Summary – NY City Regulations
On May 11, 2021, New York City Mayor De Blasio signed into law 888-A and 901-A, a New York City Local Law 51 and 52, respectively. Collectively known as the New York City “Retirement Security for All” legislation, these laws impose a mandatory auto-enrollment payroll deduction Individual Retirement Account (IRA) program for employees of private sector employers, which do not currently offer a retirement plan, and employ five or more employees “whose regular duties occur in” New York City. Employers are not required to contribute to these accounts. This legislation also establishes a retirement savings board (Board) to facilitate the implementation of the Program and tasks the New York City Comptroller with establishing an investment strategy and policy as well as directing the underlying investments and investment funds. The new law took effect on Monday, August 9, 2021, however the Board has up to two years to implement the Program.
“The impetus of the bill is that out of roughly 3.5 million private sector workers in New York City, only about 41% have access to an employer-sponsored retirement plan,” said Matthew Thompson, CFP, CIMA, First Vice President and Senior Investment Management Consultant at Morgan Stanley. “This is lower than the national average, which is estimated at approximately 53%, and down from NY City’s average of 49% a decade ago.” Even more troubling, according to the NY City council who passed the bill, 40% of New Yorkers near retirement age have less than $10,000 saved for retirement. “Automatic workplace retirement savings provide an easy pathway for workers to start building a safety net and grow the savings they need to take control of their future. Employees are 20 times more likely to save for retirement with automatic payroll deductions,” said AARP New York State Director Beth Finkel.
Private sector employers in New York City are covered by the “Retirement Security for All” legislation if they:
- employ five or more employees whose regular duties occur in New York City;
- have employed no fewer than five such employees without interruption for the previous calendar year;
- have been in continuous operation for at least two years and
- have not offered or maintained in the preceding two years a retirement plan as defined by the legislation.
Employers are covered if:
- they are 21 years of age or older;
- they are regularly scheduled to work at least 20 hours per week, and
- their “regular duties occur in” New York City.
Under the new legislation, the default employee contribute rate will be 5%, but will allow employees to opt out or adjust the rate as they deem fit, up to an annual IRA maximum of $6,000 (or $7,000 for those 50 and above). The plan is flexible, thus enabling employees to keep contributing to the plan or roll it into another retirement savings plans if need be. Similar to the requirements under Employee Retirement Income Security Act of 1974 (ERISA), employers must remit funds deducted from the earnings of each eligible employee for deposit into the Program on the earliest practicable date, consistent with applicable rules, and distribute information about the Program to their employees. The employer is also required to retain records confirming compliance with the laws’ requirements for at least three years.
The law establishes a Retirement Savings Board to facilitate the implementation and jurisdiction of the program. The Board will consist of three appointees appointed by the Mayor, who will be tasked with determining the start date of the program, entering into contracts with financial service providers and administrators, creating a process for participation, and conduction education and outreach to employers, along with employees. The Board will also work closely with the Comptroller in selecting policies and investment strategies.
Additionally, the law states that the Mayor shall designate a government office or agency to enforce the program, and create a procedure that enables eligible employees to voice complaints of violations of the program, to such enforcement agency within one year of the date the employee learned of the alleged violation.
The language in the law enacting the program provides specifically that the Program is not intended to constitute an employee benefit plan covered by the Employee Retirement Income Security Act of 1974 (ERISA). Furthermore, the Program will automatically terminate if the New York City Corporation Counsel certifies that there is a substantial likelihood that the law conflicts with, or is preempted by state or federal law, including ERISA, or constitutes an employee benefit.
The law does not provide for any employer contribution and does not provide for contributions by New York City.
Any employer who continuously fails to enroll eligible employees and/or properly remit funds into each individual plan will be subject to an increase in fines for each individual violation. The initial violation will be $250 per employer. If the employer violates the law within two years of the previous violation, the fine doubles to $500, and increases to $1,000 for any subsequent violations within that two-year window. Employers who fail to properly retain records will also be subject to a $100 fine for each violation. While these amounts seem nominal at first, employers should take not that these fines apply with respect to each eligible employee. Thus, if an employer violates the law across the board and with each individual employee, these fines swiftly add up to a substantial amount.
Summary – New York State Regulations
In April 2018, the New York State legislature approved the New York State Secure Choice Savings Program, a payroll deduction IRA retirement savings program, for employees who are not offered a plan through their employers. That program is voluntary.
The retirement-for-all mandate has now been extended to employers statewide. On June 7, 2021 the New York Senate approved NY A03213-A, which was subsequently signed into law by Governor Hochul. This law converts the state’s existing voluntary IRA program (above) into a mandatory program for private-sector employers with 10 or more employees that do not currently offer a retirement program. “This legislation is similar to the City’s but requires that employees be auto enrolled into an IRA with a 3% minimum contribution rate,” explained Thompson. “The legislation also prohibits employers that currently offer retirement plans from terminating such plans in order to participate in the state program.”
Neither the State program nor the City program is yet running, however, the legislation enacting the city program provides that they City will discontinue its program if the state establishes a retirement savings program that requires “a substantial portion of employers who would otherwise be covered” by the City program to offer to their employees a savings program through payroll deduction or other method of contribution. Now that the State program is mandatory and likely will cover many of the same employers as the City program, the City may halt efforts to implement its program.
As part of the December 20th, 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA, or qualified plan (like a 401(k) plan). 403(b) plans do not qualify for the tax credit. A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.
The credit is 50% of your eligible startup costs, up to the greater of:
- $500 or
- The lesser of:
- $250 multiplied by the number of non-highly compensated employees (NHCEs) who are eligible to participate in the plan
Eligible startup costs include the ordinary and necessary costs to setup and administer the plan and the costs to educate your employees about the plan. You can claim the credit for each of the first 3 years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective. However, you cannot both deduct the startup costs and claim the credit for the same expenses and you are not required to claim the allowable credit.
Additionally, an eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.
Kimberly R. Roffi, CPA
Kim, who has been a member of the firm since 2001, has over 19 years of public accounting experience. Today, she is a partner of the firm and previously served as Director for the firm’s tax and business advisory practice and Director of Finance and Operations for the firm internally. Kim has written Practice Insights for Lexis Nexis’ tax research platform and has been published in Building Long Island magazine.