By Christopher K. Kelly
Small business owners in New York face many decisions each day. Being part of a community bank, it’s not uncommon for us to be involved in conversations on how to best attract, retain, and take care of employees in terms of compensation, health benefits, vacation, and retirement. This last item, retirement and financial security, is an increasingly common topic of interest. In our discussions with workers in New York, most understand there is a need for them to be saving for retirement. They know that people are living longer (meaning income will be needed for a longer period of time), Social Security benefits will not meet their income needs, and health insurance in retirement will be a significant expense. These conversations often lead to two questions: (1) Does the employer offer a retirement plan and (2) Does the employee have the capacity to make saving for retirement a priority in their budget?
Over the past several years, there has been an increased effort at the state and federal levels to help small businesses provide their employees access to a retirement savings plan. Small business owners have a variety of retirement plans to choose from, including: 401(k), 403(b), Profit Sharing, Pension Plans, SIMPLE IRAs, and SEPs. Each of these programs offers its own set of features, requirements, varying complexity, and administrative costs. Knowing which type of retirement plan to implement is not an easy task, and often leads to no selection at all. The result is that many workers in New York are still not covered by an employer-sponsored retirement plan.
In an effort to give more employees access to a retirement plan, many state governments have developed their own programs. While these retirement programs differ by state, the common features include: mandates for businesses to participate based the number of employees, automatic enrollment for employees to save 3 to 5 percent of their pay into a Roth IRA, the ability for an employee to opt-out of saving, designated investment options, and low administrative fees.
In New York, Governor Kathy Hochul signed legislation in October 2021 that will require private sector employers that have been in business for at least two years with 10 or more employees to offer some type of employer-sponsored retirement program. If an employer does not currently offer a retirement plan, the employer will be required to register and participate in the New York State Secure Choice Savings Program (SCSP).
In the SCSP, any employee age 18 or older with W-2 compensation in New York is eligible to participate. Once the employer registers for the SCSP, the employees will automatically enroll and start saving after-tax contributions from their paycheck into a Roth IRA. Employees may voluntarily change their savings rate and have the right to opt-out of the program at any time. Employees will have the option to select or change their investment strategy, but will be placed into a default investment if no election is made. Money in the Roth IRA grows tax deferred and qualified distributions from the Roth IRA will be tax free in retirement. Remember, a qualified distribution occurs if the employees takes a distribution from the Roth IRA after age 59.5 and after the Roth IRA has been open for five years.
As of today, the SCSP is still being developed and a required enrollment date has not been established. For more information about the SCSP and to review current developments, we encourage employers to visit www.securechoice.ny.gov.
While we support and advocate for more people to save for retirement, registering to participate in the SCSP might not be the best option for your business or your employees. Knowing that this requirement might soon apply to your business, now might be the right time to take another look at implementing a new retirement plan of your choosing. Here are a few key items to consider:
• The SCSP invests in a Roth IRA with current annual contribution limits of $7,000 for those under age 50 and $8,000 for those age 50 or older. By contrast, 401(k) plans offer employees to save at higher limits of $23,000 for those under age 50 and $30,500 for those age 50 or older.
• The SCSP does not allow for any type of employer contribution. 401(k) plans can be designed to include an employer match and/or a profit sharing contribution each year. An employer that provides for some type of contribution to help employees save for retirement is a great incentive to attract and retain employees.
• While the SCSP will be designed with low administrative fees, recent legislation created tax credits to offset the cost of starting a new retirement plan and additional tax credits if employer contributions are made. When the tax credits expire, plan expenses and employer contributions can be tax deductions for your business tax return.
Many retirement plan providers are building their services based on the concept of successful participant outcomes. The idea is to offer a retirement program that helps employees select an appropriate savings rate, encourages increased savings rates over time, and selects and manages an investment strategy to and through retirement. Offering a program that engages your employees can help lead them to better financial security in retirement.
As a small business owner, we recognize that you might not know where to begin. If you want to start a new retirement plan for your business, you might first talk to your current resources. These might include your bank, insurance provider, investment advisor, payroll company, accountant, attorney, or other trusted advisor you work with. Any one of these might be able to offer you a solution or direct you to someone that can explain the different types of retirement plans and help you select a retirement plan provider.