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

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

Does your state require business owners to offer a retirement plan? More and more states are mandating retirement plans to ensure workers can save for retirement through automatic payroll contributions from their employers. In Illinois, offering a retirement plan is now mandatory if you own a business with 5+ employees and you have been in operation for at least two years. Eligible employers must either provide retirement benefits on their own or enroll their employees in the state program. The state program in IL is “Secure Choice”, which requires employers to automatically withhold a minimum of 5% of an employee’s compensation and place it in a qualified retirement plan. 

Specifics for the IL plan 

Employer registration deadlines 

The changes will go live in three waves: 

  • Wave 1: The enrollment deadline for employers with 25+ employees has already passed. 
  • Wave 2: The enrollment deadline for employers with 16-24 employees is November 1, 2022. 
  • Wave 3: The enrollment deadline for employers with 5-15 employees is November 1, 2023. 

Additional information 

  • Employers who do not comply with the Illinois Secure Choice Savings Program Act will be subject to fines and penalties as described in 820 ILCS 80/85. Enforcement for non-compliant employers with 25 or more employees will begin in 2022. 
  • The first year of non-compliance penalty is $250 per employee. 
  • The second year of non-compliance penalty is $500 per employee. The years need not be consecutive for penalties to apply.

Does my state mandate a retirement plan? 

More than 30 states have considered enacting state-mandated retirement plan legislation. 14 of them have passed legislation for state-sponsored retirement plans. Program mandates, structure, and roll-out vary, so be sure to understand how (and if) this applies to you and your company. 

Click on each state to learn more about their plan. 

  1. California 
  2. Colorado 
  3. Connecticut 
  4. Illinois  
  5. Maine 
  6. Maryland 
  7. Massachusetts 
  8. New Jersey 
  9. New Mexico 
  10. New York 
  11. Oregon 
  12. Vermont 
  13. Virginia 
  14. Washington 

Additionally, Arizona, Arkansas, Idaho, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, Utah, West Virginia, Wisconsin, and Wyoming have all introduced legislation but haven’t finalized if or when they will offer plans. 

I’m a small business owner – what’s my best option?

In this tight labor market, a good benefits package helps you compete for talented workers. A Simple IRA (SavingsIncentiveMatchPLan forEmployees) is a great “first” option for small business owners who want to start offering retirement benefits.It is not as expensive as offering a 401K to the employee, and it’s easy to maintain from a compliance standpoint. As a result, it takes less work for the small business owner to maintain it.  

SIMPLE IRA plans: 

  • Can provide a significant source of income at retirement by allowing employers and employees to set aside money in tax-deferred retirement accounts. The employee would not have to pay taxes on the increase of their investments, but would pay taxes when they withdraw money. 
  • Do not have the start-up and operating costs of a conventional retirement plan. 
  • Are available to any small business with 100 or fewer employees. 
  • Are easy and inexpensive to set up and operate by using Form 5304-SIMPLEPDF,Form 5305-SIMPLEPDF, a SIMPLE IRA prototype or an individually designed plan document. 
  • Do not have a filing requirement for the employer. 

Here’s how contributions work for a SIMPLE IRA: 

  • The employer is required to contribute each year. This contribution is either a: 
    • Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or
    • 2% nonelective contribution for each eligible employee 
      • Under the “nonelective” contribution formula, even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation up to the annual limit of $305,000 for 2022; $290,000 for 2021; $285,000 for 2020 (subject tocost-of-living adjustmentsin later years) 
  • Employees may elect to contribute to the plan.
  • Any employee (including a self-employed individual) may participate if they earned at least $5000 in compensation during any 2 previous years, and they expect to receive at least $5000 during the current calendar year. See theparticipation rulesfor details. 
  • The employee is always 100% vested in (or, has ownership of) all SIMPLE IRA money 
  • For 2022, annual employee contributions: 
    • are limited to $14,000* 
    • for employees age 50 or over, a $3,000 “catch-up” contribution is also allowed* 
    • *Each employee’stotal contributions are limitedand subject to annualcost-of-living-adjustments. If you miscalculated a participant’s contribution, find out how you cancorrectthis mistake.

How do I set up a SIMPLE IRA Plan? 

It’s pretty easy! There are three steps to establishing a SIMPLE IRA plan. 

  1. First, complete a written agreement to provide benefits to all eligible employees
    • You can use Form 5304-SIMPLE PDF or Form 5305-SIMPLE PDF to set up a SIMPLE IRA plan. Each form is a model Savings Incentive Match Plan for Employees (SIMPLE) plan document.
    • Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions.
    • Use Form 5305-SIMPLE if you will deposit all SIMPLE IRA plan contributions at an employer-designated financial institution.
  2. Next, give employees certain information about the agreement, such as notifying them before the beginning of the election period about options/changes/etc.
  3. Last, set up an IRA account for each employee, where all contributions to the plan must go.

If your business is registered in a state that requires employers to provide a retirement plan, you do have good options. For instance, you can go with the state plan, a traditional 401(k) plan, or the SIMPLE IRA Plan. Even if you are NOT required to provide the plan, it may make good business sense to do so. Who doesn’t want to be more competitive in today’s tight job market? Plus, your employee will thank you – even if they have to put off being young until they can retire!

Angie Noll
angien@reconciledsolutions.net