Retirement Mandates: State-Run vs Employer-Sponsored Plans 

More states are passing legislation requiring organizations to provide employee retirement benefits in the form of either an employer-sponsored retirement plan or a state-run plan. Even if your organization's state does not have a retirement plan mandate, we only see this trend rising. Here's what employers need to know about state-mandated retirement plans and how to prepare for upcoming legislation changes. 

The Rise of State-Run Retirement Plans in the U.S.  

In 2016, California began mandating that employers who meet certain requirements must offer their employees an employer-sponsored retirement plan or offer a state-run plan. Other states soon followed suit and continue to do so; as of October 2024, 12 states have actively mandated retirement plans in place, and more than 20 states have proposed legislation for similar plans. 

What Are State-Mandated Retirement Plans?  

State-mandated retirement plans require eligible employers to offer employees a retirement savings option. These plans are typically state-sponsored and often take the form of Roth Individual Retirement Accounts (IRAs). Employers can either enroll their employees in the state program or provide a qualifying alternative, such as a 401(k) plan.  

Key Differences Between State-Run and Employer-Sponsored Retirement Plans  

State-mandated plans typically involve automatic payroll deductions into Individual Retirement Accounts (IRAs) and are designed to be simple for employers and employees. The state oversees the program, handling the management and administration, while employers are responsible for facilitating contributions.  

The rules surrounding state-run retirement plans differ from state to state, but they are generally less costly and have a lower administrative burden for employers. However, state-run retirement plans are more restrictive than employer-sponsored plans; state-run plans offer fewer investment options, lower employee contribution limits, and do not permit employer contributions. 

Employer-sponsored plans provide more flexibility and higher contribution limits but come with higher administrative responsibilities and costs for employers. Employers may choose to customize employer-sponsored retirement plans, and in addition to employee payroll deductions, many employers make profit-sharing contributions to reduce their tax liability. Employers can also require employees to have a certain level of service before participating in the plan, and they can choose how to invest the plan's assets, the type of plan, and the type of contribution. Employers with an existing ERISA-qualified retirement plan do not need a state-sponsored one. 

Why Business Owners Need to Prepare for State Mandates  

More states are passing legislation mandating that employers offer employer-sponsored retirement or state-run plans. The requirements for employers differ vastly from state to state, and some plan features may vary by state, so it's vital that employers stay on top of past and pending legislation to determine if they will be affected.  

Compliance Considerations 

State-run plans are based on where an employee lives, not where the organization is located. Organizations with employees in multiple states must comply with differing state requirements, resulting in a significant administrative burden. While organizations with employer-sponsored plans generally have a third-party administrator helping with state compliance requirements, employers offering state-run retirement plans are responsible for monitoring requirements to stay compliant. In addition, employers must watch their employee headcount as they grow so they don't inadvertently cross the employee threshold required to participate in the retirement plan mandates.  

How to Choose the Right Retirement Plan for Your Business 

Choosing the right type of retirement plan for your organization starts by discussing your goals and what you're trying to accomplish, whether that be cash flow, tax deductions, or providing additional employee benefits, and then determining what makes the most sense for your situation. For example, offering a state-run retirement plan may be a good option for a new small business without the cash flow to support contributions. 

Next Steps for Business Owners: Preparing for the Future 

State-run plans are coming, so it's essential for employers to follow past and pending legislation to stay informed and prepared for changes in legislation that may affect them. Working with a retirement plan consultant who is well-versed in state-mandated retirement plans and their intricacies can help employers lighten their administrative burden and stay compliant with state regulations. If you have questions about your retirement plan or need assistance, please feel free to reach out to us using the contact form below.