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Here’s what you need to know about Illinois Secure Choice retirement plans
Employers Retirement legislation

Here’s what you need to know about Illinois Secure Choice retirement plans

Nicolle Willson, J.D., CFP®, C(k)P®

Making it easy for your employees to save for retirement isn’t just best practice, it’s the law in some states. In 2018, Illinois rolled out Secure Choice, a state-run retirement program that employees can join as an alternative to an employer-sponsored plan.

Secure Choice isn’t your typical retirement offering. From employer obligations to participant eligibility, we’ll go through what you need to know about the Illinois program.

Right way to 401(k)

What are the employer requirements?

Secure Choice impacts most Illinois businesses that don’t offer an employer-sponsored retirement plan. Specifically, its requirements apply to companies in Illinois that meet all of the below criteria:

  • They have at least 25 employees
  • They’ve operated for two or more years
  • They don’t offer an employer-sponsored retirement plan

First, state law requires these businesses to register with the program online and complete a brief questionnaire. They’ll then be provided informational materials for employees. From that point, businesses must automatically enroll participants within 30 days. In that time, participants will be allowed to opt-out or adjust their contribution rate, which defaults to 5% if they don’t take any action. They’ll also be able to make changes at any time moving forward.

While participating companies don’t have to pay administration fees or worry about compliance obligations like non-discrimination testing, they are on the hook for administering and remitting their employees’ contributions. For example, if a plan participant wants to change their contribution rate from 5% to 7%, employers will still need to process that change in their HR or payroll software. But beyond that, employers are generally left on the sidelines—so much so, that Secure Choice forbids them from providing an employer match or contributing to accounts in any way.

The fine for not complying with this rule (or any of the program’s requirements) can reach $250 per employee for the first year, and the $500 per employee for every subsequent year. The state hasn’t begun enforcement yet and won’t start that process until 2021, in order to focus on helping employers come into compliance with the program rules.

What are the investment options for Illinois Secure Choice plans?

Today, 401(k) plan sponsors and participants are accustomed to a variety of offerings and features — pre and post-tax contributions and profit sharing are just some of the options on the table. While Secure Choice makes saving easier for state residents who don’t have access to an employer-sponsored 401(k) plan, it does so at a cost: namely, choice.

Secure Choice gives employees the option to participate in a Roth or traditional IRA. As a refresher, Roth plan contributions come out of employee paychecks after taxes, while traditional plan contributions come out pre-tax.

In addition, because these plans are IRAs rather than 401(k) accounts, they’re subject to lower contribution limits. As of this writing, individuals can defer up to $6,000 per year in an IRA (and an extra $1,000 if they’re at least 50 years old). The annual limits for 401(k) participants are $19,500 per year (and an extra $6,500 if they’re at least 50 years old). Key differences with Guideline 401(k) plans are highlighted below.

Illinois Secure Choice Guideline 401(k)
- Auto-enrollment (5% contribution rate by default)

- Savers can opt out or update their contribution rate
- Auto-enrollment

- Participants can opt out or update their contribution rate
- Employees pay approximately 0.75% of assets under management (AUM) per year

- No fees for employers
- Employees pay 0.08% assets under management (AUM) per year*

- Low cost for employers, starting at $49 + $8 per participant, per month
- Employers can't make contributions - Employers can make contributions for total savings up to $57,000 in 2020

What are the other ways Illinois Secure Choice is different from a 401(k)?

There are a few other details to keep in mind. While loans aren’t permitted as they are in 401(k) plans, pre-retirement withdrawals are. As is the case with conventional IRAs, savers under the age of 59½ will need to pay taxes on investment earnings and an early withdrawal penalty. Similarly, once they reach age 72 they’ll have to start taking required minimum distributions.

While Secure Choice may have a few drawbacks when compared to private, employer-sponsored offerings, it has some noteworthy perks for participants. Though sponsored plans can limit or exclude coverage to seasonal or part-time staff, Secure Choice doesn’t leave eligibility to employers’ discretion. If you work for a company for more than 60 days, no matter your hours, they’ll still be required to enroll you.

For the underemployed and those historically underserved by employer-sponsored 401(k) plans, Secure Choice offers a means of saving. Even self-employed individuals are eligible to enroll in the program. The only caveat here is that, like any Roth IRA, there is an income limit to participate: $139,000 for single tax filers and $206,000 for joint households. Participants who exceed those limitations should ensure they’re saving in the Traditional IRA option.

There’s also the matter of account portability. Because their employers simply act as facilitators, individuals maintain ownership of their Secure Choice accounts. If they switch employers, the Roth IRA comes along with them — sparing participants from the often complicated and time-consuming rollover process. What’s more, individuals can continue contributing to their Secure Choice account even if their subsequent employer offers a retirement plan.

Secure Choice isn’t the first program of its kind. As of July 2020, nine other states have implemented similar programs. But while these offerings aren’t necessarily as robust or customizable as employer-sponsored 401(k) plans, they serve an important purpose: closing the retirement savings gap.

Nearly half of US workers don’t have access to an employer-sponsored retirement plan. Guideline’s mission is to help close that gap by making it easier for small businesses to offer a retirement plan that helps secure employees’ future. To that end, we’re thrilled that states like Illinois are invested in achieving that goal.

To learn about Guideline’s 401(k) plans, click here. You can also read our state-by-state roundup to see what your jurisdiction offers.

This content is for educational purposes only and is not intended to be construed as tax advice.  You should consult a tax professional to determine the best tax advantaged retirement plan for you.

*The annual account fee of 0.08% applied to assets under management is calculated and deducted on a monthly basis at 1/12 of the annual stated rate (0.08%) based on the account balance on the last day of each month.