When Expanding Retirement Plan Access Makes Employers Think Twice
A version of this article has appeared in Investor Magazine
By John H. Robinson, Owner/Founder
Federal and state lawmakers deserve credit for trying to make retirement plans available to more American workers. Too many employees, particularly those working for small businesses, reach retirement with little more than Social Security and whatever they managed to accumulate on their own.
The problem is not the goal. The problem is that legislators keep trying to achieve it by placing more responsibility on employers.
Every new retirement plan mandate comes with another eligibility rule to monitor, another payroll procedure to establish, another notice to distribute, and another opportunity to make an expensive mistake. Large corporations have human resources departments, benefits specialists, payroll teams, lawyers, and consultants to handle these responsibilities. Small business owners often have none of them.
For many small employers, the person responsible for retirement plan compliance is the same person responsible for hiring employees, making payroll, negotiating the lease, paying vendors, and keeping the doors open.
Congress may believe it is expanding retirement plan coverage. In practice, it may be giving small business owners another reason not to establish a plan at all – or worse, to terminate their existing plan.
The Long-Term Part-Time Employee Problem
Historically, many 401(k) plans could exclude employees who did not complete at least 1,000 hours of service during a 12-month period. The original SECURE Act changed that by creating a new category of “long-term part-time employees.”
Under the initial rule, an employee generally had to be permitted to make salary deferrals after completing at least 500 hours of service in three consecutive 12-month periods. SECURE 2.0 shortened the measurement period from three years to two for plan years beginning after December 31, 2024. The provision was also extended to ERISA-covered 403(b) plans.
The objective is understandable. Someone who works 10 or 15 hours per week for the same employer over several years should have an opportunity to save for retirement through payroll deductions.
But consider what the rule means for a small employer.
The employer must now track hours for part-time employees across multiple years, even when those employees never come close to working 1,000 hours in a year. The employer must understand how the rules apply to rehired employees, breaks in service, eligibility dates, plan entry dates, and different employee classifications. The employer may also need to retain records for workers who left and later returned.
Although employers generally are not required to make matching contributions for employees who qualify solely under the long-term part-time rules, they must still identify those employees and give them an opportunity to defer compensation. Failure to do so may require corrective contributions and formal remediation under IRS procedures.
The IRS itself advises plan sponsors to review employee census data carefully and correct employees who were not offered a timely opportunity to participate.
To a member of Congress, tracking 500 hours may sound simple. To a restaurant, retail store, medical practice, or small construction company with seasonal and part-time workers, it may be anything but simple.
Automatic Enrollment Is Not Automatic Administration
SECURE 2.0 also generally requires many new 401(k) and 403(b) plans established after December 29, 2022, to use automatic enrollment beginning with the 2025 plan year.
Covered plans generally must enroll eligible employees at an initial contribution rate between 3 and 10 percent of compensation. The rate must then increase by one percentage point each year until it reaches at least 10 percent, subject to a 15 percent ceiling. Employees may opt out or select a different contribution rate.
There are exceptions, including certain businesses with 10 or fewer employees, employers that have been in business for less than three years, governmental plans, and church plans. Existing plans generally are grandfathered.
Again, the policy rationale is sound. Automatic enrollment has been shown to increase retirement plan participation because many employees who would not complete an enrollment form will continue contributing once deductions begin.
But automatic enrollment does not make plan administration automatic.
Someone must determine when each employee becomes eligible, provide the required notices, establish the proper payroll deduction, process opt-out elections, implement annual contribution increases, and correct mistakes. Payroll systems and recordkeeping platforms do not always communicate perfectly. An employee’s election may be received but not implemented. A deduction may start late. An automatic increase may be overlooked.
Each seemingly minor error creates another compliance problem for the employer.
Automatic enrollment may help employees save, but it also changes a voluntary employee benefit into a more complicated administrative obligation. A business owner considering a new 401(k) plan may reasonably ask whether the benefit is worth the cost, paperwork, and liability.
Some will decide that it is not.
Hawaii Adds Another Employer Mandate
Hawaii has now joined the growing number of states attempting to close the retirement coverage gap through a state-facilitated IRA program.
The Hawaii Retirement Savings Program was created to provide private-sector employees without access to an employer-sponsored plan with a way to save through payroll deductions. Under Act 113, signed in 2025, covered employers must automatically enroll covered employees in the program unless the employee opts out.
The law broadly defines a covered employer as a business operating in Hawaii with one or more employees. An employer generally is excluded if it has offered or maintained a qualifying retirement plan for some or all employees at any time during the preceding two years.
The state program is intended to impose no employer contribution requirement. It may therefore be described as free to employers. But “no employer contribution” is not the same as “no employer cost.”
Employers will still have to register, supply employee information, coordinate with their payroll system, transmit deductions, process changes, respond to employee questions, and document compliance. A business using an outside payroll provider may face additional setup or service charges. A very small employer handling payroll internally will have to learn another system.
The state-sponsored account is an IRA, not an employer-sponsored qualified retirement plan. It does not provide the same contribution limits, plan design flexibility, employer matching opportunities, or potentially broader investment choices available through a 401(k). Yet the employer is still conscripted into administering the payroll connection.
The irony is difficult to miss. Hawaii wants more employers to facilitate retirement saving, but its mandate may cause some business owners to establish a minimalist state IRA arrangement instead of adopting a more generous employer-sponsored plan.
Worse, an employer with an existing plan may eventually conclude that maintaining it is no longer worth the complexity. Because Act 113 looks back at whether an employer offered or maintained a qualifying plan during the preceding two years, termination would not necessarily produce immediate eligibility for the state program. Still, the broader incentive problem remains. As federal compliance obligations accumulate, employers may become increasingly reluctant to sponsor plans voluntarily.
Incentives Work Better Than Mandates
Lawmakers seem to assume that every retirement savings problem can be solved by adding another employer requirement. That assumption ignores how small businesses make decisions.
A retirement plan is not mandatory for most private employers. If establishing one requires too much expense, administrative attention, or legal exposure, the employer can simply decline to do it. If maintaining an existing plan becomes too burdensome, the employer may freeze or terminate it.
Congress has expanded tax credits for small employers that start retirement plans, which is a constructive approach. But the value of those credits can be undermined when the plan becomes harder to administer year after year.
A better policy would focus on genuine simplification. Employers should have access to safe-harbor plan designs with minimal testing, standardized notices, integrated payroll systems, straightforward eligibility rules, and correction procedures that do not require a benefits lawyer to understand.
States should also recognize that payroll mandates are not costless simply because employers are not required to contribute money.
The people writing these laws want more Americans to save for retirement. So do I. But good intentions do not guarantee good outcomes.
If legislators continue heaping complexity, recordkeeping duties, and compliance risk onto small businesses, they may discover that their efforts to expand retirement plan coverage have produced the opposite result. The easiest retirement plan for a small employer to administer is still no retirement plan at all.
As a financial planner working with small business owners, I have a couple of 401(k) clients who are considering terminating their plans because of the LTPT and auto-enrollment complexity. I have another client who has said the new regs make him reticent to hire part-time staff. I am pretty sure these are not the outcomes that the legislators envisioned. Such idealism needs a reality check.