Are Small Businesses Required to Offer Retirement Plans?

As a small business owner, you might be wondering if you're required to offer retirement plans to your employees. The good news is that there's no one-size-fits-all answer, but we'll break it down for you.

The Employee Retirement Income Security Act of 1974 (ERISA) doesn't require small businesses to offer retirement plans, but the Affordable Care Act (ACA) does mandate that certain employers offer health insurance. However, there's a connection between the two.

In the US, employers with 50 or more employees are required to offer health insurance, but there's no similar rule for retirement plans.

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Some states, like Oregon, have mandated that small employers participate in state-sponsored retirement plans, such as OregonSaves, to ensure widespread access to retirement savings options.

These state-mandated retirement plans are designed to level the playing field for employees of small businesses, who may otherwise lack access to retirement savings benefits.

To comply with state mandates, small businesses may benefit from speaking with a legal or tax advisor to learn how to meet these new rules.

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Employers may also leverage these plans to help attract and retain industry talent, as providing retirement benefits can be a competitive advantage.

Some state-mandated retirement plans, like those in Connecticut, Colorado, California, and Illinois, are structured as Roth IRAs.

In these programs, employees will be capped at the IRA contribution limits of $7,000 or $7,500 for employees aged 50 or older.

Here are some key facts about state-mandated retirement plans:

OregonSaves and SEP-IRAs share a common goal of providing retirement savings options to employees. OregonSaves has no administrative fees for employers, and plans are funded entirely by employees.

All contributions made by employees to OregonSaves are 100% vested, meaning they can take their retirement savings with them if they change jobs. This is a significant benefit for employees who may switch employers frequently.

In contrast, SEP-IRAs allow employers to make contributions to their employees' retirement accounts, but these contributions are not vested until the employee has worked for the employer for a certain period of time.

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State-sponsored retirement programs are a type of government-required retirement savings program that applies to private-sector employers who don't sponsor their own plan. These programs are designed to help more workers, especially those at small businesses, save for retirement without placing financial burdens on employers.

State-mandated retirement plans are a low-cost solution with few fiduciary responsibilities for employers. However, they tend to have inflexible options within, and limited tax-favored features.

Some states have enacted legislation and are in the process of implementing a state-mandated program. These programs vary in terms of covered employers and employer participation.

Here are some examples of states with mandates in development:

If you're a small business owner, you're likely aware that offering a retirement plan can be a great way to attract and retain top talent. In fact, 60% of workers say they're more likely to stay in their current job if they have an employer-sponsored retirement plan.

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But did you know that you have options beyond the state-mandated auto-IRA? Some states allow employers to choose a different retirement plan, such as a traditional 401(k) plan. Contribution limits for a 401(k) are significantly higher, at $23,500 in 2025 (or $31,000 for those older than 50).

A 401(k) plan also offers more flexibility, with no income limits on contributions. This can be a major advantage for your employees, who may be able to save more for retirement. Plus, you can potentially incentivize your employees to save even more by providing a match.

Here are some key differences between an auto-IRA and a traditional 401(k) plan:

If you're looking for an even easier and lower-cost option, consider a SEP (Simplified Employee Pension) plan. A SEP allows employers to set aside money in traditional individual retirement accounts (SEP-IRAs) for all employees, including themselves. Contribution limits are up to 25% of each employee's pay, making it a great option for small businesses.

A SEP is a low-cost retirement plan option that's perfect for small businesses or self-employed individuals.

You can establish a SEP as late as the due date of your company's income tax return for the year you want to establish the plan.

Here are some key benefits of a SEP:

A SEP allows you to contribute up to 25 percent of each employee's pay, but you can't contribute more than $61,000 for 2022 or $66,000 for 2023.

You're not required to contribute every year, and you can choose to make larger contributions in good years and reduce them in down times.

If you're considering a state-mandated auto-IRA for your employees, you may want to explore alternative retirement plan options. Some states allow employers to choose their own program, giving you the flexibility to select the one that best suits your employees' needs.

