Are You Ready?
I do this to myself every time this year – I have the best intentions of getting all of my Christmas to-do’s done early like Christmas cards, baking, and finalizing Christmas gifts; however, I always seem to be sliding into the finish line with a day or two to spare. But what’s the fun in the holidays without the Christmas rush!? Ha!
Good thing I have some great Christmas helpers.
Employers of private-sector businesses have also been feeling the rush over the last few months due to the recently enacted legislation in 18 states and two cities which requires private-sector businesses with a certain amount of employees to participate in a state-facilitated IRA program or choose a retirement plan from a non-government provider as long as it meets state requirements (such as a 401k or SIMPLE IRA). This legislation is the result of many states across America experiencing a retirement savings crisis. The Federal Reserve reports that financial well-being declined and 35% of those surveyed said they were worse off than the year before, while only 31% of non-retirees from the 2023 survey thought their retirement plan was on track — down 9% from the year before1. (Source: https://www.paychex.com/articles/employee-benefits/8-states-state-sponsored-ira)
Source: www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf
Of the 18 enacted states, almost all are mandatory and have various deadlines for enrollment over the last year and upcoming months. In the state of Virginia, employer registration began in July 2023 and the deadline is February 15, 2024 for those with 25 or more employees. If deciding to utilize the state plan, Retire Path VA, employers in Virginia can begin the registration process here – https://www.retirepathva.com/contact
The RetirePath Virginia plan is a basic one-size fits all retirement savings program for businesses they do not wish to sponsor a plan for their own employees. Essentially the plan establishes Roth IRAs through the state for eligible employees. Here is a helpful comparison of the RetirePath Virginia plan versus a customized plan such as a 401k:
| RETIREPATH VIRGINIA | CUSTOM 401(K) FROM TRA | |
| Pre- and Post-Tax Deferrals | Roth IRA w/ auto after-tax payroll deduction | Pre-tax or Roth elective deferral contributions |
| Contributions | $6,500 – ($7,500 age 50+) | Lesser of 100% of compensation or $22,500 |
| Catch-Up Contributions | Determined by Roth IRA contribution limits | $7,500 annually for those age 50 and older |
| Employer Match | Employers cannot contribute to the program such as matching funds. | Available |
| Income Limit | Savers not eligible for the default Roth IRA have the option to recharacterize contributions to a traditional IRA | No income limits |
| Investment Choices | Limited selection of low-cost investment options | Can provide a wide variety from top asset managers |
| Automated Payroll Integration | Available | Available |
| Customizable for businesses | Not customizable | Yes – for example, Safe Harbor, SIMPLE, Profit-Sharing & Cash Balance |
| Tax Credit | No, since there are no start-up costs for employers | Yes – 100% of the expenses paid up to the greater of $500 or the lesser of $250 for each non-HCE’s. A maximum tax credit of $5,000 per year would be available for 3 years. |
If you are an employer located in another state – the current mandates and timelines can be found here: https://www.paychex.com/articles/employee-benefits/8-states-state-sponsored-ira
In order for employers to remain compliant, you must:
- Register by the deadline (when provided) or offer a qualified option that satisfies the mandate
- Set up payroll deduction for employees (the percentage of wages allocated per pay period has yet to be determined)
- Hold an annual open enrollment period
- The statute includes a provision to development enforcement mechanisms and penalties for noncompliance with the program. At this time, penalties have not been finalized.
While the RetirePath Virginia plan is very simple with no employer contribution requirements and low costs, the SECURE Act 2.0 (Setting Every Community Up for Retirement Enhancement) created tax savings incentives for businesses who are setting up a 401k for the first time.
The tax credits include:
- 50% of your eligible startup costs, up to the greater of:
- $500; or
- The lesser of:
- $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
- $5,000.
Eligible startup costs
You may claim the credit for ordinary and necessary costs to:
- Set up and administer the plan, and
- Educate your employees about the plan.
Eligible tax years
- You can claim the credit for each of the first 3 years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.
No deduction allowed
- You can’t deduct both the startup costs and claim the credit for the same expenses. You aren’t required to claim the allowable credit.
Auto-enrollment tax credit
- An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.
These tax incentives coupled with the benefits of more customization, flexibility, and greater investment choices may make a 401k a more attractive option for employers. Also keeping in mind that any employer contributions are a deduction to the business and pre-tax contributions are a deduction for employees.
Regardless of which state you reside in, if you are an employer and do not already have a retirement plan in place, it is recommended to consult with your accountant and advisor to see what makes the most sense for your employees and your business. While it is mandated, from our perspective, an employer sponsored retirement plan is a gift that keeps on giving.
Happy Holidays to all our amazing clients and readers! We are grateful for your support and entrusting Meridian.