Many states now require businesses to give their workers access to a retirement savings vehicle. See what these mandates may mean for your small business and employees.
Over the past few years, many states have begun to require that workers have access to a retirement savings vehicle. In Oregon, for instance, businesses with 20 or more employees were required to enroll in a state-mandated retirement program back in 2018. By 2019, that requirement applied to businesses with five to 19 employees. And in 2023, businesses with one to four employees are also expected to comply.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”. In 2019, the Center for Retirement Research at Boston College estimated that Americans were facing a retirement savings deficit of $7.1 trillion.4 Since then, economists believe the shortfall has become more severe.5
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.6 Furthermore, workers are 20 times more likely to save for retirement if workplace savings are automatic.6
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)7. For instance:
- Employees in these programs will be capped at the IRA contribution limits of $6,500 or $7,500 for employees aged 50 or older8
- 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 years9