When faced with upcoming retirement plan mandates, it can be hard to choose the right plan for your business. Read on to see which retirement plan types are considered qualifying plans across the states currently initiating state-wide retirement plan mandates.
Traditional or Roth IRAs
Qualifying plan in all states.
Traditional IRAs, or individual retirement accounts, are one of the more common paths to save for retirement. As the name suggests, this type of retirement plan operates with only a single participant. Each participant in an IRA receives their own retirement account. IRA contributions are not taxed when account owners make contributions but are taxed when withdrawals are made.
IRAs allow contributions up to $6,000 annually for those under age 50, or $7,000 if 50 or older.
A Roth IRA is similar to a traditional IRA. The main difference is that the money is taxed when contributions are made, not upon withdrawal.
Benefits
- Lower initial cost than custom plan
- Simple to maintain
Drawbacks
- No employer-matching contributions
- Contribution limits are severely reduced compared to a 401(k), which reached $20,500 in 2022.
SIMPLE IRAs
Qualifying plan in all states.
SIMPLE IRAs are similar to traditional IRAs, but have different contribution limits. Made specifically with small businesses in mind, these plans involve a lower cost. Employers are required to make matching or non-elected contributions.
Benefits
- Requires employers to make matching contributions to employees’ accounts.
- It typically involves a lower initial cost than a custom plan
Drawbacks
- The contribution limits are limited to $14,000 annually
- Generally, only available to businesses with less than 100 employees
Payroll Deduction IRAs
Not a qualifying plan in all states.
Payroll Deduction IRAs contain the same benefits and drawbacks as a traditional IRA. The main difference between Payroll Deduction IRAs and other IRAs is that they are set up to automatically invest when participants get paid. This means a set amount or percentage of employee’s paychecks are taken out before they receive it and invested directly into their retirement account, much like a 401(k).
Benefits
- Typically involves a lower initial cost than a custom plan
Drawbacks
- The contribution limits are limited to $6,000
- No employer contributions
401(k), 403(b), and 457(b) Plans
Qualifying plan in all states.
401(k) plans are by far the most common retirement plans for working Americans. In a 401(k), participants contribute your money, and you, as the employer, can match up to a certain amount.
Earnings in a 401(k) plan accrue on a tax-deferred or tax-exempt basis depending on when the money was contributed.
401(k) plans allow eligible employees to make contributions either before (Traditional) or after (Roth) taxes. 401(k)s and IRAs are both popular when considering a retirement plan. If deciding between the two, it may be best to weigh the plans against each other.
403(b) plans are essentially 401(k) plans but are offered exclusively to nonprofits, public schools, or churches.
457(b) plans are essentially 401(k)s but are offered exclusively to state and local government employees.
Benefits
- Employers may make matching contributions
- Participants can contribute up to $20,500 in 2022
- Employers may also give employees a share of the profits
- Wide range of investment options
Drawbacks
- Higher account costs
SEP Plans
Qualifying plan in all states.
A SEP operates by allowing employers to make contributions to plan accounts on behalf of their employees. Employers can also contribute to their own accounts. Contribution limits for SEP plans must not exceed the lesser of:
- 25 percent of the employee’s payroll, or
- $61,000 (in 2022)
Benefits
- Easy to set up
- Low administrative cost
Drawbacks
- Employees cannot make contributions to their accounts.
Multiemployer Plan (MEP)
Not a qualifying plan in all states.
Multi-employer plans are plans that are applied across multiple companies. Each employer and employee regardless of the company is under the same plan. Each employee sets up an agreement with their employer over how much they contribute to their retirement account.
Companies are also not forced to set up plans with other companies within the same industry. Pooled employer plan (PEP), a type of multiemployer plan, allows for diverse businesses to live under the same plan.
Benefits
- Lower initial cost
- Lower maintenance costs than standalone plan
Drawbacks
- Fewer customization capabilities
