New York State has enacted requirements under which certain private sector employers, including nonprofit organizations, are required to establish automatic payroll deduction IRAs if a qualified retirement plan is not not offered to employees (“Secure Choice IRA”). More than half of private sector employees, including part-time workers, in New York City do not have access to an employer-sponsored retirement savings option. The Secure Choice IRA was developed to address the retirement savings crisis. The goal is to promote greater retirement savings for private sector employees in a convenient, automatic, inexpensive and portable way. Only certain employers (defined below) are affected by the new rules and have up to two years to implement the programs.
New York City has enacted a similar law, Retirement Security for All. However, New York City law states that the city’s program retirement savings board will not implement the city’s program if “the State establishes a retirement savings program that requires a substantial portion of employers who would otherwise be covered to offer their employees the option of contributing to the accounts through payroll deduction or another method of contribution. Since the New York State program will likely cover many of the same employers as the New York City program, it is unclear whether the city program will be implemented. Employers should note that the Secure Choice IRA does not distinguish between New York State and New York City, and the city-state distinctions described below will only apply if the two programs are implemented.
Which employers are subject to the Secure Choice Savings Program Payroll Withholding IRA?
- Any private sector employer engaged in a business, industry, profession, trade or other business in New York, including private and not-for-profit businesses, who has at any time during the preceding calendar year continuously employed at least
- Ten (10) employees in the State of New York, or
- Five (5) employees in New York,
- Be in business for at least two (2) years, and
- Has not offered, in the past two (2) years, a qualified retirement plan such as a 401(k) or 403(b).
An employer that facilitates its employees’ access to the Secure Choice IRA program is a participating employer. An employee enrolled in the Secure Choice IRA program is a registrant.
What rights do employees have?
1. Employees have the right to (a) participate in the IRA Secure Choice and select the level of contribution, which can be expressed as a percentage of salary or as a dollar amount up to the annual IRA limit ( the limit for 2022 is $6,000, and $7,000 for employees age 50 and over).
2. Employees may choose to opt out of the Secure Choice IRA program using the applicable opt-out form.
3. If an employee does not opt out or elect to participate with a different contribution level, the employer will automatically enroll them at the default contribution rate, which is
- Three percent (3%) of wages in the State of New York, or
- Five percent (5%) in New York (the “Default Rate”).
4. Registrants may change their contribution level at any time, subject to rules promulgated by the New York State Secure Choice Savings Board.
5. The Secure Choice IRA is individually owned, which makes it portable – employees can take it with them if and when they change jobs.
What should an employer do?
- As part of the Secure Choice IRA, a participating employer must provide disclosure documents to its employees. Notice must be provided to new employees upon hire and to existing employees at least one month before the participating employer facilitates access to the Secure IRA savings program. The notice must inform the employees of their electoral choices; the benefits and risks associated with program contributions; processes for making contributions, withdrawing from the program, changing contribution level, withdrawing savings, selecting beneficiaries, accessing information about financial literacy programs, and obtaining more information; information on how to obtain financial advice from financial advisers (that Participating Employers are not able to provide financial advice and Participating Employers are not responsible for investment decisions made by employees); and that the program fund is not guaranteed by the State of New York.
- Participating employers must automatically enroll in the Secure Choice IRA each employee who does not opt out of participation using the applicable opt-out form or who has elected to participate with an employee contribution level other than three percent (3%) of salary in New York State or five percent (5%) in New York.
- Participating employers must withhold and remit payroll deductions to the program no later than the 30th day after the employee enrolls in the Secure Choice IRA.
- Participating employers must retain records for a minimum of three (3) years.
Note: Employers do not make employer contributions to the Secure Choice IRA on behalf of their employees. Additionally, employers cannot terminate an existing qualified plan to participate in the Secure Choice IRA.
Does the employer assume a risk?
The program is designed to limit the liability of employers. The Secure Choice IRA is not covered by the Employees Retirement Income Security Act of 1974, as amended (“ERISA”), and the participating employer will not be considered a trustee of the program. The participation of participating employers is limited. Unlike a qualified plan, with the Secure Choice IRA there are no employer contributions, no annual testing requirements, and no annual returns to file. Participating employers will not be responsible for an employee’s decision whether or not to participate in the program or for the investment decisions of the New York State Secure Choice Savings Board or any registrant. The board should select investment options that include a target date lifecycle fund and may also include a conservative capital protection fund, a growth fund, an annuity fund, or a secure yield fund. In New York, there are penalties for employers who do not register their employees, make deposits or maintain records. Penalties increase for continued violations ($250 per employee for the first violation, $500 per employee for the second violation within two years, and $1,000 per employee for the third and subsequent violations, plus an additional fine of $100 violation for employers who do not keep compliance records for three years).
Similar automatic IRA programs have been enacted in more than a dozen states, including California, whose program was at issue in the first case challenging whether ERISA anticipates state law that creates an IRA program operated by the state. The Ninth Circuit upheld the lower court’s ruling that the ERISA preemption does not apply. The panel concluded that ERISA applies to plans that are established or maintained by an employer, but that here “it is the state that established CalSavers and the state that maintains it – not eligible employers “. On Feb. 28, the U.S. Supreme Court declined to hear the case, leaving in place the Ninth Circuit’s ruling that state-sanctioned self-IRAs can co-exist with employee-sponsored benefit plans. employer and submitted to ERISA.
When are the rules effective?
Although New York State and New York City laws are currently in effect, each of the boards, which is responsible for the administration and operation of automatic IRAs, has up to two years to implement the programs. Thus, employers do not need to take immediate action. Employers will have nine months after the board opens the enrollment program to begin making payroll deposits. On January 26, the New York State Secure Choice Program Board of Directors held its first meeting and asked the Department of Taxation and Finance to begin implementing the program.