Surveys have long indicated that paid leave and retirement plans are among the most coveted of employee benefits, and their value has only increased as employers continue to face a tight labor market. Increasingly, though, some employers have a reason beyond recruitment and retention to offer such benefits—they now are legally required to do so under state law.

State-Mandated Paid Leave

While the U.S. Congress has yet to enact federal legislation requiring any form of paid leave, some of their state counterparts have already taken action. According to the U.S. Department of Labor, for example, 11 states and the District of Columbia have laws requiring paid family and medical leave programs for eligible workers (the federal Family and Medical Leave Act requires leave for covered employees, but the leave need not be paid).

Paid family and medical leave laws generally require pay for employees who take extended time off for qualifying reasons, including bonding with a new child or caring for seriously ill family members. Some states and localities have gone farther, requiring paid time off that can be used for a broader range of reasons. Illinois, for example, will soon require employers to provide paid time off for any reason.

Beginning in 2024, under the Paid Leave for Workers Act, most Illinois employers must allow full- and part-time employees up to 40 hours of annual paid leave, without requiring any documentation. (Note: Employers and employees in Cook County and the City of Chicago will remain subject to existing paid sick leave ordinances.) The leave will accrue at the rate of one hour for every 40 hours worked, and employees must be paid their full wages while on leave.

State-Mandated Retirement Plans

Paid leave is not the only area of employee benefits where state legislatures are getting involved. They also are beginning to push employers to help employees save for retirements.

The Georgetown University Center for Retirement Initiatives reports that, as of June 30, 2023, 19 states have enacted “state-facilitated retirement savings programs.”

The state programs usually place enrollees in Roth individual retirement accounts (IRA) by default, with the accounts funded by automatic payroll deductions of 3-5%. Employees’ Roth contributions are after-tax, meaning they do not reduce taxable income, but qualified withdrawals are tax-free. Roth IRA contributions are subject to annual limits that are adjusted for inflation. Contributions to a Roth IRA are limited each year. For 2023 employees can contribute up to $6,500 to a Roth IRA; and if you are age 50 or older, the limit is $7,500 in 2023 using $1,000 in catch-up contributions.

Illinois is among the states requiring retirement plan options for employees. It has had such a program since 2018.

Typically, these states require that covered employers either offer a retirement plan themselves or enroll their employees in a state-sponsored retirement program.

Illinois employers that have been in business for at least two years, have at least five employees and do not provide a retirement plan must automatically enroll their employees in the Secure Choice Savings Program. The state has been phasing in implementation, initially covering employers with 500 or more employees. The final phase will take effect on Nov. 1, 2023, when the mandate will apply to employers with five or more employees.

Participants are enrolled by default in a Roth IRA with a 5% pay roll contribution, but they can choose to change their contribution level or fund option, as well as opt out altogether, at any time. Notably, employers are not considered plan fiduciaries, nor do they pay any fees or make contributions. Their role is limited to registering for the program, providing the necessary employee information to create accounts and facilitating payroll contributions.

The exact rules and requirements vary by state. In some states — including New Mexico and Washington — the programs are voluntary. And Washington also offers eligible small employers a marketplace where employers can choose among several plans. Check the details for your state program, if any.

Please note, there may be penalties applied for non-compliance as steep as $250-$500 per employee depending on the timing of the failure to implement. In addition, an average number of employees may be used in the calculation, this may result in steeper penalties.

For questions on state-mandated leave and retirement plans, contact Heather Smelley at [email protected] or 312.670.7444.