The Big Apple Joins A Small Crowd, With Possible Headaches For Local Employers – Employment and HR

Seyfarth Synopsis: New York City has
joined the growing list of jurisdictions to establish a mandatory
auto-IRA retirement savings program for private sector employers
who do not offer employees access to a retirement plan. By doing
so, it becomes part of the trend to provide the opportunity for
employees who do not have access to an employer-sponsored plan to
save for their retirement during their working years through a
payroll-deduction process.

Three states — California, Oregon and Illinois —
have established, and operate, such programs at the state level,
whereby covered employers are required to auto-enroll employees in
IRA retirement savings accounts. The California program, CalSavers,
recently prevailed in the U.S. Court of Appeals for the Ninth
Circuit against a challenge that the program was pre-empted by
ERISA. The primary bases for this decision are that the program is
not run by a private employer and that employers maintaining ERISA
retirement plans are exempted from coverage by the program (hence
no interference with an ERISA plan).

Several other states have begun to implement similar programs,
in some cases mandatory and in others (like New York State)
voluntary. All the programs appear to have in common that they
create an administrative board to operate the program, and then
leave such board to work out the details of implementation.

The New York City legislation follows the same pattern —
one piece of legislation establishes the program and another
establishes a “retirement savings board” to implement and
oversee the program. The program applies to private sector
employers located in the City employing at least five employees and
that do not currently offer a retirement plan such as a 401(k) plan
or a pension plan. The default employee contribution rate, which
will apply to employees who are age 21 or older and working at
least 20 hours a week, is set at 5%, although an employee can
choose a higher rate (up to the IRA annual maximum) or a lower rate
(including none).

Although the City’s legislation takes effect 90 days after
enactment (i.e., in August 2021), the program will not go into
effect until implemented by the retirement savings board, which is
contemplated to take as long as two years. Further, the program
will not go into effect if the City’s corporation counsel
determines that there is a substantial likelihood that the program
will conflict with, or be preempted by, ERISA. Such determination
should take the Ninth Circuit decision into consideration, given
the strong resemblance between the City’s program and the
CalSavers program.

Like several other states, New York State has authorized an
auto-IRA program (the New York State Secure Choice Savings
Program), but the New York State program differs from most other
such programs by using Roth (after-tax) IRAs, which have a limit on
the contributor’s income, although such limit is unlikely to be
exceeded by the employees targeted by the program. Further, the New
York State program is voluntary — no employer is required to
make it available to employees.

No conflict should arise between the City’s program and the
New York State Secure Choice Savings Program, because the current
state program is voluntary. However, there are current proposals to
make the New York State program mandatory, in which case a conflict
could arise. Even under the current New York State program, it is
unclear whether the City would accept Roth IRA contributions as
meeting the City’s mandate, leaving aside questions regarding
the contribution rate and which employers and employees are
covered.

A more formidable operational difficulty for City employers is
that Connecticut and New Jersey have authorized, but not yet
implemented, mandatory auto-IRA programs for employers located in
those states, although Connecticut is reported to be launching a
pilot program in July, 2021. Although all these programs exempt
employers that maintain an ERISA retirement plan, there may be
employers located within the metropolitan New York City area whose
employees will be subject to differing mandates depending on
whether employed in New Jersey, Connecticut or the City itself, all
of which will require compliance by that employer but with possibly
differing rules.

At the moment there is nothing a New York City employer needs to
do. We are monitoring developments related to this new program,
including the corporate counsel’s determination as to whether
or not there is a substantial likelihood that the New York City
program will be preempted by ERISA, and will report back.

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