On December 15 the State of Oregon will implement its next round of private company retirement plan requirements. Companies with 20 to 49 employees will be required to auto-enroll all employees who do not currently have a retirement plan into the OregonSaves retirement program. Employers with 50 or more employees have been phased into implementation starting November 15, 2017 and are already under these requirements.
Oregon initiated the OregonSaves program in July 2017, in an effort to boost retirement preparedness and assist employees who may not have retirement programs with their employer. The program offers a Roth Individual Retirement Account (IRA) where employees can make contributions through payroll deduction. All employees, full and part-time, who have worked for the company for at least 60 days, are required to be auto-enrolled into the plan by the employer. Contributions start at five percent of the employee’s compensation, with the rate increasing by one percent each year to a maximum of ten percent. Although employees are auto-enrolled, they still have the option to “opt-out” of the program and forgo participation. By no means are employees required to start at five percent; the State merely gives the five percent as a starting point for employees, who are then given the ability to adjust their contribution percentage up or down as deemed necessary.
Since the program is a payroll deduction Roth IRA, the requirements for OregonSaves are the same as any other Roth IRA plan. The limits are $5,500 for employees under 50 years of age, and employees age 50 and over can contribute an extra $1,000, or a total of $6,500, each year. All funds contributed to the plan are from the employee–no employer contributions can be made. Contributions are also subject to the Roth IRA adjusted gross income phase-out limitations, going from $120,000 to $135,000 for single filers and $189,000 to $199,000 for married filing joint. To garner compliance with OregonSaves, the State requires all employers to register their companies on the OregonSaves.com website, whether or not the company has a retirement plan. Employers that do have a program such as a 401(k), 403(b), Simple IRA, or Simplified Employee Pension (SEP) are exempt from the program. However, the State does require them to re-certify their plan every three years.
On a positive note, OregonSaves is certainly an option for those small employers that do not have the financial means to adopt a company retirement plan. Because the program does not incur the administrative costs of a traditional 401(k) plan and employer contributions are not allowed, the company will not have those additional expenses. This program helps get employees started on saving for retirement when they may not even be thinking about taking such steps for their future. The plan also allows employees to take their account to another company if they change employment. The OregonSaves account belongs to the employee, and the employers have no control over the accounts.
One drawback of the OregonSaves plan is the limit to annual contributions. See the comparison chart below. For those employers who have the ability and desire to offer a broader array of benefits, a traditional 401(k) plan can provide more possibilities towards retirement savings, which may be more in line with the needs of the company and its employees.
The contribution limits for traditional 401(k) plans are considerably higher than the Roth IRA limits allowed by the OregonSaves plan. For the 2018 calendar year, employees under age 50 are able to defer up to $18,500 from their compensation to a 401(k) plan. Employees age 50 and older can defer an extra $6,000, for a total of $24,500. In addition, 401(k) plans can allow employees to make their contributions in pre-tax or after-tax (Roth) dollars, not to exceed the totals stated above. Note: after-tax Roth contribution limits to 401(k) plans are not to be confused with the Roth IRA limits.
The benefits of a 401(k) plan extends to the employer side also. While the OregonSaves plan does not allow for employer contributions, a 401(k) plan does. The IRS puts limits on how much of a benefit employees can have contributed to their retirement plan on an annual basis. Employers can contribute up to another $36,500 as a tax deductible contribution in the form of a profit sharing or matching contribution, or a combination thereof. This takes the total individual contributions for an employee up to $55,000 for employees under 50 years of age, and up to $61,000 for employees age 50 and over. However, whether employers are able to contribute up to this level depends on the specifics of their plans–all qualified retirement plans are subject to compliance testing, and working with an experienced retirement plan professional can help to maximize benefits while staying in compliance.
A 401(k) plan offers advantages to company owners and their employees, while giving each a meaningful benefit. With a properly structured plan, employers have the ability to help their employees save for retirement with larger contributions and increased flexibility, while gaining for themselves the added bonus of tax savings that comes with offering this to employees.
Whether employers are able to offer a traditional defined contribution plan or ensure their employees have the opportunity to get involved in OregonSaves, the key for all parties involved is to start saving for a better retirement.
Mark Reynolds is a partner and shareholder and leader of the Retirement Plan Services Team. Reynolds works with small to medium size retirement plans, focusing on optimal plan design, to ensure Plan Sponsors are able to maximize benefits for both the Plan Sponsor and the participants. His team provides Third Party Administration (TPA) services and compliance for small and medium group retirement plans. Reynolds has passed the FINRA Series 7 and 66 exams, and holds his Oregon Insurance.
Reynolds is a Financial Advisor offering Securities through 1st Global Capital Corp., Member FINRA, SIPC, Investment Advisory services through 1st Global Advisors, Inc. and Insurance services offered through 1st Global Insurance Services, Inc. Jones & Roth and 1st Global are unaffiliated.
