Understanding State-Mandated 401(k) and Retirement Plans

There are a number of government-based areas that may have a major impact on your company's HR and related practices, and one great example that's becoming more common around the country in recent years is the use of state mandates for 401(k) and other forms of retirement planning. More and more states have begun adding such mandates to their laws, and this is worth considering whether or not your state is currently one of them.

At Integrated Companies, we offer a huge range of employer HR solutions meant to make this entire realm simpler and easier, including things like benefits packages, worker's compensation and more. Why are more and more states mandating these sorts of plans, what are some examples of recent such mandates, and what should our Utah clients be aware of if such requirements ever come to this state -- or if they also operate in others where such laws are already in place? Let's take a look.

Basics on State-Mandated Retirement Plans

State-mandated requirement plans are becoming more and more common, and generally offer employers two basic options for compliance:

  • Enrolling employees in a state-sponsored program: For many employers, this is the more attractive of the two options. The state takes on much of the investment risk and fiduciary responsibility for managing the program, which can save businesses a great deal of money. Employees are also typically able to keep their accounts if they move to another state.
  • Creating a private retirement plan that meets certain requirements: This option gives employers more control over the design and management of their retirement plans, but also comes with greater fiduciary responsibility and investment risk.

Why It's Becoming More Common

There's a simple reason behind the increase in state-mandated retirement plans: There's a huge retirement savings gap in the US, and it's only growing. Most working households have no retirement savings at all, and even those that do have an average of just $3,000 saved. This leaves tens of millions of Americans facing the very real possibility of a future in poverty.

In response to this crisis, many states have decided to take action by mandating that employers offer retirement savings plans to their workers. The hope is that by making it mandatory for employers to offer retirement savings opportunities, more workers will take advantage of them and begin setting aside money for their future.

Example of a Recent State-Level Mandate

One of the most recent such mandates to take effect came in one of Utah's key neighbors to the east. Back in 2020, Colorado passed the Colorado SecureSavings Program, one meant to address nearly a million workers in the state who have no retirement plan sponsored by their state. This plan just kicked in on a pilot basis starting in October of 2022, and will be a full-on requirement for all employers in the state in 2023.

This program, like many others in different states, allows employees to contribute to a Roth Individual Retirement Account (IRA) directly from their paychecks. The money is then deducted before taxes, meaning that employees can save on their taxes now and enjoy tax-free withdrawals in retirement. Employers are not required to match employee contributions, but they are allowed to do so if they choose.

On top of this, like in many other states, this law also involves access to tools and resources to help employers set up and administer their plans -- and to help employees understand their options and meet their goals.

Importance of Reading the Fine Print

Requirements for state-mandated retirement plans vary quite significantly between jurisdictions, and this means that any company doing business in multiple states needs to be very careful to ensure compliance. This is doubly true for companies with employees who regularly travel across state lines for work, as they may need to comply with the laws of multiple states.

For example, some states have different requirements for part-time and full-time employees, while others do not. Additionally, some states exempt certain types of businesses from their requirements -- those that are under a certain size, for instance, or those that already offer retirement plans to their employees. Others exempt certain types of workers, such as those who are under the age of 18 or who have only been employed for a short period of time.

Still other states have different deadlines for when employers must begin offering retirement savings plans to their employees. For all of these reasons, it's very important to read the fine print of any state-level retirement mandate that may apply to your business.

Penalties for Not Complying

There are varying penalties for employers who do not comply with these sorts of state-mandated retirement plans. Some states may not impose any penalties for the first year or two of the program in order to give employers time to get up to speed. After that, though, employers may be subject to fees or fines if they do not offer a qualifying retirement savings plan to their employees.

Other States With Current or Pending Mandates

There are several other states that already have these laws in place, either pending implementation or with full implementation already in place. Those in this former category include Maine, New Jersey, New Mexico, Virginia and Vermont; those in the latter include California, Connecticut, Illinois, Maryland, Massachusetts, Oregon and Washington. As we noted above, requirements vary quite a bit from state to state, so it's important to check the specific details of any that may apply to your company.

For more on this, or to learn about any of our HR compliance and other employer services, speak to our team at Integrated Companies today.