During October 2021, New York State (NYS) passed legislation that made participation in the NYS Secure Choice Savings Program (the “Program”) mandatory for certain employers. The Program is one of many state-facilitated savings programs that are being adopted in states across the country. These state-facilitated savings programs are designed to solve a simple, but not easily fixed problem: getting more people to save for retirement.

According to the Bureau of Labor Statistics, as of March 2021, 68% of private sector employees had access to retirement benefits through their employer and about half of all private sector employees choose to participate.[1] When looking at employees in the lowest quartile of the wage distribution, however, the access rate drops to 45%, with only around a 25% participation rate.[2] This is a problem because studies have shown that individuals are up to 15 times more likely to save for retirement if they are given the ability to save through a payroll deduction arrangement through their employer.[3]

Therefore, in hopes of spurring more people to save for retirement, NYS decided to act by amending the Program to promote greater access to payroll deduction retirement savings among private-sector employees in the state.

Background

State-facilitated savings programs for private-sector employees have been studied by almost every state at this point, and 16 states (and 2 cities) have enacted some version of a retirement savings program for private sector employees. Some states have decided to make participation in their savings program voluntary,[4] but the majority of states have chosen to make participation mandatory for certain employers. The following states have all opted to go the mandatory route: California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, New Jersey, New York, Oregon, and Virginia. The 2 cities mentioned above are New York City (NYC) and Seattle, both of which have also created mandatory programs. However, only California, Connecticut, Illinois, Maryland, and Oregon have programs that are currently accepting contributions. The rest of the jurisdictions identified above are still in the process of getting their programs off the ground.

All the mandatory savings programs generally follow a similar structure in terms of defining which employers must participate, which obligations employers have, the investment options available, and so forth. Therefore, while this analysis will primarily focus on the NYS Program, it will also provide a glimpse at the general structure of mandatory state retirement savings programs elsewhere.

Oversight and Program Launch

General administration and responsibility for the proper operation of the Program rests on the New York Secure Choice Savings Program Board (the “Board”).[5] The Board’s duties include designing and operating the Program, establishing and monitoring investment options, and facilitating education and outreach to employers and employees.[6] The Board, nonetheless, has delegated the duty to develop and implement the Program to the NYS Department of Taxation and Finance.[7]

As of the end of 2022, it is not clear when the Program will launch. The legislation amending the Program calls for it to be implemented and enrollment to begin no later than December 31, 2021.[8] Nevertheless, the legislation also gives the Board the authority to delay the implementation of the Program for an additional 12 months if needed.[9] Presumably, the Board availed itself of this authority because the Program is still not operational as of the time of drafting. The Board held a meeting in September 2022, during which the launch of the Program was not heavily discussed; therefore, it seems likely that enrollment will not begin until sometime in 2023.

In states that have launched their programs, the enrollment date for employers has usually been staggered based on the employer’s size. Under this approach, employers with more employees have an earlier enrollment and compliance date than employers with fewer employees. California, for example, had a September 30, 2020 enrollment date for employers with more than 100 employees. Employers with over 50 employees, however, had until June 30, 2021 to enroll and employers with 5+ employees had until June 30, 2022. It is possible that NYS will take a similar approach, but there is no indication yet what they will do.

Employers Required to Participate and their Duties

For an employer’s participation in the Program to be mandatory, the following 4 elements must be met:

1. The employer is a person or entity engaged in a business, industry, profession, trade, or other enterprise in NYS, regardless of whether the activity is for profit or not;
   
   
2. The employer has at all times employed at least 10 employees in NYS during the previous calendar year;
   
   
3. The employer has been in business at least 2 years; and


4. During the preceding 2 years, the employer has not offered a qualified retirement plan, including plans qualified under Internal Revenue Code sections 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b).[10]
   
   

If any one of these elements are not met, the employer’s participation in the program is not required. For example, if an employer had 15 employees during the summer months, but less than 10 the rest of the year, the employer would not be required to participate. Further guidance is needed on whether such an employer would still be afforded the ability to enroll its employees if it wanted to participate. Since the goal of the Program is to increase access to payroll deduction retirement savings, it would make sense to allow employers with less than 10 employees to participate in the Program, but it is not clear if this allowed based the legislation itself. The Illinois program, for example, applies to employers with 5 or more employees in the state, but employers with 4 or fewer employees may also voluntarily participate. It remains to be seen if NYS will take a similar approach.

For those employers who are required to participate in the Program, their duties are designed to be purely administrative. First, within 9 months of the Program opening for enrollment, participating employers must set up a payroll deposit arrangement to allow each employee to participate in the program.[11] Second, participating employers will have to disseminate informational materials drafted by NYS to their existing employees at least 1 month prior to the employer facilitating access to the Program.[12] And lastly, participating employers will be required to automatically enroll each employee who does not opt out, followed by deducting contributions from employee wages and remitting these contributions to the Program.[13]

Because participating employers only have administrative tasks under the Program, employers are not liable for an employee's decision to participate in, or opt out of, the Program or for their investment decisions in the Program.[14] In addition, unlike an employer who sponsors a 401(k) or other type of qualified plan, employers participating in the Program do not have any duty to monitor investments or perform tasks like nondiscrimination testing.

Employee Participation and Contributions

The Program defines “employee” as any individual who is at least 18 years old, who is employed by an employer, and who has earned wages from an employer in NYS during the calendar year. [15] Therefore, full or part-time status is not relevant to participation in the Program. Participating employers are responsible for enrolling any individual who is considered an employee, unless the employee opts out.

