As far as state-mandated retirement plans go, employers are required to offer all of their employees access to a retirement savings plan or opportunity to save money, but the mandate is only to offer a state-specific plan; you have the freedom to opt for whichever one you think will be of the most benefit for you and your company.
But how exactly do state-mandated retirement plans work?
While programs can vary significantly – and some have traditional IRAs – most of them do feature Roth IRAs, in which taxes on contributions are paid by employees today, providing them with tax-free income that they can access when they are of retirement age.
What do employers need to know about state-mandated retirement plans?
In most instances, employers of five or more and who aren’t currently offering employees a retirement plan or access to one, must take part in the scheme, but if you’re already offering a plan, you may be able to register for an exemption online through your state.
What do employees need to know about state-mandated retirement plans?
Depending on which state you work in, enrolment for new hires after 30 to 60 days takes place automatically, and in general, you will have 3 to 5% of your paycheck deducted. However, employees are able to opt-out of a retirement plan as and when they wish to, and are able to alter the amount they contribute, too.
Can a business face penalties if it fails to adhere to a state mandate?
If your business fails to comply with a state mandate, it may well face stiff penalties, although these can vary from state to state, and each one will have a different set of regulations. To avoid facing such penalties, carry out some research using your state’s website, so that you can be clear on exactly what’s expected of you as an employer.
Which should you choose: a state-mandated retirement plan or that of an independent provider?
Generally speaking, state-mandated retirement plans can be somewhat rigid in their design, while in the vast majority of instances, programs that are employer-sponsored tend to offer a good deal more flexibility. That said, a lot of state retirement plans don’t have any costs upfront, while traditional ones often have administrative fees associated with them.
State-mandated retirement plans typically place a limit on the amount employees are able to put towards their nest egg, too, with contribution limits that have been set at $6,000 annually, by the federal government. Compare that to some plans from independent providers offering 401(k)s in which as much as $20,500 can be contributed each year, and the prospects for retirement over the long-term, may look rosier for employees.
In conclusion, a plan from an independent provider may cost employers less to maintain, and may also offer greater value in the long term. However, it pays to research your options carefully, as not all providers offer the same options or cost the same.
To explore your retirement program options in more detail as an employer, reach out to a payroll provider who can offer you a non-biased view of what’s available, and help you choose the right one for you and your employees.