401(k)

Does Your State Require Your Small Business to Offer a Retirement Plan?

Many states are mandating that workers have access to a retirement savings vehicle. See what these requirements may mean for your business and your employees.

Over the past few years, many states have begun to require that workers have access to a retirement savings vehicle. Oregon was the first to the race, mandating that employers offer retirement accounts in 2017.1

 

Other states have since followed suit—including California, Colorado, Connecticut, Illinois, Maryland, Massachusetts and Washington—while still others have passed legislation that is simply awaiting implementation.2

 

If you are a small business owner, this wave of legislation may affect you directly, as several of these new laws apply to employers with five or fewer employees.3 If your small business operates in a state that now mandates access to retirement benefits, you may need to automatically enroll your employees into an Individual Retirement Account (IRA) or another qualifying private plan. This explains why these plans are sometimes called “auto-IRAs”.

 

Depending on where your business operates, there are specific retirement plan adoption deadlines that you will be required to meet to continue operating legally and avoid potential penalties.

 

Why States are Sponsoring Retirement Programs

To understand why more states are enacting mandatory retirement plans, it may be helpful to consider what has been called the “retirement crisis”. A combination of factors including insufficient savings, higher inflation, longer life expectancies and rising healthcare costs have contributed to this crisis. In a study at NCOA and the LeadingAge LTSS Center at UMass Boston researchers found that 80% of households with older adults are financially struggling or at risk of falling into economic insecurity.4

 

State-mandated retirement plans have consequently been introduced to address these growing concerns around the American retirement gap. Employers are being asked to play a role in the programs because research shows that Americans are 15 times more likely to save for retirement when they can do so at work.5 Furthermore, worker participant rates jump to 94% in plans with automatic enrollment vs 67% without it.5

 

Some Things to Know About State-Mandated Auto-IRAs

State-mandated retirement plans are designed to help employees save for their post-career lives. In essence, they allow employers who do not currently offer a workplace retirement plan to enroll employees into a state-sponsored program.

 

The majority of state-mandated retirement plans are structured as Roth IRAs (such as those in Connecticut, Colorado, California and Illinois)2. For instance:

 

  • Employees in these programs will be capped at the IRA contribution limits of $7,500 or $8,600 for employees aged 50 or older.

 

  • While contributions to a Roth IRA are not tax-deductible, withdrawals during retirement may be tax free as long as the account holder is older than 59½ and the account has existed for more than five years.6

Retirement Plan Alternatives

Although these state-mandated auto-IRAs might be an appropriate solution for some employers, your employees may benefit from a different retirement plan. Some states are allowing for that flexibility by allowing employers to choose the program that best fits their business. Alternatively, employers may be able to opt out of the state-mandated programs by setting up a private retirement plan, such as an employer-sponsored 401(k) plan.

 

To help you make an informed decision when fulfilling your state’s requirements, it can be useful to consider some differences between an auto-IRA and a traditional 401(k).6.

 

  • In 2026, 401(k) contribution limits are $24,500 (or $32,500 for those older than 50 or $35,750 for those age 60-63 years old), which are considerably higher than IRA contribution limits.
     
  • While Roth IRAs have income limits (for 2026, $153,000 single filers; $242,000 for married people filing jointly), there is no income limit for your employees to contribute to a 401(k).
 
  • While 401(k) contributions may be tax-deductible, withdrawals are generally taxed as ordinary income 

 

Providing a 401(k) plan to your employees may have some benefits. Contribution limits are higher, there are no income restrictions on contributing and you can potentially incentivize your employees to save even more by providing a match.

 

Plus, a match may provide your company with a competitive advantage: According to several recent research reports, more than half (53%) of workers say they are more likely to stay in their current job if they have an employer-sponsored retirement plan.7

 

Meeting State Mandates

As state-mandated retirement savings vehicles become an increasingly popular legislative priority, small businesses are being called upon to help improve the financial future of their employees by providing retirement benefits. Employers may benefit as well by leveraging these plans to help attract and retain industry talent. However, as these new rules may be complicated, employers may benefit from speaking with a legal or tax advisor to learn how to comply.

 

Morgan Stanley offers small business 401(k) services to help you and your employees reach their retirement plan goals while fulfilling your state’s retirement savings plan mandate. Furthermore, working with a provider like Morgan Stanley also gives your employees access to a Financial Advisor, who can provide educational resources to help your employees gain even more confidence on their retirement journey.

 

Talk to a Morgan Stanley Financial Advisor to learn more about your options to help you determine what makes the most sense for your business and team. You should also consult with your legal and tax advisors.

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Footnotes:

1 401GO. Is Offering a 401(k) Mandatory?. 2024.

2ADP. State-mandated retirement plans. 2025.

3 Human Interest. What is a state-sponsored retirement plan? 2025.

4 NCOA. Addressing the Nation's Retirement Crisis: The 80%. 2025.

5 AARP. Employer-Facilitated Retirement Savings. 2025.

6 IRS. Types of retirement plans. 2025.

7 401K Specialist. Solid Benefits (Led by Health, Retirement) Keep Most Employees at Current Job. 2025.

 

Disclosures:

When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.

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