As alluded to above, the Program operates on an opt-out basis.[16] In other words, employee enrollment in the program will be automatic and employees who do not want to participate will have to affirmatively opt out. Once the Program is operational, at least once a year it will offer an open enrollment period during which employees who previously opted out may enroll.[17] This open enrollment period will be the only chance employees who opted out may change their mind and enroll during the year.[18] On the other hand, enrolled employees have the ability to terminate their enrollment in the Program at any time.[19]

Enrolled employees have the discretion to select a contribution level – as a percentage of wages or as a fixed dollar amount – that fits within their budget.[20] Nonetheless, for participants who do not select a contribution level, the default rate will be 3% of his or her wages.[21] Interest, investment earnings, and investment losses on employee contributions will all be allocated to individual Program accounts too.[22] But unlike some other retirement plans, employer contributions are not permitted in the Program; all contributions must come from employee payroll deductions.

Several investment options will be offered under the Program and participants will be able to choose where their contributions are invested.[23] At the outset, the Program will offer the following options: target date funds, a growth fund, a growth and income fund, and a conservative principal protection fund. For participants who do not select an investment option, their contributions will be put in the default option chosen by the Board. It is not clear what that default investment option will be yet, but many other states use an age-appropriate target date fund as the default investment.  

The individual accounts in the Program are designed to be Roth individual retirement accounts (IRAs).[24] As it stands now, it does not appear that pre-tax contributions will be permitted under the Program. Thus, employee contributions to the Program may be withdrawn at any time tax and penalty free. In addition, any earnings on contributions may also be tax free if the withdrawal is taken after a 5-year holding period and the account owner is at least 59 ½ years old. On the flip side, withdrawals of earnings by an account owner prior to reaching age 59 ½ would be subject to regular income tax plus an additional 10% excise tax.  

As Roth IRAs, individual accounts in the Program are also subject to the federal IRA contribution limits. For 2023, the contribution limit for IRAs is $6,500, plus a catch-up contribution of $1,000 for individuals age 50 and over.

Lastly, these individual accounts are designed to be portable such that they follow employees around if and when they change jobs. Therefore, if an employee moves between two participating employers, contributions from both employers will be to the same employee account. This is intended to simplify the retirement savings process. 

Costs Associated with the Program

The initial administrative costs associated with creating and managing the Program may be paid by NYS.[25] Once the Program has sufficient assets to cover its own administrative costs though, all administrative costs are to be paid from assets of the Program and the Program will repay any start-up funds provided by NYS.[26] Such administrative fees will be allocated on a pro rata basis to individual accounts.[27] As a result, the costs of the Program will be borne by the participants and not employers or taxpayers.

Because employers are not liable for the costs of the Program, there is some concern that employers might terminate the retirement plans they sponsor in order to participate in the free state Program. However, the legislation prohibits an employer from terminating its qualified plan for the purposes of participating in the Program.[28] Furthermore, a PEW study showed that in states which have already launched their programs, businesses with retirement plans have continued to offer them and businesses without retirement plans are adopting new ones at rates similar to before the state option became available.[29]

New York City Auto-IRA Program

Back in May 2021, NYC became the second city to adopt a government-sponsored retirement savings program for private-sector employees. The NYC program is quite similar to the NYS one, with one significant difference: the NYC program applies to employers with 5 or more employees in NYC. However, it is unlikely employers will have to worry about complying with both the NYC and the NYS programs.

The NYC law creating their program has a provision stating the NYC program will be discontinued if “the board certifies to the mayor and speaker in writing that the state has established a retirement savings program that requires a substantial portion of employers who would otherwise be covered employers to offer to their employees the opportunity to contribute to accounts through payroll deduction.”[30] Although there has not been an update since the NYS Program became mandatory, the consensus appears to be that the NYC program will not move forward since the NYS Program will cover a substantial portion of employers caught under the NYC program. As a result, NYC employers will likely only have to worry about complying with the NYS Program.

Legal Challenges to Mandatory Programs

There have been a few lawsuits targeting these mandatory state savings programs, one of which resulted in the Ninth Circuit affirming their legality. The California program was challenged by the Howard Jarvis Taxpayers Association (HJTA) on the grounds that it was preempted by the Employee Retirement Income Security Act (ERISA). ERISA is one of the major statutes that govern employee benefits, and it preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” that ERISA covers.[31] This is significant because if ERISA were to preempt these mandatory savings programs, they would not be able to go into effect.

The Ninth Circuit ultimately decided that ERISA preemption did not apply because the program is not an “employee benefit plan” under ERISA’s definition. ERISA defines an “employee pension benefit plan” as “any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances[,] such plan, fund, or program” provides retirement income or results in deferral income by employees.[32] In short, the Ninth Circuit concluded that the California program was not “established or maintained by an employer” because the state established and maintains the program, not employers. As mentioned above, employers are only given administrative duties under these mandatory savings programs and the Ninth Circuit found that these duties were not sufficient to satisfy ERISA’s definition. As a result, the Ninth Circuit sided with California and found the program legal. HJTA appealed this decision, but the Supreme Court declined to take the case which leaves the Ninth Circuit’s ruling in place. If someone were to file suit against the NYS Program, it is likely the Second Circuit would affirm its legality under the same reasoning.

Conclusion

It is likely that the NYS Program will open for enrollment sometime in 2023, but there are still many questions that remain unanswered.