Earlier this month, Illinois became the first State to enact legislation that requires private-sector employers who do not offer qualified retirement plans to enroll their employees in individual retirement accounts (i.e., “IRAs”). Now-former Governor Pat Quinn signed the Illinois Secure Choice Savings Program Act (“Act”) into law on January 4, 2015.

The Act, which will become effective with enrollment occurring sometime in the next 24 months, has a broad reach. The following provides a high-level summary of the applicability of (and requirements under) the Act:

What Employers are Subject to the Act?

For any given year, the Act applies to any employer that:

  • Is a private for-profit or non-for-profit company engaged in business in Illinois;
  • Has been in business for at least two years;
  • Has employed at least 25 employees in Illinois at all times during the previous calendar year; and
  • Has not offered a qualified retirement plan (for example, a 401(k) or 403(b) plan) in the preceding two years.

An employer with fewer than 25 employees and/or that has been in business for less than two years may, but is not required to, participate in the program.

What Does the Act Require?

A private-sector employer that meets the above criteria will be required to either (i) set up a retirement plan for its employees, or (ii) automatically enroll its employees who are age 18 and older in the savings program created by the Act and set up payroll deductions for them to make deposits into the program.

The program itself will be established and administered by a seven-member board (“Board”) established by the Act. Employee accounts under the program will be set as Roth IRAs under Internal Revenue Code (“Code”) section 408A (i.e., an after-tax IRA).

The payroll deduction amount is set at a default 3% of the employee’s “wages” (generally, the amount shown in box 10 of Form W-2 (wages, tips, other compensation), less amount properly shown in box 14 (nonqualified plans)).

Employees may select a payroll deduction amount higher or lower than 3% (subject to the deduction limits under Code section 219(b)(1)(A)) or, alternatively, opt-out of the program entirely. An employee who opts out may later enroll in the program during the applicable open enrollment period (to be set by the employer). An employee’s account will be portable from one employer to another.

When Will Compliance Be Required?

The legislation includes a 24-month implementation period following its adoption (i.e., an employer may not be required to comply until 2017). During this pre-implementation window, the Board is required to seek an opinion/ruling of the IRS and the Department of Labor regarding the applicability of the federal Employee Retirement Income Security Act (“ERISA”) to the program. The program may be derailed – and never implemented – if it is determined that the IRA arrangements offered under the program will fail to qualify for the favorable federal income tax treatment ordinarily accorded to IRAs under the Code or it is determined that the program is an employee benefit plan under ERISA.

Assuming these federal hurdles can be overcome, then once the Board opens the program for enrollment, an employer will have up to nine months to establish the required payroll deduction program.

What is the Penalty for Failing to Comply?

An employer that fails to enroll an employee in the program as required by the Act may be hit by a penalty of $250 per employee for each calendar year (or portion thereof) that the employee was not enrolled in (and did not opt-out of) the program. For any calendar year beginning after an initial penalty has been assessed, an increased $500 penalty may be assessed for any portion of that calendar year during which the employee remains unenrolled in (or has not otherwise opted out) of the program.