Analysis of Connecticut's New Mandatory Auto-Enrollment IRA Program for Employees

By David Beck, CPA, QPA, ERPA Principal, PASI, LLC

EXECUTIVE SUMMARY  Overview The State of Connecticut has joined several other states in mandating that non-governmental employers with at least five Employees in the State (including non-profits) either; a) sponsor their own workplace retirement plan (such as a 401(k) or SIMPLE IRA Plan), or b) participate in the newly created “MyCTSavings” Program (the Program).  Employers opting for the Program must not only offer the opportunity for payroll deduction contributions to a Roth IRA, but also must automatically enroll Employees who do not make a contrary election.

Key Aspects of the Program

All non-governmental Employers in the State of Connecticut with more than five employees are required to either a) sponsor a workplace retirement plan (e.g., 401(k), SIMPLE-IRA, 403(b)), or b) participate in the Program. For more information on qualifying workplace retirement plans scroll down to Section II. For more information on plan designs available to Employers who currently do not have a Plan and whose sole motivation is avoidance of the Program, scroll down to Section IX. IMPORTANT: ALL Employers must register with the Program to either: Claim an exemption from the Program; or Register to participate in the Program.  For more information on this registration requirement, including applicable deadlines (as early as June 30, 2022, if 100 or more Employees), scroll down to Section IV. There is no hard-dollar cost paid to the Program by Employers. There are no Employer contributions required or permitted. The Program is funded exclusively by Roth Individual Retirement Accounts (Roth IRAs). For more information on the use of Roth IRAs, scroll down to Section V. Participants will have the option of investing their accounts in any of the following ways: Target-date managed portfolios (the default election). Risk-based managed portfolios. Their own selection of funds from among the available investment options.

The following is a summary of what implementing the Program involves from an Employer’s perspective:

Employers must a) provide the Program with demographic data on its Employees, and b) provide enrollment materials/disclosures to Employees. Both must be completed following 120 days of Employment. The Program will mail the Participants information concerning access to their Program account; contribution and investment elections are made through their Program Account (not the Employer). Any affirmative elections made, and any “automatic enrollments” required, will be reported to the Employer by the Program through the web portal. Employees can only make affirmative elections through the Program’s website/call centers. They CANNOT opt-out directly with the Employer. The Program’s materials, websites, etc. will be available only in English or Spanish, however the call center “will have access to translation services for other languages” (per the Program’s FAQs). Employers are required to both withhold payroll deduction contributions and remit those withholdings to the Program. The Program’s systems do include opportunities for integration with payroll vendors. For additional information, scroll down to Section VI.

Detailed Analysis of the Program

Purpose  The following detailed analysis is intended primarily for individuals who will be consulting with their clients concerning participation in the program and/or adding a workplace retirement plan in order to avoid the Program. Employers who do not currently sponsor their own workplace retirement plan may also find this detailed analysis helpful.

Resources and Source Materials: The Statute - Public Act No. 16-29 MyCTSavings Program Description MyCTSavings Employer FAQ’s

Section I Which Employers Are Required to Participate

All non-governmental Employers with Employees in Connecticut are required to participate unless: In the prior calendar year, the Employer employed fewer than five employees (i.e., 4 or less) in Connecticut who received at least $5,000 in wages. The Employer provides its Employees with a “qualifying retirement plan” (defined below). The Employer was not in existence the entire previous calendar year. All other non-governmental Employers must offer participation in the Program to their Employees as described below.

Section II Definition of a “qualifying retirement plan” (Qualifying Plan)

