Law Establishes Auto-IRA Program That Mandates Participation from Certain NYC Employers When Established
The New York City Council acknowledged the numbers were not favorable for those planning and wishing to retire with dignity. So, the Council passed two amended bills from 2018 — one that created a mandatory retirement savings plan for most private-sector employers within the city and a second that established a retirement security board. Both laws were signed May 11, 2021.
The law provides up to two years for the city retirement security board to implement the auto-IRA program and will require eligible employers with five or more employees, who do not offer a workplace retirement plan, to enroll their workers automatically in an IRA retirement account program that the city will administer.
The City Council was reacting to statistics from a study conducted for inclusion in their summary when proposing the law: only 41 percent of the nearly 3.5 million private-sector workers in New York City have access to an employer-sponsored retirement plan, and that’s down 8% from a decade ago and lower than the national average. Another troubling statistic was that 40% of city residents nearing retirement age had less than $10,000 saved.
Access was a driving force and a study by the American Association of Retired Persons (AARP) revealed that individuals are 15 times more likely to save for retirement if they have access to a plan at their place of work. Automatic enrollment plays a crucial role, as the average savings rate is 56% higher among 401(k) plans that have auto-enrollment in place.
New York City is one of the few cities in the United States to have mandated an auto-IRA program, joining states such as Oregon, California and Illinois. New York state has a voluntary program that has not been implemented yet, while several other states have announced plans to launch a pilot program, including Colorado, Connecticut and Maryland. New Jersey also has legislation to implement a mandated program.
What is NYC’s Auto-IRA Program?
This auto-IRA retirement savings program is sponsored and administered by the city of New York, facilitated by employers and funded by employee investments through payroll deductions. This plan’s Roth IRA contribution rate will be 5% of an employee’s wages, which are taxed prior to going into an account. This means there is no penalty if an individual withdraws contributions before the age of 59½. There could, however, be a tax and/or penalty on earnings withdrawn. The plan is also portable, so an employee can rollover their account to other retirement savings plans if they switch jobs.
There is a provision in the legislation for the New York City auto-IRA program that if New York state adopts a mandatory program similar to the city’s that the city program would merge with the state one.
What Employers in NYC Need to Know about Auto-IRA Mandate?
Participation in the NYC auto-IRA program is mandatory for employers who have at least five (5) employees within the New York City limits, have been in business for at least two years and have not offered a qualified retirement plan, New York state plan or payroll IRA in the past two years. They will be required to automatically enroll eligible employees in the program, as well as provide communication on the plan to eligible employees. Businesses do not make matching contributions nor are they required to administer the plan.
What Employees in NYC Need to Know About the Auto-IRA Plan?
Employees are eligible for the program if they are at least 21 years of age, earn compensation with a regular schedule that includes at least 20 hours of work per week and the regular duties of their job occur in the city limits.
The contribution rate is 5% of wages, up to the annual IRA contribution limit of $6,000 ($7,000 for those 50 and older). However, employees can change the rate to be higher or lower, and since participation is voluntary, they can opt out of the plan at any time.
The plan is portable, so can move with employees when they change jobs.
Paychex Can Help
Businesses who have been considering establishing a retirement program for employees can satisfy the city’s mandate by starting a retirement plan such as a 401(k) for employees through a provider such as Paychex. This will satisfy the requirement mandated by the law. Providing a benefit such as a retirement plan can help smaller companies compete with larger companies for talent and help younger employees start building a retirement savings.