States With Retirement Plan Mandates: Which States Have Them and What Do They Involve?

While employer-sponsored retirement plans are largely voluntary across much of the country, in some places that reality is changing.

In the absence of any federal laws requiring that employers offer retirement plans, a growing number of states are passing legislation mandating that businesses provide these types of benefits for employees.

While the number of states that already have such programs in place remains small at 16 states, the good news is that over the past decade, some 47 states have begun working on this issue, either taking steps toward adopting a mandated retirement program or introducing related legislation, which is substantial progress, according to Georgetown University’s McCourt School of Public Policy Center for Retirement Initiatives (CRI).

What’s more, with the 2023 legislative session underway, CRI is optimistic that several states will once again pursue legislative progress on state-facilitated retirement plans.

With these mandates becoming more common, it’s important to understand whether your business is impacted by such requirements and what steps are needed to comply. Here’s a closer look.

What is a state-mandated retirement plan and who is impacted?

In states where there are retirement plan mandates in place already, employers over a certain size typically must offer workers a retirement savings program of some type. Often, the mandates apply to businesses that have as little as three to five employees. 

In California, for instance, the state retirement program, CalSavers, mandates employer participation if you have five or more employees as of 2022. But that requirement drops to just one or more employees at the end of December 2025. To learn more, read our article about CalSavers programs.

Similarly, in Oregon, the state’s mandate currently applies to businesses with three to four employees, but as of July 2023, will apply if you have just one to two employees.

In such cases, businesses often have the option to adopt a private plan or an IRA program established by the state. Retirement plans offered by states are most often Roth IRAs, through which employees can make after-tax investments and the money grows tax-free. However, some states may offer traditional IRAs, which allow employees to make pre-tax contributions. 

Depending on the state, the legislative mandate may also stipulate that employees be automatically enrolled in this type of state IRA program 30 to 60 days after being hired if the company does not offer a retirement plan. However, employees can opt out of these plans if they choose.

It’s also worth noting that a few states with retirement program mandates take a different approach and offer a voluntary marketplace for retirement plans or voluntary open multiple employer plans (MEP). Under an MEP,  two or more employers (particularly small businesses) can join together and obtain better pricing by pooling administrative and fiduciary responsibilities into one pooled plan.

Penalties for non-compliance

Equally important to understand as a business owner, states with retirement plan mandates may charge steep penalties for not providing employees with access to a retirement plan. 

In California, for instance, the current guidelines stipulate that employers who have five or more employees and who do not offer a qualified retirement plan must enroll in CalSavers Retirement Savings Program. Employers that fail to do this are subject to a penalty of $250 per eligible employee for the first non-compliance notice and an additional $500 if the non-compliance continues another 90 days. 

However, penalties and requirements vary by state, so it’s important to do your research and understand the local laws.

Why are states adopting retirement plan mandates?

There’s a retirement savings crisis in the United States. A report from the Federal Reserve reveals that one in four Americans have no retirement savings. A separate report, this one from the Employee Benefit Research Institute (EBRI), found that the aggregate retirement savings shortfall for all U.S. households ages 35 to 64 as of January 1, 2020, was $3.68 trillion.

State-mandated retirement plans are an attempt to help address these types of troubling statistics. Oregon was the first state in the nation to start enrolling private sector employees in a state-operated retirement plan. The state initiated OregonSaves back in 2017, according to the Pew Charitable Trusts. Some of the other early leaders included California, which initiated CalSavers in 2019, and Illinois, which kicked-off its plan in 2018.

Which states already have retirement plan mandates?

The number of states actively considering mandated retirement plans is rapidly growing. During the 2022 legislative session, “at least 21 states had legislation to establish new programs, amend existing programs, or form study groups to explore their options,” according to Georgetown University’s McCourt School of Public Policy. By the end of last year’s legislative sessions, two more states had adopted mandated retirement programs—Delaware and Hawaii.

As of 2023, state-facilitated retirement programs have more than $839 million in assets. The states that have adopted state-mandated IRA programs of some form to date include:

Deciding whether to adopt a private plan or a state-plan

Businesses that operate in a state where retirement plans are mandated will need to decide whether to use the state-run plan or find an independent provider. Often, the best choice for your business will depend on your financial and administrative capabilities, as well as your short- and long-term goals.

State-run plans are inexpensive (they typically do not involve any upfront or set-up costs) and they also have minimal administrative requirements. However, state-run retirement plans can also be very limited in terms of how much they allow employees to save for retirement. Many states, for instance, offer Roth IRA programs. The annual contribution limit associated with this type of account by the IRS is just $6,500 for 2023 ($7,500 if you’re 50 or older). Additionally, there’s a limited number of investment providers available for state run investment plans and the investment funds, which are chosen by the government, may not always be the best options or even the most cost-effective options..

Opting to offer a private 401(k) plan, by comparison, allows for annual contributions of up to $22,500, according to 2023 IRS rules.

Most state-mandated IRA plans also do not allow employer contributions, which can be a drawback to consider. (Massachusetts is the exception to this rule, as it allows Safe Harbor contributions).

Additionally, there are no tax credits available to your business when utilizing a state-mandated retirement plan, but this type of benefit is available when offering a startup 401(k) plan. Eligible businesses may qualify for tax credits for the start-up or administration costs associated with a private, employer-sponsored plan. Read our article about employer tax credits to find out more.

The takeaway

As a business owner, it’s important to understand whether you’re required by state laws to offer a retirement plan for employees. An increasing number of states are implementing such mandates and for good reason. Significant numbers of Americans are vastly underprepared for retirement. 

The key question to consider is whether your business and its employees would be best served by a state-run plan or a private retirement plan. 

With the right plan and partner, businesses can benefit from improved employee engagement and loyalty while helping them build their retirement savings. Get started today with a free, no-obligation consultation with a 401(k) retirement specialist.