Small Maine Employers Must Offer Retirement Plans
On June 24, 2021, Maine became the most recent state to enact a state-sponsored retirement plan. This is part of an active effort by a majority of states to establish retirement alternatives for employers who do not provide existing plans to their employees. With the passing of S.P. 515 (“An Act To Promote Retirement Savings through a Public-Private Partnership”) certain employers must allow covered employees the ability to choose to contribute to an IRA under the program through a payroll deduction / IRA arrangement.
While this may not appear to be particularly impactful at first glance, the bill specifies that all covered employees are automatically enrolled into the program and will begin to contribute 5% of their salary by default. This program will apply to most businesses with 5 or more employees over the age of 18 who don’t already offer certain retirement plans to employees. If you are running a business that doesn’t currently offer a retirement plan to employees, you likely will need to modify your payroll system to accommodate contributions beginning in 2023 or 2024.
Which businesses will this impact?
“Covered Employers” include for-profit and not-for-profit persons or entities that do not offer a specified, tax-favored retirement plan. Excluded from this group are federal, state, and local governments, and employers that have not been in business during the current and previous calendar year. All covered employers with 5 or more covered employees will be required to implement the program. A covered employer with fewer than 5 employees is allowed, but not required, to offer the program.
Employers that fail to enroll without reasonable cause will be subject to penalties assessed annually, ranging from $10-$100 per covered employee, increasing every year.
When is the program required to be implemented?
Covered employers will be required to implement the program as follows:
- Covered Employers with 25 or more covered employees must offer the program beginning April 1st, 2023;
- Covered Employers with 15-24 covered employees must offer the program beginning October 1st, 2023;
- Covered Employers with 5-14 covered employees must offer the program beginning April 1st, 2024.
Which employees will the program apply to?
A “Covered Employee” is an individual who is 18 years of age or older who is employed by a covered employer and earns wages or other compensation that are allocable to Maine during a calendar year. Excluded from this group are employees of federal, state, or local government, and employees whose employer makes contributions to a multiemployer pension trust fund.
Default Rules – what happens if a covered employee doesn’t specifically opt-out of the program or alter contributions in the programs?
Each covered employee must be automatically enrolled, and unless that employee opts out, 5% of his or her salary or wages will be contributed into a Roth IRA via payroll deductions. (The bill notes the possibility that traditional IRAs may be offered in the future.) The contribution percentage may be automatically increased by up to 1% annually up to a maximum of 8%.
The bill provides that the contributions will be directly deposited into a default investment such as a series of target date funds and a limited number of investment alternatives.
Opting out and changing contributions
Although covered employees may elect to opt out of the program at any time or contribute at any higher or lower rate/amount, a covered employee who has opted out will be automatically re-enrolled on a regular or specified basis. The frequency of the re-enrollment has yet to be determined, but will not be more often than annually.
What will be required from the Employer?
The bill provides that employers are not required to contribute to an employee’s plan account. In other words, the contributions are made using employee money. However, the plan will use existing employer and public infrastructure to facilitate contributions to the plan, record keeping, and outreach. While specifics have yet to be determined, it stands to reason that the employer will share a portion of the administrative burden. This likely will include the setup of the payroll function for employees’ contributions, as well as the documentation related to which employees are covered, opting out, etc.
What if employees are not eligible to make Roth IRA contributions?
Under federal rules, contributions to IRAs are limited (for tax year 2022, they are limited to $6,000 ($7,000 if you’re age 50 or older)), and can partially or fully phase out when your “Modified Adjusted Gross Income” reaches a certain threshold. “Modified AGI” includes factors beyond the employee’s wages, and often the amount is not known until the employee’s tax return is filed following year-end. This is why, under federal laws, IRA contributions may be made as late as April 15 of the following year. Maine’s new program will require some foresight into how much income from all sources (not only wages) an employee will earn during the year, because the retirement funds will be withheld during the very year those numbers are developing. For joint filers, an employee’s contribution cap also depends on his or her spouse’s earnings. The bill calls for “minimum, maximum, and default contribution levels” that are in accordance with Internal Revenue Code limits, but does not explain how it plans to accommodate these restrictions. In addition, the bill specifically excludes the employer from liability in the case of determining eligibility for IRA contributions. In the case of employees that have more sources of income than their wages, it appears that the onus is on employees to make sure they are monitoring their income and determining if they should opt out of the plan.
I’m Self-employed, am I able to participate in the plan?
Self-employed individuals are able, but not required, to participate in the plan.
Which employer-sponsored plans can be offered to employees as an alternative to the state-sponsored plan?
The bill excludes from covered employers those with specified tax-favored retirement plans. It defines the specified plans as a plan, program, or arrangement that is tax-qualified under or described in, and satisfies the requirements of, Section 401(a), Section 401(k), Section 403(a), Section 403(b), Section 408(k), Section 408(p) or Section 457(b) of the Internal Revenue Code, without regard to whether it constitutes an employee benefit plan under ERISA.
Where can I find more details and resources on this?
Despite the bill being passed more than a year ago, details related to the plan remain thin. The bill establishes the Maine Retirement Savings Board to develop and implement the plan, chaired by the executive director of the Maine Public Employees Retirement System. Their responsibilities include implementation and outreach, though nothing has been released at this point.
Numerous sources tell us that many citizens approaching retirement age are woefully unprepared, with underfunded savings. Clearly, Maine’s lawmakers are attempting to help remedy that. They have done so primarily by turning what customarily has been an “opt in” process (that many simply never get around to doing) into an “opt out” process that may encourage some savings. (And it opts them in again, possibly annually, unless they opt out again!) It places the administrative burden on the employer, who probably is in a better position (with administrative/payroll infrastructure) than the employee to make things happen, and will create an avenue for retirement holdings that some employees otherwise would not establish on their own.
Like many laws, the well-intentioned S.P. 515 creates some requirements that are missing some details, and it contains some implementation dilemmas. Hopefully these will be ironed out before the first round of required withholdings takes place in a few months. When we see those fixes, we’ll share them.
For more information, please contact Joseph Begin or your BNN advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.