Does Your Business Require A Mandatory Employee Retirement Plan?

The United States backbone of opportunity is built in it's thriving small business community.  Running a small business is the "American Dream" to creating wealth and with that comes certain responsibilities and requirements that business owners must adhere to. One such requirement is providing a retirement fund for small business employees.

Does your State require a Small Business Retirement Plan for your employees? 

Here's a current list of States that have a mandated program.

1. OregonSaves: Oregon was the first state to implement a state-sponsored retirement savings program. OregonSaves requires employers with at least one employee to facilitate employee contributions to a state-run retirement savings program.

2. Illinois Secure Choice: Illinois launched its Secure Choice program in 2018, requiring employers with at least 25 employees to offer a retirement savings plan or enroll in the state-run program.

3. Maryland's Maryland Small Business Retirement Savings Program: Maryland's program, which began in 2020, requires businesses with at least 10 employees that do not offer a retirement plan to automatically enroll their employees in a state-run program.

4. Connecticut's Retirement Security Program: Connecticut's program, which began in 2018, requires businesses with at least five employees to either offer a retirement plan or enroll in the state-run program.

5. Colorado Saves: Colorado's program, launched in 2019, is available to all Colorado workers, whether or not their employer offers a retirement savings plan. Workers can opt-in to the state-run program and contribute to an individual retirement account.

These State enacted Retirement Savings Programs vary in their requirements and implementation, however aim to expanding access to retirement savings options for workers. Retirement Savings Programs are for employees who do not have access to a large company-sponsored retirement plan. These programs require that qualifying employers offer a Retirement Savings Plan to their employees or enroll the employee into the State's retirement program.

The Retirement  Savings Programs are designed to be simple and easy to use for both employers and employees. Employers who choose to enroll in the program will be responsible for facilitating employee contributions through payroll deductions and providing basic information about the program to their employees.

Employees who participate will have the option to choose how much they want to contribute from their paycheck, and their contributions will be automatically deducted from their pay and invested in a diversified portfolio. Depending on the State, employees can also opt-out of the program if they choose.

Small businesses that do not wish to enroll in the state program can choose to offer their own retirement plan, such as a 401(k) or IRA, as long as the plan meets certain criteria set forth by the state. These criteria include offering automatic enrollment and escalation, providing low-cost investment options, and ensuring that plan fees are reasonable.

What are the Risks for not complying?

Employers who do not comply with a mandated Retirement Savings Program requirements may face penalties and legal consequences. Specifically in California employers with five or more employees who do not offer a retirement savings plan to their employees, and who do not enroll in the Secure Choice program, may face the following consequences:

1. Fines: Employers who fail to comply with the program may be subject to fines of $250 per eligible employee.

2. Legal action: The state may take legal action against employers who fail to comply with the program, including seeking injunctive relief and/or monetary damages.

3. Employee claims: Employees may also file a claim against their employer for failing to offer a retirement savings plan as required by the State. Employees may be entitled to recover unpaid wages and other damages.

In addition to the potential legal and financial consequences, employers who do not offer a retirement savings plan may also face risks related to employee satisfaction, retention, and recruitment. Without a retirement plan, employees may be less satisfied with their job and more likely to leave for a company that offers a retirement plan. Additionally, potential job candidates may choose to work for competitors who do offer a retirement savings plan.

Ultimately, employers who do not comply with the Secure Choice Retirement Savings Program may face legal and financial consequences, as well as risks related to employee satisfaction and retention. It is important for employers to consult with a financial advisor or retirement plan specialist to determine the best retirement savings options for their business and employees, and to ensure they are meeting all legal requirements.

What are the Benefits for providing a Retirement Savings Program?

There are benefits to offering a retirement savings plan to employees, including attracting and retaining top talent, increasing employee satisfaction and loyalty, and potentially reducing turnover costs. Additionally, employers who offer a plan may be eligible for tax incentives and credits.

Employers who offer a Retirement Savings Program may be eligible for tax benefits, including a federal tax credit and a state tax deduction.

1. Federal tax credit: Employers who participate in a Retirement Savings Program may be eligible for a federal tax credit of up to $500 per year for the first three years of participation. This tax credit is available to businesses with 100 or fewer employees who earn at least $5,000 per year and who contribute at least $25 per year per participating employee.

2. State tax deduction: employers who offer a a Retirement Savings Program, may be eligible for a state tax deduction. As an example California employers may be able to deduct up to $500 per year for the first four years of participation in the program.

In addition to these tax benefits, offering a retirement savings plan to employees may also result in reduced payroll taxes, as employee contributions are made on a pre-tax basis.

It is important to note that tax laws and regulations can change over time, and employers should consult with a tax professional or financial advisor for guidance on their specific situation. However, the tax benefits of offering a retirement savings plan can offset the costs associated with implementing and administering a plan, and may make it more feasible for small businesses to offer this important benefit to their employees.

Getting Good Advice

It's important for small business owners to familiarize themselves with their state's retirement fund requirement and determine the best option for their business and employees. Employers should consult with experts to ensure they are in compliance and providing the best retirement plan for their employees. A financial advisor or retirement plan specialist can ensure they are meeting all legal requirements and providing a retirement plan that meets the needs of their workforce.  Click HERE if you wish to speak with an expert on the matter.