More and more state governments are taking on the role of ensuring that companies doing business in their states provide a retirement program for their employees. Currently, 11 states plus Washington, DC have active state-mandated retirement plans, 9 have implementation of such programs in process, and 23 have proposed programs awaiting legislative approval. Only 7 states have not yet had legislation on this issue. New Jersey’s state-mandated plan, called “RetireReady NJ,” goes into effect next month.
What is RetireReady NJ?
The New Jersey Secure Choice Savings Program Act was signed into law on March 29, 2019. It created a requirement that all businesses either sponsor a retirement plan for their employees, or else they must participate in the New Jersey Secure Choice Savings Program, also known as “RetireReady NJ.” Although the act passed more than 5 years ago, there were numerous implementation delays and deadline suspensions; but now the pieces are (supposedly) in place for the program to get off the ground.
Effective Dates
Barring additional delays, businesses with 40 or more employees must comply with the new program by September 15, 2024. Businesses with 25 to 39 employees must comply by November 15, 2024. Businesses are scheduled to receive notifications from RetireReady NJ prior to their compliance deadline.
Coverage
All employers (both for profit and not-for-profit) are covered unless they meet one (or more) of the following exemptions:
They have not been in business for at least 2 years.
They did not have at least 25 employees at any time during the previous year. For this purpose, employees include anyone who either lives or works in New Jersey, is at least 18 years old, and whose wages are subject to New Jersey income tax withholding. Employees employed by a Professional Employer Organization (PEO) or an employee leasing company must be included.
They have offered their employees a “qualified retirement plan” during the preceding two years. For this purpose, a “qualified retirement plan” includes a plan qualified under IRC Section 401(a) (this includes most 401(k) plans, profit sharing plans, cash balance plans, traditional defined benefit plans, and some other plans); a 403(a) or 403(b) plan; a Simplified Employee Pension (SEP) plan; a SIMPLE IRA plan; or a 457(b) governmental deferred compensation plan.
Businesses that meet one of the exemptions must notify the RetireReady program administrators of their exemption using the Access Code they receive when they are notified about the program by the state.
Contributions to NJ RetireReady
Automatic Enrollment: If employees do not opt out of coverage, they are automatically enrolled in the program at 3% of pay. Employees must be allowed to elect a higher or lower percentage of pay, or to opt out of the program. Employees hired more than six months after RetireReady NJ begins must be enrolled within three months of their hire date (unless they opt out).
Roth IRAs: For each participating employee, a Roth IRA account is set up to receive the funds withheld from their payroll. This means that the contributions are made on an after-tax basis and are subject to Roth IRA taxation and distributions rules.
Maximum employee contribution: The maximum annual contribution is $7,000 for employees who do not reach age 50 during the year, and $8,000 for employees who are at least age 50 during the year.
No employer contributions: Employers are neither required nor allowed to make contributions to employees’ accounts.
Penalties
Employers should work with their payroll companies to set up enrollment and contributions procedures. Employers who fail to enroll an eligible employee without reasonable cause are subject to penalties of up to $500 for each violation. Employers who collect employee contributions but fail to remit them in full to the program on a timely basis are subject to very significant penalties.
Investments
Employees can choose to invest their contributions in one or more of the mutual funds offered under the program. The current investment lineup includes 7 funds plus a target retirement date series set of funds. If an employee fails to designate an investment choice, their contributions will be invested in the target date funds. The current investment lineup includes the following funds:
Capital Preservation: Vanguard Treasury Money Market
Fixed Income: Baird Core Plus Bond
Large Cap Equity: Fidelity 500 Index
Mid Cap Equity: Fidelity Mid Cap Index
Small Cap Core: Fidelity Small Cap Index
Small Cap Value: Wasatch Small Cap Value
International Equity: Fidelity Global ex-US Index
Target Date Series: Vanguard Target Retirement Funds
Costs
NJ RetireReady does not charge any fees to sponsoring employers. However, payroll companies or other service providers may charge fees for their roles in implementation or ongoing compliance. Participating employees are charged an annual maintenance fee of 0.75% of their account balance. For example, an employee with a $60,000 account balance would have a fee of $400 withdrawn from their account. This fee is in addition to the internal expense charges of the underlying funds.
Advantages of Adopting a Qualified Retirement Plan Instead of Participating in NJ RetireReady
Although there are factors that make NJ RetireReady a good choice for some employers (such as low cost and portability of accounts), it is our opinion that the vast majority of employers are far better off sponsoring a qualified retirement plan rather than participating in NJ RetireReady.
Factors that argue in favor of sponsoring a qualified retirement plan rather than NJ Retire Ready include:
Employees in a 401(k) or 403(b) plan can be offered the choice of pre-tax contributions or Roth contributions. Many factors influence which is the better choice, but the immediate tax deduction is a very popular factor inducing employee participation.
Contribution limits are significantly higher in a 401(k) plan: the 2024 limits are $23,000 for employees who do not reach age 50 during the year, and $30,500 for employees who are at least age 50 during the year.
There is much greater flexibility in the choice of investment options in a qualified plan. There is no limit to the number of investment options that can be offered and a wider range of investment objectives can be covered.
Employer contributions can be made to a qualified plan in addition to employee contributions. A 401(k) can allow for employer contributions that are a percentage of employee contributions (i.e., matching contributions), a percentage of employee pay, or various other designs that can target specific employees if certain nondiscrimination tests are passed.
Non-IRA qualified plans can be designed to allow employees to borrow up to 50% of their account balance (maximum $50,000). This prevents an employee from being taxed on amounts that need to be withdrawn temporarily if they are repaid under IRS rules.
Many other plan design features are available in qualified plans, such as longer service eligibility requirements, ability to exclude certain employees, allowing employees to roll in retirement plan savings from other sources, and many others.
Retirement plan professionals are available in most qualified plan arrangements to help with various aspects of plan administration: including an investment advisor, pension administration firm, and recordkeeper. Meetings with participants and the employer can help answer questions, increase appreciation for the plan, and result in substantially greater retirement plan savings.
Employers using RetireReady NJ have administrative responsibilities that include tracking eligibility status, providing program information to employees, enrolling new employees, complying with opt outs, depositing salary deferrals, offering an annual open enrollment period, and submitting an annual employee census. With a qualified retirement plan, many of these responsibilities are typically handled by retirement plan professionals.
Employees in RetireReady NJ are on their own in determining their Required Minimum Distributions.
Qualified plans eliminate government involvement in the contribution process.
Conclusion
If you’re a client of Preferred Pension Planning, you already have a qualified retirement plan, so you don’t need to be concerned about NJ RetireReady requirements. But if you’ve been considering terminating your qualified retirement plan for any reason, please reconsider the advantages it offers and know that you’ll be required to participate in the NJ RetireReady program going forward.
You can find the ReitreReady NJ site here!
As always, please feel free to contact us at 908-575-7575 or info@preferredpension.com if you have any questions or would like additional information.