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New Jersey’s “Secure Choice” Auto-IRA Plan: What SMBs and Their Employees Need to Know

By The Human Interest Team

“Saving for retirement is paramount for all employees, but too often, those who work for small businesses don’t have a simple way to set aside these savings.” –Phil Murphy, New Jersey Governor

From the Paid Sick Leave Law to the New Jersey Transit Benefits Law to the New Jersey Family Leave Act, New Jersey has seen a lot of change affecting employees and employee benefits. One of the newest initiatives is the New Jersey Secure Choice Savings Program, a retirement savings plan affecting small and medium-sized businesses throughout the state. Read on to see what you need to know about the program.

Workers who call the Garden State home don’t all have an easy road to retirement. In fact, 31 percent of New Jersey employees don’t have access to an employer-sponsored retirement plan, according to the American Retirement Association, and the state mirrors the harrowing national retirement trend of people’s needs growing while savings dwindle. It doesn’t affect everyone equally: employees at small and medium-sized businesses are less likely to have access to opportunities to save for retirement through their employer.

To combat these challenges and make retirement planning more convenient for both employers and employees, New Jersey Governor Phil Murphy signed the New Jersey Secure Choice Savings Program Act (A4134) into law in March 2019. The brand-new state-run retirement option requires businesses with 25 or more employees that do not already provide a qualified retirement plan to offer an automatic payroll deduction for employees, which will then be paid into an Individual Retirement Account (IRA).

The New Jersey Secure Choice Savings Program, also called the NJ Auto-IRA Law, could make it easier for private sector employees in New Jersey to save and simpler for local businesses to offer retirement planning services. Retirement plans benefit employers, too. Offering employees retirement plan options can lead to improved recruiting, decreased turnover, and tax savings. The program, expected to go into effect in early 2021, was created with costs, convenience, and ease of implementation in mind.

The top 10 things everyone should know about this upcoming program:

  1. Is it mandatory or voluntary? Both. Unlike the voluntary retirement program that will be offered in New York, the New Jersey Secure Choice Savings Program Act is mandatory for businesses (for-profits and non-profits) that fit the criteria of 25-plus employees without a current employee retirement plan, such as a 401(k) or 403(b). Employers with fewer than 25 employees may participate in the program, but will not be required to. While all the specifications are not yet clear, it’s suggested that the program will affect employers who have been in business for at least two years.
  2. What do employers need to do to comply? There will be more specifics provided, but at this point employers who participate will be required to:
    • Distribute an information packet on the program, prepared by the Board
    • Set up payroll infrastructure to accommodate automatic enrollment
    • Deposit employee payroll deductions into the program fund
    • Offer an annual Open Enrollment period and
    • Enroll any new employee no later than three months after their hire date

  3. Are there penalties for companies that fail to comply? Once the Act takes effect, businesses will have nine months to comply with the automatic payroll deductions or face penalties from the state Treasury Department. Penalties may range from a simple warning to a $500-per-employee fine. If business owners are concerned about the fees or other costs of compliance, they can elect to offer another qualified retirement savings option for employees, such as a 403(b) or 401(k). Employers will report their compliance with the Act via the business’ state income tax returns.
  4. What will the new plan cost? The plan comes with no long-term costs to the taxpayers or to employers, since program management fees will be paid for by participating employees. In the short-term, the State will cover the costs of launching the plan (and later be reimbursed by fees that come from the plan). The legislation also stipulates a ceiling for fees that are charged to participating employees: Plan management fees cannot exceed 0.75% in the plan’s first three years and 0.6% thereafter. The Act focuses on keeping retirement planning costs low and benefits high.
  5. How will the program work? The New Jersey Secure Choice Savings Program Act will be implemented and administered by the Secure Choice Savings Board, a group comprised of state officials, representatives from the general public with expertise in retirement plans, a representative of participating employers, and a representative of enrolled employees.
  6. How are investments chosen and managed? The plans will be invested and managed by a yet-to-be-named private investment firm. The program will be managed by the New Jersey Secure Choice Savings Board, which includes the office of the state treasurer, comptroller, and office management and budget, as well as two public representatives, and one representative from a business trade organization and one on behalf of enrollees. The plan will be audited annually and a report will be made available to the public.
  7. When will this happen? The Board must establish guidelines for businesses, create a website with up-to-date information, govern risk management, determine investment options, and implement the program by March 28, 2021.
  8. Who can contribute: employees, employers, or both? Only employees can contribute to the new retirement accounts; there is no mandate for an employer contribution or match. Employee contributions will be automatically deducted from their payroll and put into an IRA. A standard 3% payroll deduction will be moved, unless the employee chooses to opt out or to elect a higher or lower percentage. There is a cap to what employees can contribute, according to IRS rules about the max IRA contribution limit: In 2019, the max contribution to an IRA is $6,000 (or $7,000 for those age 50 and over).
  9. What happens if an employee changes jobs? IRAs are portable, so workers can move them if they switch jobs. New employees must be enrolled within three months of their hire date; if they decline initial participation, they can wait until an open enrollment period.
  10. What are the pros and cons of the plan? The Bill has received both support and criticism. A useful comparison point to learn more may be the results of the Illinois Secure Choice Program since the NJ program was modeled after it.

    • For employees: It is intended to address the retirement savings gap by providing more New Jerseyans with coverage. Yet it also has drawbacks, including the limited flexibility of the program (i.e. no employer matching, a default 3% payroll deduction, and a lower contribution limit compared to other retirement savings plans, such as a 401(k) or 403(b).
    • For employers: Employers are not responsible for investment returns, program design, or program benefits, but they will have to set up infrastructure and establish processes for employee payroll deductions, ensure they are compliant with the plan rules, and move employee funds into the State Fund, for example.

    What should you do now?

      Employees

      Employees should talk to their employer about their plans. If you’re interested in asking your boss or manager for a 401(k), here’s a guide that can help you ask your boss or manager for a 401(k) for your company.

      Employers

      Employers should consider whether they want to offer the program, or whether another qualified retirement plan would best suit the needs of them and their employees as well as continue to monitor the progress of the Bill. New Jersey businesses that will be adding retirement planning options and services for workers should be ready to communicate with employees and to launch the savings program in early 2021.Considering a retirement plan for your employees but not sure where to start? We can help.

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