In the coming days, affected business owners should receive notification from the State of Delaware about the new State Auto-IRA plan called EARNS (Expanding Access for Retirement and Necessary Saving). Like other states trying to decrease the coverage gap for employee retirement savings, on Aug. 18, 2022 -Delaware Gov. John Carney (D) signed the legislation. EARNS went live in July.
The program, which is being managed by Vestwell and overseen by the Delaware EARNS Program Board, comes with a mandate that requires any business with more than five Delaware employees to either offer a Qualified Retirement Plan or enroll in EARNS by January 1, 2025. Business owners must register to opt into the program or certify they qualify for an exemption by October 15, 2024. Those who do not comply will face a penalty of $250 per eligible employee per year (up to a maximum of $5,000 annually). As a small business owner, this might be overwhelming information to process in such a short timeframe. So, let's break it down.
Who Will Be Impacted?
This mandate will affect businesses that:
- Have been in business for more than 6 months in the prior calendar year
- Have more than five W-2 employees (part-time and full-time)
- Do notalready have a Qualified Plan established (see list of Qualified Plans below):
- 401(k)
- Profit Sharing Plan
- 403(b)
- Simple IRA
- SEP
- Defined Benefits or Cash balance Plan
- Employees 18 years or older and have earned income in the state of Delaware for at least 120 days are eligible to participate in Delaware EARNS
- The program is voluntary for employees, and they can change their contribution amount or opt-out at any time.
Business owners that are unsure whether to start their own plan or enroll in EARNS, it's essential to identify your wants and needs as the owner and the business as a whole. For many, the gut reaction might be to set up your own 401(k) to avoid the state-run program. But is that the right choice? Before deciding, contact your CPA or Financial Advisor to discuss the pros and cons of both EARNS and a self-run plan.
Here are three questions to help guide your decision-making process:
Do you as an owner want to contribute to your own Retirement up to the maximum allowable deferral rate? ($23,000 under 50, $30,500 over 50 for 2024)?
If so, you may not pass what is called Top Heavy Testing -meaning highly compensated employees (HCEs) cannot hold more than 60% of total plan assets. This can be challenging for owners who want to maximize their deferral. To bypass this, you would need to add a Safe Harbor Employer contribution provision, leading to the next question...
Can you afford and are you interested in making an employer contribution (Safe Harbor, Profit Sharing)?
To put your own money into the plan, you might have to provide your employees added compensation in the form of a match or profit-sharing. On average, this might be 3-4% of total compensation for employees. Business owners need to ensure they can afford this to make the plan set up and ongoing administrative costs manageable and worthwhile.
Are you okay with spending the money for an Advisor and Third-Party Administrator to help you manage your Qualified Plan?
Managing a 401(k) plan can be complex as far as the associated rules and regulations. You will need to hire experts/fiduciaries to build an efficient and compliant plan. Joining the EARNS program is considerably less expensive than running your own plan.
It's great to have options. You needn't feel pressured into opening your own plan unless it makes financial sense. The EARNS program has some advantages for smaller business owners, but it is not fit for everyone. Be sure to think through these questions. If you answered yes to any or simply want more information regarding the EARNS program compared to a startup 401(k), give RiversEdge a call 302-573-6864. Our Retirement Specialists can help guide you. For more information on EARNS visit their website.