In 2021, Illinois passed an amendment that mandates every business in the state with five or more employees to offer either the Illinois Secure Choice Savings Program or any other employer-sponsored retirement plan to its workers. Failure to do so may result in penalties for non-compliant businesses.
Finhabits has collected some important information that can help both employers and employees better understand how to comply with this mandate.
2023 UPDATE – Please scroll down to read about the new SECURE Act 2.0 benefits signed into law by the US government in Dec. 2022.
What is the Illinois Secure Choice Savings Act?
The Illinois Secure Choice Savings Act was passed in 2018 with the goal of giving private-sector workers the opportunity to save for their retirement.
Initially, the mandate only applied to businesses with 25 or more employees. However, the 2021 amendment now requires businesses to enroll their employees in either a qualifying private plan or the state-offered program (Illinois Secure Choice) if they meet the following three criteria: they have five or more employees, they have been in business for at least two years, and they don’t currently offer a retirement plan.
Businesses that offer a private plan must submit proof that their program meets the mandate’s qualifications in order to prove exemption and avoid penalties.
Employers that don’t comply with the mandate may face penalties of $250 per worker during the first calendar year and $500 per employee thereafter.
What is the Illinois Secure Choice Savings Program?
Illinois Secure Choice is a retirement savings program that fulfills the mandates established by the Secure Choice Savings Act. Businesses that meet the mandate’s criteria must either enroll their employees in the Secure Choice program or sponsor a qualified private plan.
Who is required to provide a plan?
Any Illinois business that meets the following criteria must offer a qualified retirement savings plan to its employees:
- Has five or more workers
- Has been in operation for at least two years
- Does not currently offer any employer-sponsored retirement plan like a 401k, SEP-IRA, or SIMPLE IRA
How does Illinois Secure Choice work?
The Illinois Secure Choice Saving Program allows workers to save in a Roth IRA (Individual Retirement Account).
In this state-sponsored program, the employer’s role is simply that of facilitating employee access to a retirement savings account. With Illinois Secure Choice, employers cannot offer matching contributions. Moreover, Roth IRAs have contribution limitations. For 2022, the total annual contributions by employees cannot exceed $6,000 for people under 50 and $7,000 for those 50 or older. For 2023, the total annual contributions to Roth IRAs cannot exceed $6,500 (or $7,500 for people 50 or older).
Here are some more facts about the Illinois Secure Choice Savings program:
- Registering a business means that all employees are automatically enrolled after a 30-day grace period: Employers who register for the program will have their workers automatically enrolled. Once enrolled, employees will receive an invitation to the program.
- Employees can opt out from the program at any time: If an enrolled employee wants to opt out, they can do so online by visiting saver.ilsecurechoice.com.
- The default contribution rate is 5% of gross pay: The standard rate for an Illinois Secure Choice Savings Program account is 5% of the employee’s gross pay. This quantity is deducted from the worker’s paycheck on an after-tax basis.
- Once enrolled, employees can increase or decrease their withholdings: If an employee finds that there’s a contribution rate that works better for their needs, they can adjust the contribution rate at any time to as little as 1% or as much as they want. When adjusting contribution rates, however, employees should also keep in mind their annual contribution limits.
- Contribution rates automatically increase every year: Workers that have been enrolled in the program for at least six months will have their contribution rates automatically increased by 1% on January 1 of every year, with contribution rates capping at 10%. Employees can opt out of these automatic increases at any time.
- Loans from the plan are not permitted: Workers cannot take loans from this retirement savings plan.
What employers need to know about the Illinois Secure Choice Savings Plan
Illinois employers and employees need to understand how the Illinois Secure Choice Savings Program works so that they can make informed decisions about complying with this state mandate.
Based on the information provided by the Illinois State Treasurer’s office, employers that already offer a qualifying 401k plan or another qualifying retirement program can prove exemption from the state program.
Employers that do not currently offer retirement benefits have two options: register for the Illinois Secure Choice Savings Program, or register in a private, qualifying savings plan like a 401k.
