State-Sponsored Retirement Plans: Legislation Overrides New DOL Rules

By David Strom, QKA, QPA

Studies and statistics provide alarming evidence that employees are woefully unprepared for retirement. According to data from the U.S. Census Survey of Income and Program Participation, the median amount in a retirement savings account is only $22,000.

The most common way to save for retirement is through an employer-sponsored retirement plan, such as a 401(k) plan. The 401(k) plan makes retirement savings easy with automatic payroll deduction and goes a long way to planning a secure retirement. In addition, contributions can be made pre-tax which reduce employees’ taxable income, further aiding retirement savings. A 401(k) plan allows employees to “set it and forget it” with regular payroll deductions accumulating a significant balance over time. A company match or other employer contributions help employees save even more.

Unfortunately, over one-third of employees don’t have access to a company-sponsored plan. Many have no retirement savings at all and will need to rely completely on Social Security. To address this gap, several states, including Oregon and California, are creating state-sponsored retirement plans.

The details of each state’s plan are different, but the common thread is that any employer who does not offer a retirement plan will be required to establish automatic enrollment IRAs for their employees. The employer would be required to deduct a percentage of compensation from each employee’s paycheck and transmit these dollars to the state-sponsored retirement plan every pay period.

The required deductions would start at 5% of an employee’s paycheck for Oregon residents and 3% for Californians. Contribution percentages would automatically escalate to increase the percentage deducted and saved each year. Employees who do not want these savings deducted can opt out of the program. Oregon is scheduled to begin a pilot program starting July 1, 2017, and California’s plan is expected to commence in 2018.

In 2016, the Department of Labor issued rules supporting the establishment of these plans, including clarification that employers would not be subject to the fiduciary and compliance rules required with traditional 401(k) plans.

However, the Republican-controlled Congress has passed legislation to circumvent the new rules issued by the DOL. While it is likely this bill will be signed by President Trump, it is unclear if this effort will succeed in preventing state-sponsored retirement plans. Oregon recently announced that it is moving forward with its plan.

What is clear is if an employer sponsors a retirement plan, they will then be exempt from this requirement. In addition, for a business owner or executive, a company-sponsored plan provides distinct advantages for their own retirement savings. Contributions to company-sponsored retirement plans are tax deductible, and the plans allow for special testing to provide greater contributions for owners and executives as long as a minimum employer contribution is made for eligible employees. Employer contributions are an excellent employee benefit, helping the employee accumulate enough to retire while being paid for by the company’s tax savings.

Here are some sample maximum tax-deductible contributions allowed for an owner or executive with a combined 401(k) profit sharing and cash balance pension plan arrangement:

Age 401(k) Profit Sharing Cash Balance Total
41 $54,000 $  90,000 $144,000
50 $60,000 $143,000 $203,000
55 $60,000 $184,000 $244,000
60 $60,000 $237,000 $297,000
65 $60,000 $245,000 $305,000

 

To learn more about how qualified retirement plans can help you and your employees reduce their tax bills while becoming retirement ready, please contact David Strom.

Meet David

David is a retirement plan expert who designs, consults and administers qualified retirement plans for profitable businesses and non-profit organizations of all sizes. He specializes in cash balance pension plans that provide enhanced tax-deferred retirement contributions for partners and shareholders of closely-held firms.

Connect with David here.