For startups in New York City, offering a 401(k) or other retirement savings plan is not only a smart move for attracting and retaining talent—it may also be required by law. New York City (and New York State) have enacted regulations that mandate eligible private-sector employers to provide a retirement plan option if certain conditions are met.
If you’re a startup founder or small business owner with fewer than 10 employees, you might be wondering:
- Do these rules apply to me?
- What are my responsibilities as an employer?
- Are there any tax benefits for setting up a plan?
- What happens if I have employees in multiple states?
- Should I use a 401(k) provider or a PEO (Professional Employer Organization)?
This guide breaks down NYC’s retirement plan requirements, helping you understand your obligations and key considerations for compliance.
When Do NYC Employers Need to Offer a Retirement Plan?
Under the New York City Retirement Security for All Act, a private-sector employer must offer a qualified retirement savings plan if it meets all of the following conditions:
- Employee Threshold: The business has five or more employees working at least 20 hours per week in NYC.
- Business Duration: The business has been in continuous operation for at least two years.
- No Existing Plan: The employer does not already offer a qualified retirement plan (for example, a 401(k), SEP IRA, or SIMPLE IRA).
For startups with fewer than five employees or businesses that are less than two years old, this NYC mandate does not apply. Still, offering a retirement plan like a 401(k) can be a strategic advantage in a competitive talent market.
In addition, New York State requires that private-sector employers with 10 or more employees either provide a qualified retirement plan or enroll in the state-run New York State Secure Choice Savings Program.
Employer Responsibilities Under NYC Retirement Plan Rules
If your startup is subject to the NYC mandate, you generally have two options:
- Offer a Private Retirement Plan: Options include a 401(k), SIMPLE IRA, or SEP IRA.
- Participate in the NYC-Facilitated RSA Program: This is a city-run savings plan that automatically deducts contributions from employees’ paychecks.
Key responsibilities include:
- Automatic Enrollment: Eligible employees must be automatically enrolled in the plan, with the option to opt out. Typically, the default contribution rate is set at 5% of an employee’s wages (though employees can change this rate).
- Payroll Deductions: Employers are responsible for facilitating payroll deductions and ensuring that contributions are deposited into the designated retirement plan in a timely manner.
- No Employer Contribution Mandate: The NYC program does not require employer contributions—though employers offering a private plan may choose to contribute.
- Record-Keeping: Employers must maintain compliance records (often for at least three years) to document adherence to the rules.
- Penalties for Non-Compliance: While enforcement measures are still being finalized by NYC regulators, failure to meet these requirements may result in penalties.
Tax Credits and Incentives for Setting Up a Retirement Plan
Setting up a 401(k) or similar plan can bring federal tax benefits, including:
- SECURE Act Small Business Tax Credit:
- Employers with fewer than 100 employees may claim a tax credit for up to three years to offset the administrative costs of starting a retirement plan.
- This credit covers 50% of startup costs, up to $5,000 per year.
- Auto-Enrollment Tax Credit:
- Adding an auto-enrollment feature to your 401(k) plan may qualify you for an additional tax credit (up to $500 per year for up to three years).
- Employer Contribution Deduction:
- Any matching contributions or other employer contributions to employee retirement accounts are tax-deductible as a business expense.
These credits can be particularly helpful for startups that may not be profitable initially, as they reduce future tax liabilities when the business grows.
What If My Employees Are Spread Across Multiple States?
For startups with employees in the Tri-State area, navigating different state requirements can be challenging. Here’s a brief overview:
- New Jersey:
- Employers with 25 or more employees must either offer a qualified retirement plan or enroll workers in the New Jersey Secure Choice Savings Program.
- Employers with fewer than 25 employees have more flexibility, though they should still consider providing a retirement savings option.
- Connecticut:
- Employers with five or more employees who do not offer a qualified retirement plan are generally required to participate in the MyCTSavings program or provide an equivalent plan.
If your team is spread across multiple states, offering a private 401(k) plan can simplify compliance by applying one set of rules to all employees, rather than juggling multiple state-run programs.
Tools to Set Up a 401(k) Easily
If you decide to offer a 401(k) plan, several tech-enabled providers can simplify administration, compliance, and investment management:
- Guideline: A low-cost, automated 401(k) provider that integrates with payroll systems like Gusto and QuickBooks, handling compliance with no setup fees.
- Betterment for Business: Offers a robo-advisor-powered 401(k) solution with automated investment management and competitive fees.
- Human Interest: Designed for small businesses, with automated payroll integration, employee education, and low administrative costs.
These platforms can streamline the process of offering a 401(k), often at lower costs than traditional financial institutions.
PEOs: An Alternative to Direct 401(k) Management
If your startup lacks an internal HR team, partnering with a Professional Employer Organization (PEO) can be an effective way to outsource retirement benefits, payroll, compliance, and other HR functions. Popular PEOs include:
- TriNet: Provides comprehensive HR services, including 401(k) administration, health benefits, and payroll services.
- Rippling: Combines payroll, HR, IT, and benefits administration into one integrated platform.
- Justworks: Offers user-friendly HR solutions with 401(k) plans, health insurance, payroll processing, and compliance management.
PEOs help ensure compliance with applicable laws, consolidate HR and benefits administration, and can be particularly beneficial for growing startups.
Things to Discuss With Your Accountant
Given the complexity of retirement plan regulations and associated tax implications, consulting with an accountant or financial advisor is crucial. Consider discussing:
- Compliance Requirements: Does your startup fall under the NYC or state mandates?
- Plan Options: What is the best type of retirement plan for your business?
- Tax Benefits: How can you maximize available tax credits and deductions?
- Multi-State Considerations: How should you handle employees in multiple states?
- PEO vs. In-House Administration: Would a PEO be more efficient than managing a standalone 401(k)?
Final Thoughts
Startups in NYC must navigate evolving retirement plan regulations while seeking to attract top talent. Whether you opt for a private 401(k), enroll in the NYC or state-facilitated program, or partner with a PEO, ensuring compliance and leveraging tax incentives is key to optimizing your benefits strategy.
Need help deciding the best approach for your business? Contact us at Shay CPA to discuss a strategy tailored to your startup’s needs.
Disclaimer:
This blog post is intended for informational purposes only and should not be construed as legal, tax, or financial advice or recommendation of any vendor. Regulations and incentives may change, and individual circumstances vary. Please consult with a qualified professional before making any decisions related to retirement plan implementation and compliance.