employees. In fact, when job seekers are considering their next career opportunity, retirement programs typically appear at the top of the list of benefits that employees want most.

At the same time, businesses may not be aware that a growing number of state-mandated retirement plans require employers to offer their workers a way to save for post-work life.

For clients who may not have the time to keep up with changing state laws, proactively broaching this topic is an opportunity to nurture your customer base and expand your services.

In this guide, we’ll discuss why it's a good idea to get familiar with these plans, the basics of how they work, and how presenting retirement options to clients can help expand your firm’s services.

Why are state-mandated retirement plans becoming more common?

The Pew Charitable Trust estimates that nearly 56 million private sector workers are without access to a workplace retirement plan—that’s nearly half of the private sector workforce.

In addition, one in four Americans has no retirement savings to speak of. In response, states are beginning to take matters into their own hands, passing legislation to adopt automated savings programs.

Now that we better understand why these plans are gaining traction let’s find out where they are being introduced.

Where are these plans active?

As of August 2024, 19 states have active state-mandated retirement programs or those in the planning stages. Some plans are going into effect this year, such as Delaware EARNS.

Others have recently been signed into law, like the Rhode Island Secure Choice Savings Program, while legislation has been introduced in states including Alaska, Ohio, and Pennsylvania. You can also use this resource to find out more about the states that have mandates in place, with links to individual guides.

Next, let’s discuss what the plans typically entail.

How do state-mandated retirement plans work?

Though it varies by state, most state-sponsored plans stick with individual retirement accounts (commonly known as Roth IRAs). Once set up, employees pay tax upfront on contributions, the investment grows over time, and it generally provides tax-free income as individuals reach retirement age.

Some states have traditional IRAs where pre-tax contributions can be made. When you start to withdraw funds, the income can be subject to taxes.

In almost all states with programs, employees can opt out if they choose. Employers also have a choice between the state’s plan and working with a private carrier. Employers incur no costs and are prohibited from contributing to state-sponsored employee plans.

Which businesses do these programs impact?

As retirement plans differ where you do business, so do many of the requirements. For example, in California, all employers with one or more employees on the payroll have to offer access to the state-sponsored plan (CalSavers). On the other hand, the rules for RetirePath Virginia require employers with 25 or more employees to set up either the state plan or work with a private company. The takeaway? There are no national standard rules on employee size, so it's a good idea to do your own research.

Why can it make sense to discuss state retirement mandates with clients?

By keeping clients informed, you are not only providing a valuable service, but you also have the potential to open up new revenue streams for your firm.

Penalty prevention

Ignoring the rules, whether intentionally or by accident, is potentially costly for business owners. Each state’s regulations vary. For example, employers in Oregon can face penalties of up to $5,000 per calendar year for noncompliance.

In the first calendar year, if an employer in Illinois ignores their state mandate, they could face fines of $250 per employee. During year two? Penalties rise to $500 per employee. Communicating with clients can help them avoid unwanted fees. These figures can fluctuate, so it is best to check your state's website for more information.

Help clients grow

Even if the risk of noncompliance penalties is nonexistent, talking about retirement plans could be a way to help your clients take recruiting efforts up a notch. Most job seekers are looking for more than a paycheck, preferring employers that offer perks in addition to a competitive salary. If your clients are struggling to attract talent or thinking about building an employee benefits package, they may not know where to start. And because over 80% of small businesses consider their accountant to be a trusted advisor, who better to discuss this topic with? Your clients will appreciate plans that are also eligible for tax credits, which can help offset setup costs.

Forward-looking firm

OnPay’s research found that over 70% of accounting firms want to offer more retirement plan services to existing clients. Over a quarter of these respondents shared that employee benefits administration is the top service they want to offer.

By helping your clients figure out the retirement plan that works best for them, whether private or state-sponsored, you can open doors to administering other perks, including health and life insurance, while agreeing to billable fees that make sense for everyone.

Client compliance checker

Are you wondering if your clients are following all state rules and requirements? Use OnPay’s compliance checker.

State or private plans: Which should you discuss with your clients?

If you work with companies that are doing business where there is a mandate, it does not mean that they have to use the state’s plan. Here are some resources you can use to learn more about different savings types. This way, you’ll be ready to talk about the ins and outs of each one.

Traditional 401(k)

A traditional 401(k) plan allows employees to contribute pre-tax dollars from their salary through payroll deductions. Employers can opt to match these contributions, but it isn’t required. This plan type is subject to annual ADP and ACP nondiscrimination tests to ensure that all employees, including non-executives, have equal opportunity to participate in the retirement plan. More on 401k for small businesses.

Safe harbor 401(k)

A Safe Harbor 401(k) plan automatically satisfies most of the nondiscrimination testing mentioned above. It includes certain built-in elements that help employees save for retirement by requiring companies to contribute to their employees’ 401(k) accounts. Because more employees are encouraged to participate, the IRS offers employers “safe harbor” from certain nondiscrimination testing, avoiding the pitfalls of failing these tests.

Starter 401(k)

A new type of retirement plan is a starter 401(k), which has fewer compliance requirements but some trade-offs, like lower contribution limits. These plans are also exempt from Uncle Sam's administrative burden of compliance tests.

Create opportunities to consult beyond the basics

Discussing retirement savings plans can mean different things. On one hand, if you’re doing business where there’s a mandate in place (or one on the way), you can help your clients avoid compliance-related issues or potential fines. Moreover, if you are looking for opportunities to expand offerings, proactively discussing this topic can cement your reputation as a trusted advisor — and keep your clients on board for years to come.

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