Almost any workplace retirement plan defined in the Internal Revenue Code will satisfy the exemption requirements, including plans that do not offer the opportunity for payroll deduction employee contributions. There are however important stipulations that must be considered before claiming the exemption.   Plans that offer payroll deduction employee contributions: The following is a complete list of available Qualifying Plans that permit payroll deduction contributions: 401(k) Plan (available to all non-governmental Employers) 403(b) Plan (available solely to 501(c)(3) organizations and public schools) SIMPLE IRA Plan (available only to Employers with fewer than 100 participants)  403(b) Plans and SIMPLE IRA Plans each include regulatory requirements that prevent Employers from restricting eligibility on a discretionary basis. 401(k) Plans, on the other hand, permit the Employer to design the Plan to exclude an essentially unlimited number of Employees based on job description (e.g., interns, hourly employees, per diem employees) provided certain overall participation tests can be satisfied (referred to as “coverage testing”). The Program includes no guidance at all concerning these types of exclusions and their effect on the desired exemption. As literally written, the requirement for the exemption is merely to sponsor a Qualifying Plan. Caution is advised if a 401(k) Plan excludes more than an incidental group of Employees based on job description. For example, excluding a few interns would probably be okay; excluding half of the employees (e.g., hourly employees) might not. Employers are allowed to apply uniform age and service requirements to the extent permitted by law.   Plans that only offer discretionary employer contributions: The following Plans are funded exclusively through employer discretionary contributions, and might be eligible to satisfy the Program exemption (if certain requirements are met): Profit Sharing Plan Simplified Employee Pension Defined Benefit Pension Plan / Cash Balance Plan (the remainder of this section does not cover these types of Plans). The caveats above concerning Plans that exclude employees based on job description apply to Profit Sharing Plans as well. Simplified Employee Pensions, similar to 403(b) Plans and SIMPLE IRAs, are subject to regulatory requirements that disallow the discretionary exclusion of groups of employees.   The Statute indicates that these plans do not qualify for the exemption for a calendar year if no contributions were *made* in the previous calendar year (emphasis added). There is a lack of clarity in the Statute concerning which calendar year would count as the “previous calendar year” – the Allocation Year or the Deposit Year. For example, if the Employer funds a 3% of pay contribution for 2021, then 2021 is the Allocation Year. If that contribution is deposited in 2022, then 2022 is the Deposit Year. The use of the word “made” (as emphasized above) suggests the Deposit Year is the previous calendar year, but either interpretation should be reasonable in the absence of clarifying guidance. The Deposit Year interpretation should be the most practical. For example, if a deposit is made during 2022, the Employer knows at that time they will be exempt from the Program for 2023.   Obviously, the use of these Plans to avoid the Program should only be used if an Employer is confident that a contribution will be made each year. There is no minimum contribution mentioned in the Statute, but 3% should be an unquestioned level of contributions because of that rate’s prominence in qualified plan rules (top-heavy minimum rules and “safe harbor” 401(k) rules). On the other hand, a contribution rate of 1/10th of 1% of pay ($50 on $50,000 of pay) might be questioned if it provided the basis for exemption from the Program.

Section III Timing of Eligibility and Enrollment Under the Program

The following is a chronology of the eligibility and enrollment process. 1.      An Employee will become a “covered employee” on the latter of a) the date on which the Employee attains age 19; or b) the Employee’s 120th day of employment. There is no definition of the term “employed” in the Statute, and therefore no guidance on how to address terminations and rehires, nor sporadic work schedules. The most conservative approach, and the simplest, is to treat individuals as covered employees on the 120th day following their hire date, disregarding any gaps in service (which is a common approach in qualified plans). 2.      On or about the date on which an employee becomes a “covered employee” the Employer must: Report the Employee’s demographic information to the Program (e.g. name, address, Social Security Number) through a web portal. Provide the following information to the Employees: “Summary Program Description”. This document is intended to provide an overview of the Program’s eligibility, contribution, and withdrawal provisions. As of the date of this publication (May 2022) a document including this title was not available and therefore it is unclear what exactly Employers must be providing in order to satisfy this requirement (inquiries were made of the customer service team supporting this program). Various information concerning the investment accounts and investments available. 3.      The Employee will receive a notification from the Program in the mail or via email (if the Employer provided an email address). This mailing will commence a 30-day election period. During this initial election period, the Employee can choose their investments, make an election regarding how much they choose to contribute, or opt-out of the Program altogether. Participants are only permitted to elect a whole percentage of pay - flat dollar amount elections are not permitted via payroll deduction (Employees can establish recurring ACH debits on their personal checking accounts in a chosen flat dollar amount scenario). Pay is defined as “taxable wages” (presumably before the effect of any pre-tax deductions). Each of these elections is made via the Program’s website/call centers. These elections cannot be made directly with the Employer. 4.      Any initial and/or subsequent payroll deduction elections, elections to opt-out, and any automatic deductions required will be reported by the Program to the Employer. This information is communicated both via an email to the Employer and via pop-ups on the Program's website. The Employer is then responsible for updating their payroll systems to implement these changes.

