401(k)

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

More and more states are mandating that workers have access to a retirement savings vehicle. See what these requirements may mean for your business and your employees.

Many states now require businesses to give their workers access to a retirement savings vehicle. See what these mandates may mean for your small business and employees.

 

Over the past few years, many states have begun to require that workers have access to a retirement savings vehicle. In Oregon, for instance, businesses with 20 or more employees were required to enroll in a state-mandated retirement program back in 2018. By 2019, that requirement applied to businesses with five to 19 employees. And in 2023, businesses with one to four employees are also expected to comply.1

 

Other states have since followed suit—including California, Colorado, Connecticut, Illinois, Maryland, Massachusetts and Washington—while still others have passed legislation that is simply awaiting implementation.2

 

If you are a small business owner, this wave of legislation may affect you directly, as several of these new laws apply to employers with five or fewer employees.3 If your small business operates in a state that now mandates access to retirement benefits, you may need to automatically enroll your employees into an Individual Retirement Account (IRA) or another qualifying private plan. This explains why these plans are sometimes called “auto-IRAs”.

 

Depending on where your business operates, there are specific retirement plan adoption deadlines that you will be required to meet to continue operating legally and avoid potential penalties.

 

Why States are Sponsoring Retirement Programs

To understand why more states are enacting mandatory retirement plans, it may be helpful to consider what has been called the “retirement crisis”. In 2019, the Center for Retirement Research at Boston College estimated that Americans were facing a retirement savings deficit of $7.1 trillion.4 Since then, economists believe the shortfall has become more severe.5  

 

State-mandated retirement plans have consequently been introduced to address these growing concerns around the American retirement gap. Employers are being asked to play a role in the programs because research shows that Americans are 15 times more likely to save for retirement when they can do so at work.6 Furthermore, workers are 20 times more likely to save for retirement if workplace savings are automatic.6

 

Some Things to Know About State-Mandated Auto-IRAs

State-mandated retirement plans are designed to help employees save for their post-career lives. In essence, they allow employers who do not currently offer a workplace retirement plan to enroll employees into a state-sponsored program.

 

The majority of state-mandated retirement plans are structured as Roth IRAs (such as those in Connecticut, Colorado, California and Illinois)7. For instance:

 

  • Employees in these programs will be capped at the IRA contribution limits of $6,500 or $7,500 for employees aged 50 or older8

 

  • While contributions to a Roth IRA are not tax-deductible, withdrawals during retirement may be tax free as long as the account holder is older than 59½ and the account has existed for more than five years9
people greeting each other

Retirement Plan Alternatives

Although these state-mandated auto-IRAs might be the right solution for some employers, your employees may benefit from a different retirement plan. Some states are allowing for that flexibility by allowing employers to choose the program that’s right for them. Alternatively, employers may be able to opt out of the state-mandated programs by setting up a private retirement plan, such as an employer-sponsored 401(k) plan.

 

To help you make an informed decision when fulfilling your state’s requirements, it can be useful to consider some differences between an auto-IRA and a traditional 401(k):8

 

  • In 2023, 401(k) contribution limits are $22,500 (or $30,000 for those older than 50), which are considerably higher than IRA contribution limits
 
  • While Roth IRAs have income limits (for 2023, $153,000 for single filers; $228,000 for married people filing jointly), there is no income limit for your employees to contribute to a 401(k)
 
  • While 401(k) contributions may be tax-deductible, withdrawals are generally taxed as ordinary income

 

 

Providing a 401(k) plan to your employees may have some benefits. Contribution limits are higher, there are no income restrictions on contributing and you can potentially incentivize your employees to save even more by providing a match.

 

Plus, a match may provide your company with a competitive advantage: According to several recent research reports, 60% of workers say they are more likely to stay in their current job if they have an employer-sponsored retirement plan10 and 62% say that a 401(k) employer match is key to them achieving their retirement goals.11

 

Meeting State Mandates

As state-mandated retirement savings vehicles become an increasingly popular legislative priority, small businesses are being called upon to help improve the financial future of their employees by providing retirement benefits. Employers may benefit as well by leveraging these plans to help attract and retain industry talent. However, as these new rules may be complicated, employers may benefit from speaking with a legal or tax advisor to learn how to comply.

 

Morgan Stanley at Work offers small business 401(k) services to help you and your employees reach their retirement plan goals while fulfilling your state’s retirement savings plan mandate. Furthermore, working with a provider like Morgan Stanley also gives your employees access to a Financial Advisor, who can provide educational resources to help your employees gain even more confidence on their retirement journey.

 

Talk to a Morgan Stanley Financial Advisor to learn more about your options to help you determine what makes the most sense for your business and team. You should also consult with your legal and tax advisors.

Related Stories

Discover more unique perspectives to motivate your employees and fuel your business.

Disclosures

Footnotes:

1 Human Interest. Retirement plan laws in Oregon: The basics of OregonSaves. 2023

2 ADP. State-mandated retirement plans. 2023

3 Human Interest. What is a state-sponsored retirement plan? 2023

4 Center for Retirement Research at Boston College. How Would More Saving Affect the National Retirement Risk Index? 2019

5 Bloomberg.  America’s $7 Trillion Retirement Crisis Is Only Getting Worse. 2022

6 AARP. Studies Spotlight Racial, Ethnic Gaps in Retirement Savings. 2022

7 Vestwell. State Retirement Program Mandates: What States Have Them and When Do They Take Effect? 2023

8 Investopedia. Roth IRA vs. 401(k): What’s the Difference? 2023

9 IRS. Roth IRAs. 2023

10 Plan Sponsor. Today’s Employees Expect Retirement Plan Benefit in ‘New Savings Paradigm’. 2023

11 CNBC. 62% of workers view 401(k) employer match as key to reaching retirement goals. 2022

 

Disclosures:

When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.

This material may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the material refers to website material of Morgan Stanley Wealth Management, the firm has not reviewed the linked site. Equally, except to the extent to which the material refers to website material of Morgan Stanley Wealth Management, the firm takes no responsibility for, and makes no representations or warranties whatsoever as to, the data and information contained therein. Such address or hyperlink (including addresses or hyperlinks to website material of Morgan Stanley Wealth Management) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through the material or the website of the firm shall be at your own risk and we shall have no liability arising out of, or in connection with, any such referenced website. Morgan Stanley Wealth Management is a business of Morgan Stanley Smith Barney LLC.

Morgan Stanley at Work services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley.

© 2023 Morgan Stanley Smith Barney LLC. Member SIPC.

CRC#5950523 (09/2023)

View Disclosures Close Disclosures