Qualifying employers that do not comply with the Illinois mandate may face expensive fines. The penalties for a non-compliant business are $250 per worker for the first calendar year and $500 per worker for each subsequent calendar year.
According to the Illinois Secure Choice Savings Program website, enforcement for non-compliant employers with 25 or more workers will likely begin in 2023.
The registration deadline for the Illinois Secure Choice Savings Program varies depending on the employer’s size:
- 25+ employees: the deadline has already passed, but businesses can still register today to avoid getting fined
- 16 to 24 employees: the deadline was November 1, 2022
- 5 to 15 employees: the deadline is November 1, 2023
Registration is currently open for these three types of employers, and it is recommended to avoid delaying and register today.
Since the Illinois Secure Choice Savings Program is a Roth IRA, employer contributions to the program are not permitted. In addition, owing to limitations set by the federal government, in 2022 the total annual contribution that employees can make cannot exceed $6,000 for people under 50 and $7,000 for those 50 or older. For 2023, the total annual contributions to Roth IRAs can’t be more than $6,500 (or $7,500 for those 50 or older).
How to participate in the Secure Choice Savings program
If a business has decided to enroll its employees in the Illinois Secure Choice Savings Program, it is recommended that the employer follow these simple steps:
- Register at the Illinois Secure Choice website
- Submit an annual employee census to the State of Illinois
- Create both employer and employee accounts
- Distribute enrollment information to new hires within 30 days
- Automatically enroll employees at the default 5% contribution rate
- Facilitate opt-out requests (employees will have 30 days to opt out or make adjustments to their account)
- Provide payroll deduction arrangements for each pay period
- Apply annual increases to contribution rates (up to a maximum of 10% of wages)
Illinois Secure Choice FAQ
In order to better understand the Illinois Secure Choice Savings Program, here are answers to some of the most Frequently Asked Questions:
What are the benefits of enrolling in the Illinois Secure Choice Savings Program?
Illinois Secure Choice comes with a variety of benefits that include the following:
- Online registration: Employers enroll their own employees in the program. Once a business has registered, its workers will receive an invitation from the Illinois Secure Choice Savings Program.
- Less hassle: Businesses don’t pay any fees, don’t make contributions, and are not responsible for paperwork or administrative duties.
- Accounts are portable between jobs: Employees can keep their Roth IRAs, even if they switch jobs.
Is Illinois Secure Choice mandatory?
No, businesses that already offer a qualifying 401k plan or another qualifying retirement program can prove exemption from the state program. For those businesses that do not currently offer retirement benefits, there are two options: register their company with the Illinois Secure Choice Savings Program or find a private alternative like a qualifying 401k plan that fulfills the state guidelines.
If you’re an employee and your company has enrolled in the Illinois Secure Choice Savings Program, you can choose to opt out of the plan. When a worker opts out within 30 days after the establishment of the account, there will be no payroll deductions made from the employee’s paycheck, and the account will not be activated. In case the employee chooses to stop participating after contributions were made, the contributed funds will remain in the account, but no future payroll deductions will be made.
Is Illinois Secure Choice a Roth IRA?
Yes, the Illinois Secure Choice Savings Program is a Roth Individual Retirement Account (IRA). Roth IRAs are retirement savings accounts that offer tax-free withdrawals and have certain limitations set by the federal government. For example, in 2022 the maximum amount an employee under 50 can contribute to their Roth IRA is $6,000, while the maximum contribution limit is $7,000 for people 50 or older. In 2023, the total annual contributions to Roth IRAs cannot exceed $6,500 (or $7,500 for those 50 or older).
Is Illinois Secure Choice pretax?
Since the Illinois Secure Choice Savings Program is a Roth IRA, contributions are made on a post-tax basis. This means that employees don’t receive tax benefits for their savings.
Can I withdraw my money from Illinois Secure Choice?
Yes, employees can take their money out of their accounts at any time. However, if taken out before age 59½, the saved earnings are subject to taxation and a penalty by the IRS.