Section IV Employer Registration Process/Deadlines

Action is required of ALL Connecticut non-governmental Employers with five or more employees, even if they already sponsor a workplace retirement plan. Regardless of whether an Employer is exempt, or will be required to participate in the Program, they need to be looking for either an email or a hard-copy mailing from the Program with information concerning the registration process. If no such communication is received well in advance of the deadline shown below, Employers should call the Program at (833) 811-7435 (M-F, 9 AM-6 PM).  All Employers are eligible to register as of April 1, 2022. Registration must be completed as of the following dates (the mailings will be sent in batches according to these deadlines): Employers with 100 or more employees: June 30, 2022 Employers with 26 to 99 employees: October 31, 2022 Employers with 5 to 25 employees: March 30, 2023 (not the 31st). According to the Program’s call center, any Employer can call the Program at (833) 811-7435 (M-F, 9 AM-6 PM) to a) obtain assistance in claiming the exemption related to a Qualifying Plan; or b) commence Participation; even if the above-referenced correspondence has not been received.

Section V Use of Roth IRAs as a Funding Vehicle

A discussion regarding the differences between pre-tax and Roth IRAs is beyond the scope of this article.

The use of Roth IRAs exclusively is useful for the following reasons: It does not require the Participant to claim a deduction on their Form 1040. A failure to claim the deduction of an IRA Contribution to a Traditional (pre-tax) IRA would make it an after-tax contribution. Any withdrawals from a Traditional (pre-tax) IRA create taxable income, resulting in double-taxation (assuming Employees will not track/report their “after-tax basis”). A large portion of these Roth IRA balances will be “cashed out” by Participants. With Roth IRAs, solely the cumulative investment gains are subject to income tax AND the 10% penalty tax (if under 59 ½). With pre-tax accounts, the entire balance is taxable/penalized. Presumably, the Program will benefit a demographic that is primarily in a very low tax bracket or perhaps pays no income taxes. Most personal financial advisors would recommend Roth IRAs in these cases. It should be noted however that not all individuals are eligible for Roth IRA contributions (click here for more information).  The Program makes it very clear that individuals who are not eligible for Roth IRA contributions are responsible for opting out of the program.

Section VI Payroll System Updates

Employers participating in the program will of course be required to update their payroll systems to add the applicable deduction codes. Payroll deductions should be limited to the applicable maximums each calendar year (2022: $6,000 plus $1,000 if 50 or older).  These deductions will not impact the calculation of any taxable income (Federal, Medicare, Social Security, etc.) and are not required to be reported anywhere on Form W-2.

Section VII Deposit of Contributions Withheld

Any amounts withheld must be ACH debited to the Program using the Program’s website. Although the Program does not include an explicit deadline for contributions, it should be reasonable to follow the timing rules applicable to 401(k) plans (7 business days if fewer than 100 employees, ASAP if greater than 100 employees).

Section VIII Payroll Vendor Solutions

If an Employer decides to participate in the Program, they should consult with payroll vendors to see if they are establishing interfaces with the Program. This type of integration would be valuable considering the volume of data required to be exchanged between the Employer and Program (demographic data and employee elections).  Additional fees for this functionality would likely apply.

Section IX Plan Designs to Avoid Program Participation

If an Employer currently has no Qualifying Plan in place and would like to add such a Plan for the sole and exclusive purpose of avoiding the Program, the following Plan designs would be a starting point for any conversations. 

401(k) Plan Possible Provisions Employees become eligible following both a) attainment of 21 years of age; and b) 12 months of service (including 1,000 hours). Beginning in 2024, anyone with 500 hours in 3 consecutive years would also be eligible. NO mandatory automatic enrollment. NO mandatory Employer Contributions. Owners of the business and Employees earning more than $130,000 a year might not be eligible to Participate. Complex testing requirements, and possible mandatory Employer Contributions, apply to 401(k) Plans that cover these Employees.

SIMPLE IRA Plan Provisions Employees with $5,000 of Compensation in 2 years are eligible (no age requirement) Available only to Employers with fewer than 100 Employees. No mandatory automatic enrollment. There are mandatory Employer Contributions Matching Contribution of 100% of the first 3% contributed (can be reduced to 100% of 1% for 2 out of 5 years); OR 2% of pay regardless of an Employee’s payroll deduction contributions.

403(b) Plan – 501(c)(3) Non-Profits Only Immediate eligibility from date of hire. Employees normally working less than 20 hours per week may be excluded. No mandatory automatic enrollment. No mandatory Employer contributions. Executives/Officers earning more than $130,000 per year do NOT need to be excluded (making 403(b)’s the preferred approach for 501(c)(3) non-profits).

For more information, or if you would like to discuss further, please contact us.

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