State-mandated vs Employer-sponsored Retirement Plans
Retirement has become an increasingly popular topic among state and federal legislatures in the recent years. While 72% of the American workforce has access to a retirement plan, only 56% are enrolled in a plan. Studies say that 22% of Americans have less than $5,000 saved for retirement. Further, 15% have nothing saved at all. For these reasons, many states have passed legislation to form a state-sponsored retirement plan. These plans are different than those that an employer could offer. Let’s take a look at state-mandated vs employer-sponsored retirement plans.
State-mandated retirement plans
At this time, 11 states have passed legislation to implement a state-sponsored retirement plan. These states include:
- New Jersey
- New York
These states require employers of a certain size to either offer an employer-sponsored retirement plan or have their employees enrolled in the state-sponsored retirement plan. While each state’s plan is unique, there are many similarities across the states. For the purpose of this article, any requirements listed are those of the Maine State Retirement Program that will be implemented in 2023. Be sure to check with your state for its’ requirements.
The state-sponsored retirement plan for Maine, and most states, will be set up as a Roth IRA. This means that contributions made by employees into the state retirement plan are made as a post-tax deduction. Taxes are taken from an employee’s income before their contributions are put into the retirement account. The benefit of a Roth IRA is that when money is withdrawn during retirement, taxes are not taken from these withdrawals.
There are both pros and cons to state-sponsored retirement plans for employees and employers. Check out the below tables to learn more or download our infographic.
|Low administrative costs.
|Penalties for non compliance.
|Less administrative work than other plans such as 401(k)s,
|Does add administrative work like tracking and reporting contributions, eligibility, etc.
|No requirement to match employee contributions.
|No flexibility to choose plan options.
|Access to a retirement plan.
|Automatically enrolled in plan unless they choose to opt out.
|No taxes withheld once withdrawals are made.
|Taxes taken on income prior to contributions being withheld.
|Often times, employers do not provide a match on employer contribution.
|Lower contribution limits ($6,500 or $7,500(over 50) in 2023).
Employer-sponsored retirement plans
An employer-sponsored retirement plan is a type of fringe benefit offered to eligible employees by an employer. Businesses have an array of retirement plan options available to them. Any of the following plans would satisfy the requirement of the Maine Retirement Savings Program and keep a business in compliance.
- 408(k) SIMPLE IRA
- 457(b) plan
- SEP IRA
The two most common retirement plans, especially for those businesses under 100 employees, are Traditional 401(k)s and SIMPLE IRAs. Each type of retirement plan has its’ own advantages and disadvantages. It is important for a business to consider everything that goes along with each type of plan.
Offering an employer-sponsored plan, as opposed to a state-sponsored plan has pros and cons for each the employer and employee. Let’s take a look.
|A great benefit to help attract and retain top talent.
|Some plans come with high administrative costs.
|Can choose the plan that works best for their employees and business situation.
|Some plans come with high administrative tracking and reporting.
|Potentially $16,500 in tax credits in the first 3 years of a new plan.
|Potential annual compliance testing.
|Secure Act 2.0 allows employers:
Years 1 & 2: 100% tax credit for employer contributions up to $1,000 per employee.
Year 3: 75% tax credit for employer contributions up to $1,000 per employee.
Year 4: 50% tax credit for employer contributions up to $1,000 per employee.
5th Year: 25% tax credit for employer contributions up to $1,000 per employee.
|Usually employers contribute/match some portion of employee contributions.
|Comply with state requirements.
|Access to a retirement plan.
|Generally taxes are taken when withdrawals are made in retirement.
|Have more flexibility on how much to contribute.
|Do not have to participate.
|Much higher contribution amounts.
|Depending on plan, contributions can be made on a pre-tax basis.
|Employers generally match a portion of contributions.
|May be able to take a loan on their account.
Which type is right for my business?
There is no retirement plan that fits the needs of every business. Take a look at your business’ financial situation and your employee’s needs. First, explore your options. Whether it be your payroll company or your trusted financial advisor, focus on trustworthy, reputable companies to help your company with retirement plans. At Paper Trails, we work with many local financial advisors and partners with several direct 401(k) providers; we would be happy to make a recommendation for your business.
Next, make a decision. Once you have chosen a provider, evaluate your options and decide on which type of plan, whether your own or the State’s, makes the most sense for your business.
And finally, communicate your decision to your employees. Whatever plan you choose, provide plan information to your employees so they can make informed decisions about investing in their future.
You can download our Maine Retirement Saving Program Guide to Compliance here.