Can employers match employee contributions?
No, since the Illinois Secure Choice Savings Program offers a Roth IRA, employer contributions are not permitted.
Can I join the program if I’m self-employed?
Yes, a self-employed individual can enroll in the Illinois Secure Choice Savings Program if he or she meets the following requirements:
- Is at least 18 years old
- Has earned income
- Is eligible for contributing to an IRA
Can participants in Illinois Secure Choice also be eligible for the Saver’s Credit from the IRS?
Yes. If participants are eligible, they can take advantage of the Saver’s Credit. It is important to note that the Saver’s Credit is a federal tax credit that may be available for employees who make contributions to their retirement plan.
Is there a fee for participating in the program?
Yes, employees pay a fee based on the assets under management. The fee is approximately 0.75% of the assets per year, which basically translates into $0.75 for every $100 saved.
According to the Illinois Secure Choice Savings Program website, this fee pays for the administration of the program and the operating expenses charged. Also, there is a $5 annual paper statement fee, but this can be avoided by applying for e-delivery.
How is Illinois Secure Choice different from other plans like a 401k or an IRA?
Illinois Secure Choice offers a Roth IRA, which operates differently from 401k plans. Here are some key differences between the state-run plan and other private plan options:
IRA Employee Contribution Limits. The employee contribution limit to a Roth IRA is $6,000 for people under 50 and $7,000 for those who are 50 or older. Programs like the Finhabits 401k plan offer higher employee contribution limits. Compared to an IRA, 401k plans have significantly higher contribution limits, allowing employees to contribute up to $20,500 in 2022, or up to $27,000 for those aged 50 and older.
Secure Choice Matching Contributions. Illinois Secure Choice doesn’t allow employers to match employee contributions. In contrast, the two 401k plans that Finhabits offers are “Safe Harbor” plans, which means that employee contributions receive matching contributions. Each of these plans has its own contribution matching and investment formulas, so employers can decide which plan better meets the needs of their employees.
IRA Income Limitations. The Roth IRA offered by the Illinois Secure Choice program has income limitations. Employees who exceed the maximum income limit of $144,000 for a taxpayer filing singly or $214,000 for married taxpayers filing jointly cannot participate in the program. 401k plans are not subject to these income restrictions.
IRA After-Tax Contributions. Employees who participate in the Illinois Secure Choice program can only make after-tax contributions. This means that they don’t receive a tax benefit in the year they made their contributions. With an IRA, investment earnings are tax-deferred, but they don’t become tax-free until they are withdrawn. For more information about the differences between IRAs and 401ks, please speak with a tax professional. A 401k plan allows both before-tax and after-tax contributions.
Investment Options. Illinois Secure Choice limits investments to four different funds: the Target Retirement Fund, the Capital Preservation Fund, the Conservative Fund, and the Growth Fund. Depending on the provider, a 401k plan may offer broader investment options in assets such as company stocks and variable annuities.
2023 UPDATE – New Tax benefits: On Dec. 29, 2022 the SECURE Act 2.0 was signed into law by the U.S government. Thanks to this update to the 2019’s SECURE Act, eligible businesses with up to 50 employees can have access to more tax credits than ever before for establishing a retirement plan for their employees (up to 100% of the plan costs for the first three years). Credits for eligible businesses with 51 to 100 employees remain similar to the original SECURE Act provisions (that is 50% of administrative costs, capped annually at $5,000). Plus, the SECURE ACT 2.0 includes an additional credit for 5 years of up to $1,000 per employee equal to the applicable percentage of eligible employer contributions to an eligible employer plan (not including a defined benefit plan). Please check with your tax advisor for more details.
As the first financial wellness and retirement savings platform in both English and Spanish, Finhabits can help your business comply with the Illinois retirement mandate and, if eligible, take advantage of the new SECURE Act 2.0 benefits. To learn more about Finhabits 401k plan options and prices, visit us at www.finhabits.com/401k or call us at 1-800-935-7214.
Finhabits explains: How does your business benefit from offering a 401k plan?