Article contributed by Jonathan J. Boyles, Ellenoff Grossman & Schole LLP
New York City recently passed legislation that will require all employers with five or more employees to participate in a City-sponsored retirement program (the “NYC Program”), unless the employer already offers a retirement plan to its employees (for example, a 401(k) or SIMPLE IRA plan).
The NYC Program will create an individual retirement account (“IRA”) for each covered employee. Employee contributions to the IRA are funded by automatic payroll deduction from the employee’s paycheck, with a default 5% contribution rate. Employer contributions are neither required nor permitted.
The five-employee threshold is determined by looking back to the previous calendar year to see if at least five employees were continuously employed during the year. All employees will be counted in determining whether the five-employee threshold is met. The law makes no distinction between part-time or full-time employees or employees who are minors.
While all employees are counted to determine whether the employer is covered by the law, not all employees are required to be enrolled in the NYC Program. The employer is only required to enroll employees who are age 21 or older and who are regularly scheduled to work at least 20 hours per week.
The law’s summary noted that 40% of New Yorkers near retirement age have less than $10,000 saved for retirement. The City Council also reported that out of roughly 3.5 million private sector workers in New York City, only 41% have access to an employer-sponsored retirement plan, lower than the national average (53%), and down from 49% a decade ago.
As advertised, an employer’s obligations are supposed to be limited. The employer does not sponsor the retirement program or have any liability for the investment results or administration. The employer’s only duty is to enroll in the NYC Program and to deduct employee contributions from payroll and send them on to the NYC Program.
Administering payroll, however, is a thankless task that may sound easy, but it is always a challenge (a challenge under tight deadlines). Adding an IRA deduction, especially for a program that is not integrated with an employer’s payroll provider/system, creates multiple opportunities for error. When you take into account that an employee can change the contribution rate or opt-out of participation, the employer’s bookkeeping process will become more complex. The law requires employers to remit the employee contributions to the NYC Program at the “earliest practicable date,” and presumably the failure to do so will be a violation.
Employers are subject to penalties of up to $250 for each violation (with each affected employee constituting a separate violation), with second violations assessed at $500 per violation and subsequent violations assessed at $1,000 per violation. If the enforcement agency fails to respond to an employee’s complaint within four months, the employee has the right to sue the employer and recover attorneys’ fees and costs. The law also includes a record retention provision, which requires employers to maintain records demonstrating compliance with the law for three years, with a $100 penalty per employee per violation.
Technically, the law takes effect on August 9, 2021, but employers have some reprieve as the newly-created Retirement Security Board has up to two years to implement the NYC Program. In the interim, employers that do not offer a retirement plan have some choices and should start planning now.
Until now, employers may have seen a retirement plan among employee benefits as a “nice to have,” but not as a necessity for employee retention, or as an administrative burden that could not be supported. The additional regulation and administrative burdens created by the NYC Program may cause the pendulum to swing for employers that have not yet offered retirement plans.
By offering a retirement plan, an employer can avoid the NYC Program’s rules. An employer’s options include:
- Establishing its own 401(k) plan (or 403(b) plan for non-profits). This has become streamlined with IRS pre-approved plans. The employer selects from a checklist (adoption agreement) to pick its plan design.
- Participate in an Association Retirement Plan, which pools unrelated employers that work in the same industry or region.
- Participate in a Pooled Employer Plan, which is similar to an Association Retirement Plan, but under the 2019 SECURE Act, unrelated employers can join together even if they are not in the same industry or region.
- Participate in a plan sponsored by a Professional Employer Organization (“PEO”), which can also provide human resources and payroll support, along with benefit plan offerings.
- Participate in a multi-employer plan for employees covered by a union contract.
Many of these options allow employee retirement contributions to be integrated with payroll (avoiding the burden of manual adjustments and potential for error). In addition, the IRS limits for these retirement plans are substantially higher than the IRA limits, offering employees additional opportunities to save their own money for retirement. In 2021, the maximum 401(k) contribution is $19,500 ($26,000 if you’re age 50 or older), while the IRA limit is $6,000 ($7,000 if you’re age 50 or older).
Jonathan J. Boyles is a partner at Ellenoff Grossman & Schole LLP, where he specializes in employee benefits and executive compensation law. Jonathan J. Boyles can be reached at JBoyles@egsllp.com or via phone at 212-370-1300.