In 2025, 401(k) contribution limits are a significant $23,500 (or $31,000 for those older than 50), which is considerably higher than IRA contribution limits.

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Employers can opt out of state-mandated programs by setting up a private retirement plan, such as an employer-sponsored 401(k) plan. This can provide your employees with a more comprehensive retirement savings option.

A 401(k) plan has several benefits, including higher contribution limits, no income restrictions on contributing, and the potential to incentivize employees to save more with a company match.

According to research, 60% of workers say they are more likely to stay in their current job if they have an employer-sponsored retirement plan, and 62% say that a 401(k) employer match is key to achieving their retirement goals.

Here are some key differences between an auto-IRA and a traditional 401(k) plan:

Establishing a retirement plan can be a straightforward process. To establish a SEP, contact a retirement plan professional or a representative of a financial institution that offers retirement plans. You can choose between the IRS model SEP, known as Form 5305-SEP, or another plan document offered by the financial institution.

Choosing a financial institution to maintain your SEP is crucial, as it becomes a trustee to the plan. Trustees work with employers and agree to receive and invest contributions, and provide each participant with a notice of employer contributions made each year and the value of their SEP-IRA at the end of the year.

A SEP may be established as late as the due date of the company's income tax return for the year you want to establish the plan. For example, if your business's fiscal year ends on December 31 and you filed for the automatic 6-month extension, the company's tax return for the year ending December 31, 2022, would be due on October 15, 2023, allowing you to make the initial SEP contribution no later than October 15, 2023.

Here are the key steps to establish a SEP:

Establishing the Plan is a crucial step in setting up a SEP. You can choose between the IRS model SEP, known as Form 5305-SEP, or another plan document offered by a financial institution.

To establish a SEP, you'll need to contact a retirement plan professional or a representative of a financial institution that offers retirement plans. This entity will become the trustee to the plan, responsible for receiving and investing contributions, and providing each participant with a notice of employer contributions made each year and the value of their SEP-IRA at the end of the year.

Trustees of SEP-IRAs are generally banks, mutual funds, insurance companies that issue annuity contracts, and certain other financial institutions that have been approved by the IRS.

The first step is to complete and sign Form 5305-SEP (or other plan document if not using the IRS model form). This form will include the name of the employer, the requirements for employee participation, and a written allocation formula for the employer's contribution.

A SEP may be established as late as the due date (including extensions) of the company's income tax return for the year you want to establish the plan. For example, if your business's fiscal year ends on December 31 and you filed for the automatic 6-month extension, the company's tax return for the year ending December 31, 2022, would be due on October 15, 2023, allowing you to make the initial SEP contribution no later than October 15, 2023.

You'll also need to give your employees a copy of the Form 5305-SEP (or other plan document if not using the IRS model form) and its instructions, along with certain information about SEP-IRAs. This written statement must explain that a SEP-IRA may provide different rates of return and contain different terms than other IRAs the employee may have.

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Here are the key steps to establishing a SEP:

As you establish and administer your SEP, it's essential to keep your employees informed about the plan and its details. You must give them a copy of IRS Form 5305-SEP and its instructions, or the document used to establish the plan, when they become eligible to participate.

You also need to provide a written statement explaining the terms of the SEP, how changes are made, and when employees will receive information about contributions to their accounts. This statement is crucial in keeping your employees informed and up-to-date.

The financial institution plays a significant role in employee communications, providing an annual statement for each participant's SEP-IRA that reports the fair market value of their account. This statement is a great way to give employees a clear picture of their account balance.

In addition to the annual statement, the financial institution also gives participating employees a copy of the annual statement filed with the IRS, which includes contribution and fair market value information. This ensures that employees have a record of their contributions and account balance.

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Here are some key employee communications that you should be aware of:

The financial institution should also notify participants by January 31 of each year when a minimum distribution is required, ensuring that employees are aware of their obligations.

