State-sponsored retirement plans are programs run by state governments that give workers access to retirement savings when their employers don’t offer a sponsored plan such as a 401(k). These programs typically use at least one of the following saving models:
A financial services firm designated by the state administers each program while overseeing the corresponding investments and funds. The cost to employers is typically minimal.
Furthermore, some states require eligible employees to automatically enroll in the program and contribute a specific percentage of their wages via payroll deductions. Employees, however, may later opt out of these programs.
Many states have introduced mandatory retirement plans to tackle the significant gulf in retirement savings across the U.S.
Research highlights that many Americans are unprepared for retirement, with approximately one-quarter of working adults having no savings set aside for their later years. Moreover, it’s estimated that more than 50 million American workers don’t have access to an employer-offered retirement savings plan. By 2040, this deficit is expected to cost states an estimated $334 billion in increased spending.
State-mandated retirement programs aim to reduce this financial insecurity by addressing a key barrier for employees: access to a retirement savings plan.
While fewer than half of all states have a state-sponsored retirement plan, the number of those with new retirement plan laws has spiked in recent years.
|
State |
Effective Date |
Plan Type |
Employer Compliance by Size |
|
California |
7/1/2019 |
All employers with at least five employees (employers with at least one employee must participate by December 31, 2025) |
|
|
Colorado |
10/1/2022 |
All employers with at least five employees |
|
|
Connecticut |
4/1/2022 |
All employers with at least five employees |
|
|
Delaware |
7/1/2024 |
All employers with at least five employees |
|
|
Hawaii |
Implementation Deadline TBD |
Employees will have the option to opt-in |
|
|
Illinois |
Originally 2015 |
All employers with at least five employees |
|
|
Maine |
1/1/2024 |
All employers with at least one employee |
|
|
Massachusetts |
2012 |
Non-profit employers with 20 or fewer employees |
|
|
Maryland |
9/15/2022 |
Employers of all sizes |
|
|
Minnesota |
1/1/2025 |
All employers with at least five employees |
|
|
Missouri |
9/1/2025 |
All employers with at least 50 employees |
|
|
Nevada |
7/1/2025 |
|
|
|
New Jersey |
6/30/2024 |
All employers with at least 25 employees |
|
|
New Mexico |
Originally 7/1/2024 |
Program is voluntary for all employees |
|
|
New York |
Originally 2018 |
No enrollment requirement at this time, but expected to change to all employers with at least 10 employees |
|
|
Oregon |
7/1/2017 |
Employers of all sizes |
|
|
Vermont |
7/1/2026 |
|
|
|
Virginia |
7/1/2023 |
All employers with at least 25 employees |
|
|
Washington |
Originally 2015 |
All employers with 100 or fewer employees |
Since retirement plan laws vary widely, employers should consult their state’s agency for all state retirement plan requirements and deadlines. Some states, for example, mandate compliance only for businesses of a certain size. Moreover, some states require employees to enroll automatically in a plan and contribute from their wages. Employees wanting to opt out of said plans may need additional information or assistance.
Most state-sponsored retirement plans are set up as Roth IRAs, with employee contributions occurring after payroll and income taxes are withheld. However, some states (e.g., Minnesota) allow employees to contribute before such taxes are applied, similar to how a Traditional IRA operates.
Pre-tax contributions reduce an employee’s taxable income and overall tax liability, resulting in immediate tax savings. Post-tax contributions, conversely, offer tax-free withdrawals during retirement, including any accumulated interest or earnings, provided the withdrawal meets the IRS’ qualified distribution criteria.
Employers in a state with a mandatory retirement plan law must choose between adopting a state-sponsored retirement savings plan or offering their own private plan.
State-sponsored plans, such as auto-IRAs, are often the simplest option. They’re inexpensive to set up and have minimal administrative requirements. They’re designed to reduce obstacles for small businesses or those new to offering retirement benefits.
However, even the best state retirement plans have shortcomings. For example, auto-IRAs usually have tighter restrictions on how much an employee can contribute each year ($7,000 in 2025 for those under 50) and don’t allow employers to match employee contributions.
Conversely, private plans, such as 401(k) accounts, have significantly higher contribution limits ($23,500 in 2025) and may entitle the employer to certain tax credits that offset setup and administration costs. Moreover, allowing employer contributions can make these plans much more appealing when retaining employees or attracting new hires.
Simply put, state-sponsored plans can be affordable and simple for employers to use but also limited in how much they benefit employees. Private plans often offer more options and benefits but can be more expensive and time-consuming to manage.
Sixty percent of workers are likelier to stay with their current employer if the organization offers a retirement savings plan. That makes it one of the most important priorities considered next to competitive salaries and flexible work hours.
In other words, even when a state doesn’t require one, it pays to have a robust retirement savings plan employees can count on.
This is where having the best payroll and benefits administration software can make a world of difference — particularly platforms that offer employees multiple options by integrating with both private and state-sponsored retirement savings providers.
Request a demo today to see how much easier benefits administration and retirement savings can be with Paylocity.
PJ joined Paylocity in 2015 as a Government Relations Specialist and earned her M.A. in Finance from Southern New Hampshire University in 2017. PJ currently leads a team of tax professionals and works with tax and payroll operations groups.
Simplify benefits management with an all-in-one platform that connects seamlessly to Payroll. Say goodbye to endless questions about balances and policies across multiple providers. With our Flexible Benefits solution, employees can manage their benefits from one place, while you save time, ensure compliance, and reduce costs. Maximizing third-party administrative offerings has never been easier — for you and your team.
