Which States Mandate a Retirement Plan?

State-sponsored retirement plans are programs run by state governments that give workers access to retirement savings when their employers don’t offer a sponsored plan such as a 401(k). These programs typically use at least one of the following saving models: 

• Auto Roth Individual Retirement Accounts (Auto-IRA) 
• Voluntary payroll deduction IRA 
• Voluntary marketplace plan
• Voluntary Multiple Employer Plan (MEP) 

A financial services firm designated by the state administers each program while overseeing the corresponding investments and funds. The cost to employers is typically minimal.

Furthermore, some states require eligible employees to automatically enroll in the program and contribute a specific percentage of their wages via payroll deductions. Employees, however, may later opt out of these programs.

Why are Retirement Plans Required by Law?

Many states have introduced mandatory retirement plans to tackle the significant gulf in retirement savings across the U.S. 

Research highlights that many Americans are unprepared for retirement, with approximately one-quarter of working adults having no savings set aside for their later years. Moreover, it’s estimated that more than 50 million American workers don’t have access to an employer-offered retirement savings plan. By 2040, this deficit is expected to cost states an estimated $334 billion in increased spending.

State-mandated retirement programs aim to reduce this financial insecurity by addressing a key barrier for employees: access to a retirement savings plan.

Which States Have Mandatory Retirement Plans?

While fewer than half of all states have a state-sponsored retirement plan, the number of those with new retirement plan laws has spiked in recent years.

Employer Retirement Plan Considerations

Since retirement plan laws vary widely, employers should consult their state’s agency for all state retirement plan requirements and deadlines. Some states, for example, mandate compliance only for businesses of a certain size. Moreover, some states require employees to enroll automatically in a plan and contribute from their wages. Employees wanting to opt out of said plans may need additional information or assistance.

Employee Retirement Plan Considerations

Most state-sponsored retirement plans are set up as Roth IRAs, with employee contributions occurring after payroll and income taxes are withheld. However, some states (e.g., Minnesota) allow employees to contribute before such taxes are applied, similar to how a Traditional IRA operates.

Pre-tax contributions reduce an employee’s taxable income and overall tax liability, resulting in immediate tax savings. Post-tax contributions, conversely, offer tax-free withdrawals during retirement, including any accumulated interest or earnings, provided the withdrawal meets the IRS’ qualified distribution criteria.

Private Retirement Plans vs State-Sponsored Retirement Plans

Employers in a state with a mandatory retirement plan law must choose between adopting a state-sponsored retirement savings plan or offering their own private plan.

State-sponsored plans, such as auto-IRAs, are often the simplest option. They’re inexpensive to set up and have minimal administrative requirements. They’re designed to reduce obstacles for small businesses or those new to offering retirement benefits.

However, even the best state retirement plans have shortcomings. For example, auto-IRAs usually have tighter restrictions on how much an employee can contribute each year ($7,000 in 2025 for those under 50) and don’t allow employers to match employee contributions.  

Conversely, private plans, such as 401(k) accounts, have significantly higher contribution limits ($23,500 in 2025) and may entitle the employer to certain tax credits that offset setup and administration costs. Moreover, allowing employer contributions can make these plans much more appealing when retaining employees or attracting new hires. 

Simply put, state-sponsored plans can be affordable and simple for employers to use but also limited in how much they benefit employees. Private plans often offer more options and benefits but can be more expensive and time-consuming to manage.

Empower Retirement Savings with Paylocity

Sixty percent of workers are likelier to stay with their current employer if the organization offers a retirement savings plan. That makes it one of the most important priorities considered next to competitive salaries and flexible work hours.

In other words, even when a state doesn’t require one, it pays to have a robust retirement savings plan employees can count on.

This is where having the best payroll and benefits administration software can make a world of difference — particularly platforms that offer employees multiple options by integrating with both private and state-sponsored retirement savings providers.

Request a demo today to see how much easier benefits administration and retirement savings can be with Paylocity.