As businesses prepare budgets, compensation plans and employee benefits for the coming year, retirement plans deserve a place in the conversation. For New York employers, there is another consideration: state law requires certain businesses that do not offer a qualified retirement plan to facilitate retirement savings for their employees.
That requirement may prompt an employer to take action, but it also creates an opportunity to consider a larger question. What type of retirement plan best supports the company, its employees and the owners' long-term goals?
The answer can have implications for recruiting, owner retirement savings, cash flow and taxes.
Are New York Employers Required to Offer a Retirement Plan?
No. But if a retirement plan is not provided directly by the employer, then an employer generally must facilitate the New York State Secure Choice Savings Program if it had at least 10 employees in New York throughout the previous calendar year, has been in business for at least two years and has not offered a qualified retirement plan during the preceding two years.
This state savings program is an automatic-enrollment payroll deduction program that allows eligible employees to contribute to Roth IRAs. Employees may opt out, and participating employers cannot contribute to employees' Secure Choice accounts.
Employers that already offer a qualifying retirement plan, such as a 401(k), SEP IRA or SIMPLE IRA, generally are exempt from facilitating Secure Choice.
New York establishes registration deadlines through the program, and employers subject to the requirement are notified when they need to register. Business owners should review communications from the program rather than assuming a single statewide deadline applies to every employer.
What Are the Options for Meeting New York’s Requirement?
For employers subject to the requirement, the two primary options are to facilitate New York Secure Choice or offer a qualified employer-sponsored retirement plan, such as a 401(k).
Secure Choice gives employees who otherwise lack a workplace retirement plan access to a Roth IRA through payroll deduction. The employer facilitates the program but does not sponsor the account or make contributions.
A 401(k) and other employer-sponsored retirement plans can provide considerably more flexibility in plan design. Depending on the plan, employers may offer matching or profit-sharing contributions, establish eligibility provisions and create a benefit structure that reflects the company's workforce and compensation strategy. Contribution limits for 401(k) plans are also higher than IRA limits.
For an employer deciding how to respond to New York's requirement, compliance is one factor. The company's growth plans, workforce, cash flow and the owners' retirement objectives may point toward a different solution.
Could Starting a Retirement Plan Qualify for Federal Tax Credits?
Potentially. Federal tax credits can help eligible small businesses offset some of the costs associated with establishing their own retirement plans.
Under current IRS rules, eligible employers with 100 or fewer employees may qualify for a retirement plan startup cost credit when establishing a SEP, SIMPLE IRA or qualified plan such as a 401(k). Employers with 50 or fewer employees may qualify for a credit equal to 100% of eligible startup costs, subject to limits established by the IRS. Employers with 51 to 100 employees may qualify for a credit equal to 50% of eligible startup costs, also subject to applicable limits.
Certain small employers may also qualify for a separate credit related to employer contributions during the first five years of a new defined contribution plan, SEP or SIMPLE IRA. An additional credit may be available when an eligible employer adds a qualifying automatic-enrollment feature.
Eligibility depends on several factors, including workforce size, employee participation and whether the employer or related businesses maintained another plan in prior years. Employers should review the specific requirements with their tax and retirement plan advisors before relying on a credit.
Does Using New York Secure Choice Provide the Same Tax Credits?
Business owners should understand an important distinction.
The federal startup credit applies to eligible employers that establish a SEP, SIMPLE IRA or qualified retirement plan. New York Secure Choice is a state-facilitated Roth IRA program, and participating employers are prohibited from contributing to employee accounts.
As a result, facilitating Secure Choice is different from establishing an employer-sponsored retirement plan for purposes of the federal incentives described above. An employer considering its options should evaluate potential federal tax credits along with the costs and benefits of establishing its own plan.
This does not automatically make an employer-sponsored plan the right choice. The economics depend on the size and composition of the workforce, expected employer contributions, administrative costs and what the owners want the plan to accomplish.
What Type of Retirement Plan Should a Growing Business Consider?
A 401(k) is a common starting point because it can accommodate employee salary deferrals along with employer matching or profit-sharing contributions. Plan design can also evolve as a company adds employees or its compensation structure changes.
Businesses with strong cash flow that are looking to maximize available tax deductions may also consider pairing a 401(k) with a cash balance plan. A cash balance plan is a type of defined benefit plan that may allow larger retirement contributions for owners and other participants, depending on factors such as age, compensation and workforce demographics. It also carries funding and administrative requirements that need to be evaluated carefully.
Other businesses may find that a SIMPLE IRA, SEP IRA or another structure better matches their needs.
The important question is how the plan fits the business rather than which option is easiest to implement.
Which Option May Be Best for My Business?
For businesses subject to the New York requirement, it may be worth comparing Secure Choice with an employer-sponsored retirement plan before deciding how to proceed.
Secure Choice can provide a relatively straightforward way to satisfy the state requirement, but employers have less control over plan design, cannot make employer contributions and do not receive the federal startup and employer-contribution tax credits that may be available to eligible businesses establishing their own retirement plans.
An employer-sponsored plan such as a 401(k) can offer greater flexibility in plan design and may give business owners additional opportunities to support employee benefits, contribute toward their own retirement goals and potentially qualify for federal tax incentives. Those advantages come with additional costs, administrative requirements and responsibilities that should also be considered.
If attracting and retaining employees, increasing retirement savings or taking advantage of available tax incentives are priorities for your business, an employer-sponsored plan may be worth evaluating before defaulting to the state program.
Before choosing a path, talk with the Davie Kaplan team. Our CPAs and financial advisors can help you compare New York Secure Choice with employer-sponsored retirement plan options, consider the tax implications and coordinate with retirement plan providers.
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