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The Internal Revenue Service (IRS) provides valuable resources for small businesses to maintain compliance with retirement plan regulations. The IRS website lists several publications that offer guidance on SEP retirement plans, including Form 5305-SEP and the SEP Plan Checklist.

If you're looking for more information on retirement plans, the IRS website also offers jointly developed publications with the DOL, covering topics such as 401(k) plans, automatic enrollment, and payroll deduction IRAs. These resources can help you make informed decisions about your business's retirement plan.

Some key resources to consider include the Retirement Plans Startup Costs Tax Credit and the Choosing a Retirement Solution for Your Small Business publication (Publication 3998). By staying informed and taking proactive steps, you can help ensure compliance and avoid costly mistakes.

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Mistakes can happen even with the best of intentions, but there are programs in place to help correct them.

The U.S. Department of Labor and the IRS offer correction programs for SEPs, which can help employers fix plan errors and protect participants' interests.

These programs are designed to encourage early corrections, which can be a big help in keeping the plan's tax benefits.

Ongoing review is key to spotting and correcting mistakes in plan operations, making it easier to stay on track.

The IRS and Department of Labor have resources available to provide further information on correcting errors and maintaining compliance.

The Internal Revenue Service (IRS) provides a wealth of information for small businesses looking to establish a retirement plan. You can find the main IRS website, as well as guidance on maintaining a SEP retirement plan, on their site.

The IRS offers a range of resources to help small businesses navigate the process of setting up a retirement plan. Form 5305-SEP is available on the IRS website, and the Retirement Plans Startup Costs Tax Credit can help offset the costs of establishing a plan.

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If you're looking for more comprehensive information, the IRS jointly developed publications with the DOL can be a valuable resource. These publications can be found on the IRS website or ordered electronically or by calling toll-free.

Some of the jointly developed publications include "Choosing a Retirement Solution for Your Small Business" and "401(k) Plans for Small Businesses". These publications provide detailed information on the establishment and operation of a 401(k) plan, as well as other retirement plan options available to small businesses.

Here are some additional resources that may be helpful:

The IRS and DOL also offer voluntary correction programs to help small businesses correct any errors in their retirement plans. The "Retirement Plan Correction Programs" publication provides more information on these programs.

As a small business owner, you're likely aware that offering a retirement plan can be a significant benefit for your employees. In fact, 60% of workers say they're more likely to stay in their current job if they have an employer-sponsored retirement plan.

A 401(k) plan may be a good option to consider, as contribution limits are higher than IRA contribution limits, at $23,500 in 2025 (or $31,000 for those older than 50). This means your employees can save more for their retirement.

You can also incentivize your employees to save more by providing a match, which can be a competitive advantage for your company. A 401(k) employer match can be key to your employees achieving their retirement goals, with 62% of workers citing it as essential.

By providing a 401(k) plan with a match, you can potentially attract and retain top talent, while also supporting your employees' long-term financial security.

More than 30 states have considered enacting state-mandated retirement plan legislation, and 17 states now have laws enabling state-sponsored retirement plans.

If you have employees reporting income in one of these 17 states, you may be required to comply with state-mandated retirement plans.

Even if your state doesn't require a workplace retirement plan, you may still be required to comply if you have a certain number of employees.

This can be a complex issue, so it's essential to stay informed about the specific laws and regulations in your state.

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Businesses have two main options to consider for retirement plans: government-sponsored programs and privately offered plans. Government-sponsored programs are generally low-cost with few fiduciary responsibilities for employers.

One type of privately offered plan is the Simplified Employee Pension (SEP) plan, which is easy to set up and has lower operating costs than a conventional retirement plan. A SEP allows employers to contribute directly to traditional individual retirement accounts (SEP-IRAs) for all employees, including themselves.

Under a SEP, an employer can contribute up to 25 percent of each employee's pay. This can provide a significant source of income at retirement for both employers and employees.

Businesses should evaluate whether a privately offered plan like a SEP is more suited for them, considering factors such as flexibility, options, and tax-favored features.

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