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 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.