If you're running a medical or dental practice, you've got a lot on your plate. From treating patients to maintaining state-of-the-art equipment to training employees—it can be overwhelming. There are also those pesky things called retirement benefits. Do you even know where to begin with them?
Some states have implemented the requirement for businesses to either offer a retirement benefit through the private market or sign up with the state’s plan. In this article, we'll explain what your options are, describe what a qualifying retirement plan is, and convince you that making your own retirement plan is better than going along with the retirement plan provided by the state.
Are Retirement Plans Required by Law?
The legal requirements surrounding retirement plans can be a little tricky. First, federal law does not require employers to provide retirement plans.
However, federal law does have certain requirements for employers if you choose to provide retirement benefits for your employees. To give a few examples, ERISA (Employee Retirement Income Security Act - the federal law for retirement plans) specifies whether spouses have rights to employee benefits, how long an employee can be away from their job before their benefits are affected, and when employees must be allowed to participate in the plan.
More importantly, for your purposes, some states require employers to provide retirement plans. At the time of this writing, 14 states have enacted state-mandated retirement plan legislation. Those states include:
- New Mexico
- New Jersey
- New York
Of these states, only California, Connecticut, Illinois, Massachusetts, Oregon, and Washington have active state-sponsored retirement plans. The others hope to implement their plans sometime between 2022-2023.
If you have concerns about staying compliant with the law, HR for Health's software will help you do that.
What are State-Mandated Retirement Plans?
In general, employers in the states listed above have two options:
- Use the retirement plan provided by the state
- Sponsor a retirement plan of your own through the private market
If your medical or dental practice wants to go with a state-mandated retirement plan, it's important to know what that entails. These state plans are usually Roth individual retirement accounts (IRA). Typically, employee contributions are deducted from post-tax income.
This means that when an employee finally withdraws from the account, the money is usually tax-free. Traditional IRA's work in the opposite way. Deductions come from payroll before taxation, thus lowering the taxable income. However, when the retirement money's finally withdrawn, it is subject to taxes.
Download this Retirement Tip Sheet to find out the five most important questions to ask when choosing a retirement plan for your practice.
Types of Retirement Plan Benefits and Plans
Let's get more specific. What type of retirement plan you can offer depends on the location of your practice. What's required and offered in California will differ from what's required and offered in Oregon.
What's Required in California
In California, if your practice has over 50 employees, you're required to provide retirement benefits. Beginning June 30, 2022, you'll be required to provide benefits if you have five or more employees. If you don't offer a private retirement plan, you'll be required to participate in CalSavers, the state plan.
Qualified private retirement plans include:
- 401(a) – Qualified Plan (including profit-sharing plans and defined benefit plans)
- 401(k) plans (including multiple employer plans or pooled employer plans)
- 403(a) - Qualified Annuity Plan or 403(b) Tax-Sheltered Annuity Plan
- 408(k) - Simplified Employee Pension (SEP) plans
- 408(p) - Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Plan
- Payroll deduction IRAs with automatic enrollment
California Businesses: What You Need to Know About New Requirements for a Retirement Plan or Enrollment in CalSavers
What's Required in Connecticut
In the state of Connecticut, if you have five or more employees and they've been paid more than $5,000 in a year, your practice will need to join MyCTSavings if you don't offer your own retirement plan.
A qualified retirement plan in Connecticut includes exactly what the state of California includes.
What's Required in Illinois
In Illinois, if your office has five or more employees and has been in business for at least two years, you must join Illinois Secure Choice if you don't offer your own retirement plan.
To offer your own plan, it needs to be a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), 457(b), or a Taft-Hartley plan.
What's Required in Massachusetts
In Massachusetts, only nonprofits with 20 or fewer employees are required to provide retirement benefits for their employees. This must be a 401(k) retirement plan through the Massachusetts CORE Plan for Nonprofits or a private provider. Being that this applies to Nonprofits, this likely does not impact medical or dental practices.
What's Required in Oregon
Oregon requires all organizations with five or more employees to join Oregon Saves if they don't offer their own retirement plan. Organizations with four or fewer employees will be required to offer a plan starting some time in late 2022.
If you want to offer a qualified retirement plan or are already doing so, you can go here for the exemption.
What's Required in Washington
The state of Washington actually administers a retirement plan marketplace. The government approves certain private plans, and businesses have the freedom to choose which one they want to use. The plan is targeted at small businesses.
If you're in one of these states, then, you have the option of using the state plan or providing your own plan through the private market. Fortunately, HR for Health offers a qualified retirement plan option.
Benefits of State-Mandated Retirement Plans
What are the benefits of using state-mandated retirement plans?
One benefit is that it will keep you from doing the legwork of finding a qualified retirement plan that works for you. You have enough going on with your dental practice or optometrist office. You'll need to do the administrative work of signing up your employees for the plan, but at least you don't have to go looking for a plan.
Second, some of the state plans prohibit organizations from contributing to the plan. This relieves any pressure you may feel to make a contribution, thus helping your bottom line.
Why State-Mandated Retirement Plans Aren't That Great
One of the biggest downfalls of state-mandated retirement plans has to do with your bottom line. For example, in California, a business owner is only able to put away $6,000 per year. By contrast, most 401(k) plans won't limit you.
Second, private plans are often much better for employees. As the employer, you can contribute to the plan, thus making your practice that much more attractive. For example, if you're an optometrist office in Sacramento and contribute five percent to an employee's retirement benefits through a private plan, you'll be that much more competitive than the optometrist office across town which cannot do so through the state plan.
Third, there's more administrative work than is advertised with the state-mandated plans. In California, for example, you as the employer must register and add all eligible employees to the program and manually add all participants every year (and these are just two tasks of many). You may not gain as much in administrative relief through the state plan
How do I Create My Own Qualified Retirement Plan?
Creating your own retirement plan will take some research and administrative effort. Each state will have qualifying plans, and it's up to you to determine the right fit.
Here are just a few basic considerations:
- The cost of the plan
- How much you can contribute as the employer
- The tax implications for you and the employees
Create A Qualified Retirement Plan for You and Your Employees
While requirements to provide retirement benefits are probably good for employees, using the state-mandated plan may not be. Find a plan that works for you and become a more attractive employer than you would be without it.
HR For Health Is Here For You
Figuring out qualified retirement plans can be a daunting task. Fortunately, HR for Health offers a qualified retirement plan and can house your documents in its software for secure, paperless keeping. The benefit of setting up your retirement plan with HR for Health is that it means you have one less person/business that you need to work with. HR for Health can be your “one stop shop” for your HR needs and our software is the perfect tool for streamlining your day-to-day HR tasks. Set up a consultation today!