February, 2023

CLIENT ALERT

MyCTSavings
Connecticut State Retirement Savings Mandate:
Doing Nothing Isn’t a Great Option For Connecticut Employers

With Connecticut’s mandatory payroll deduction IRA program swinging into full gear next month, now may be a good time for CT employers that do not sponsor a qualified retirement plan to take a hard look at the implications of the CT program. The enrollment deadline for CT employers with 5 to 25 employees is March 30, 2023 (the enrollment deadlines for larger employers have already come and gone).

First, a few details. The CT program:

  • generally applies to employers with 5 or more employees in CT on October 1st of the preceding calendar year, and at least 5 such employees have been paid $5,000 or more in the preceding calendar year

  • excludes employees who work for an employer for fewer than 120 days or who have not attained age 19

  • does not apply to employers that currently provide a qualified retirement plan

  • requires covered employers to facilitate employee enrollment and participation in the program

  • automatically enrolls employees at a specified contribution rate (3% of compensation) unless an employee affirmatively opts out or elects some other contribution level

  • is implemented utilizing a Roth IRA to receive an employee’s payroll contributions

  •  does not require or permit employer contributions  

It is critical for CT employers that do not offer a retirement plan for their employees, and are thereby potentially subject to the CT program mandate, to carefully consider their retirement plan alternatives. Many employers of all sorts will find the CT program wanting as compared to the flexibility, control, personalized design and other advantages of a qualified retirement plan. For example:

  • Low contribution limits. For 2023, the IRA contribution limit is $6,500 (or $7,500 if age 50 or older), while the defined contribution qualified plan contribution limit is $66,000 (or $73,500 if age 50 or over).
 
  • No tax-deductible employer contributions. An employer contribution to a qualified plan is currently tax-deductible by the employer. Contributions to the CT program do not reduce current income taxes.
 
  • Can’t choose pre-tax contributions. Contributions to the CT program can only be made on a Roth, after-tax basis. Qualified plans, by contrast, are typically designed to offer both traditional, tax-deferred savings, and Roth, after tax savings (including some combination of the two).

  • Higher earners can’t participate. For 2023, Roth IRAs are not available for married couples filing jointly with incomes of $228,000 (or individuals with incomes of $153,000) and over. According to FAQs published by the CT program, those with incomes above these thresholds are ineligible to participate in the program.
 
  • Limited, government-selected investment alternatives. Under the CT program, a CT governmental authority determines participant investment options, including a default investment alternative. Administrative costs of the state program are assessed against employees’ accounts. In a qualified retirement plan environment, employers are free to select appropriate investment alternatives, fee structures and payment arrangements in light of their individual circumstances and needs.
 
  • No eligibility and vesting conditions. Qualified retirement plans allow an employer to establish eligibility and vesting conditions, within certain statutory standards, and provide for employer contributions. These plan design elements are entirely absent from the CT program.
 
  • Diminished benefits package. A 401(k) or other qualified retirement plan can serve as a valuable recruitment tool and is viewed by many employees as a fundamental employee benefit.

Until now, employers could procrastinate on their retirement plan decisions with no real consequences, other than losing out on a potentially valuable annual tax deduction. Now, not taking affirmative and preemptive action on employer-provided retirement plan considerations may mean passively defaulting into the inherently limited CT payroll deduction Roth IRA program. Many successful CT employers may find that “doing nothing” in the retirement plan arena puts them at a disadvantage and would be far better served by considering the comparative advantages of a qualified retirement plan solution instead.

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If you have any questions about the CT program or would like additional information or assistance regarding retirement plan alternatives, please contact Andrew Roth, partner, (914) 220-8033, ARoth@dmlawyers.com, of our office.
 
Westchester Office:
1133 Westchester Avenue, Suite N208, White Plains, New York 10604
914.948.1556
Long Island Office:
105 Maxess Road, Suite 124, Melville, NY 11747 
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