Ready, Set and Coming Soon to Illinois: A Savings Program
Larry A. Ruff
It is anticipated that Illinois will soon launch their Secure Choice savings program for employers who currently do not offer a qualified retirement plan, such as a 401(k) plan, to their employees. This compulsory program applies to employers with 25 or more employees and businesses operating in Illinois for two years or more. It is being rolled out in three phases.
The first phase starts with notifications in November for employers with 500 or more employees. The next two phases start in 2019: July for employers with 100 to 499 employees, and November for those with 25 to 99 employees.
Over the past couple of years, Illinois has been developing a list of employers who are subject to the above requirements through employer reporting on the Illinois Withholding Income Tax Returns, Form IL-941. Employer answers will determine who is notified by Illinois. This means those employers should be preparing to provide a response to Illinois. If you decide to ignore the state, penalties will initially be $250 per employee in the first year of non-compliance. Penalties increase to $500 in subsequent years.
What is this program?
The Illinois program is a payroll deduction IRA for Roth IRA’s. This means that it is subject to IRA and Roth IRA regulations and limits. The program provides a convenient way to save through payroll deductions. Employees will be automatically enrolled in the program at 5% of their compensation. Employees may opt out of the program.
Illinois manages the entire program along with their chosen plan administrator and investment firms. Participants pay for the entire cost of this program through an asset-based fee of 0.75% or 75 basis points. Investment options are limited to target date, index and capital preservation funds.
The program covers both full-time and part-time employees. It also covers seasonal employees who are employed for more than sixty days.
What will I need to do?
Employers need to communicate the program, facilitate enrollment, set up payroll deductions and timely remit contributions. All employers or their payroll representative will need to register online at www.ilsecurechoice.com.
Employers do not have any fiduciary responsibilities or other obligations under ERISA. Employers pay no administration fees or contribute to the program. You simply serve as facilitator.
Program costs and payback
Two million dollars have been appropriated to get this program set up and publicized to participants. If you look at the Secure Choice website, you can see that quite a bit of time has been invested to get this program ready. In addition to the ongoing costs, the program participants will ultimately pay for the set up costs as part of their fee.
Illinois originally did a feasibility study, which indicated that the program might cover its costs around year ten with a 5% default contribution. That is quite a tall order to cover these costs over such a long period. In the end, participants could end up paying a larger fee if the program revenues generated from the invested assets are not enough to cover the start-up and administration costs.
A few snags or bumps in the road
Besides the long-term cost hurdle, there are other challenges ahead. In August, Governor Bruce Rauner issued an amendatory veto that changes the program to be permissive, rather than mandatory. His concerns are that small employers may either not sponsor a retirement plan or will terminate existing retirement plans.
A bigger challenge he cited is that the law exempting certain state-run retirement programs from Employee Retirement Security Act of 1974 (ERISA) was repealed in 2017. This means that it is now possible state run programs, like Secure Choice, could be considered subject to ERISA without this exemption. The statutory language enacting Secure Choice states that the program may not be implemented if it is determined to be subject to ERISA.
Many questions remain
The success of the program depends on a significant number of participants to recoup the program cost and its reliance on being exempt from ERISA. If the Governor’s veto stands, this could severely lengthen the time to recoup the program’s cost with fewer participants enrolled. Recouping costs in this scenario may not be feasible. A vote by the legislature may not occur until November, so stay tuned.
In addition, the ERISA exemption issue may ultimately be challenged in court, which means by statute the program would have to be shut down if it is determined to be subject to ERISA. At least one industry group and some taxpayer groups are currently contemplating lawsuits against Secure Choice. They believe it violates the reporting requirements of ERISA.
Before Secure Choice comes your way, small employers need to decide if they are considering adding a retirement plan. Take the time to evaluate your retirement plan options now. Retirement plans take some time to establish, so you will want to be ready to put a plan in place before Secure Choice comes your way.
For more information on retirement plan designs, contact Larry Ruff at firstname.lastname@example.org or call him at 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.