In our frum community, attitudes toward retirement planning range widely. Some are meticulous, even a bit obsessive, about their IRAs and 401(k)s. Others, overwhelmed by the myriad parnassah challenges in the here and now, view retirement accounts as an exotic and distant luxury. But regardless of where you stand personally, the government is currently pushing major interventions toward retirement savings that will affect many, many readers.
On the one hand, new laws in a number of large states, including NY and NJ, now OBLIGATE many employers to offer workplace retirement savings accounts. Employers who ignore these new obligations will face hefty financial penalties. This is the “stick.”
At the same time, the federal government has rolled out multiple significant tax credits, incentivising employers and employees to focus on retirement savings. These are the “carrots.” So, many readers will have some big decisions to make, and soon.
This article will offer a brief macro overview of these retirement sea-changes. Further newsletters will clarify how companies can remain in compliance while maximizing retirement tax and HR benefits, and how employees and individuals should use their new retirement account options.
The Stick: New State Obligations Are Here
Following in the footsteps of other blue states (see the map below), New York and New Jersey now require established employers, both companies and not-for-profit organizations, which have 10 or more in-state employees, to offer some form of payroll-deduction retirement savings accounts. NJ’s plan went live in late 2024, and NY’s is rolling out now, throughout 2026. While penalties for non-compliance haven’t been handed out yet, they will be significant, so ignorance isn’t an option here.
Click here to view it on the Georgetown University website.
Simple, Rigid, and Limited State IRAs
The arrival of these state mandates creates an immediate fork in the road for many thousands of companies and organizations, including myriad mosdos. Employers now have two paths to compliance: either directing employees into new state-administered IRA programs, i.e., New York’s “Secure Choice” or “RetireReady NJ”, or opening their own private pension options, such as 401(k) or 403(b) plans. And the differences between these two options are significant.
State-managed IRA plans are cookie-cutter, designed to be low-cost and have minimal compliance requirements. That’s good. But they also enable far lower employee contribution limits (as they are legally IRAs), inflexible tax and investment options, and no employer tax credits. The state plans also require a constant interface with the state’s preferred custodian, investment, and software vendors. Not good.
Vs Complex, Flexible Tax-preferred 401ks
A 401(k), designed and overseen by each employer, on the other hand, allows for much higher employee savings limits, abundant employer tax benefits, and full investment and administrative customization. But all these potential benefits, options, and compliance obligations lead to far more complexity and fees. Employers will need to weigh their pros and cons carefully.
To make things more interesting, though, the federal government has been sweetening the 401(k) route, offering substantially increased tax benefits for small employers (under 100 employees) who open new 401 (k) plans. These tax sweetener carrots may sway many companies to consider the more robust employee retirement benefits that a 401(k) structure offers, rather than accepting the simpler State IRA option.
Retirement Tax Credit #1: $15K for Employer Startup Administrative Costs
For tax benefit #1, small employers (< 100 employees) can now claim up to $5,000 X 3 years to cover “qualified” logistical costs of getting a plan off the ground. The IRS is essentially covering most or all of the administrative, legal setup, and employee education costs for small startup 401(k) plans. The thought is that, over 3 years, these plans can become self-sustaining through employee “co-pays” to cover overhead costs. Those who default into the State IRAs don’t qualify.
Retirement Tax Credit #2: 175k for Retirement Benefits Reimbursements
Far greater than the 15k are the significant tax credits available to small employers who fund employee accounts with a match or profit-sharing contribution. Employers can receive a tax credit of up to $1,000 per employee to reimburse them for retirement benefits they’ve contributed to employees’ 401(k) accounts.
We are talking close to $200,000 in total, which can be tapped for employee retirement benefits! This tax credit is also available only for new 401 (k) plans, and the percentage of the reimbursement phases out over 5 years. Not-for-profit organizations, which generally don’t pay income tax, won’t benefit at all from these credits.
Since this tax credit is also unavailable to employers who use the state IRA option, which does not allow employer contributions, it may tip the scales in favor of 401(k) adoption.
Massive reimbursements for employee benefits can be an HR game-changer that allows for-profit companies to boost retention and help staff build a nest egg at little to no out-of-pocket cost. After the phaseout, executives can choose to stop employee contributions while still maintaining an excellent retirement plan to maximize and simplify their tax-sheltered retirement savings.
Employee Decision Time
The decision of whether to offer the State IRA option or a 401(k) plan is for employers to consider. Employees will then have their own research cut out for them. Depending on what ultimately is on offer, employees will have to decide how much of their paychecks to direct toward these new retirement accounts and how these funds should be invested.
Choosing wisely will depend on myriad factors, including whether there’s an employer match on offer, investment options, and the fees, which can be onerous compared to options individuals can select beyond their workplace offerings.
A key point for employees to recognize is that, whether it’s the state IRA or a new 401(k) option, employers will, must, default to deduct a percentage of employees’ paychecks and auto-invest those deductions into target-date mutual funds.
Employees can opt out, adjust the amounts they want deducted, and tweak their Investments. But if you do nothing, you will be enrolled on autopilot. So pay attention if you start getting emails about a new retirement option at your company.
Retirement Tax Credit #3: A $2,000 Annual Saver’s Match
One fascinating federal tax credit, newly revised starting in 2027, incentivizes low- to middle-income earners to save for retirement. Singles earning up to about $21,500 (AGI) who deposit $2,000 into any retirement account will receive a $1,000 matching contribution deposited into their accounts, courtesy of Uncle Sam. For couples filing jointly, the maximum eligibility level is $41,000, and the maximum contribution required is $4,000, for a maximum match potential of $2,000.
Tapping into this tax credit year after year can make a huge difference for low-income people, especially if it’s on top of employer matches!
Those claimed as dependents on another tax return and full-time students aren’t eligible for this credit. Smaller retirement matches will be provided for higher-income earners, with a total phaseout at $35,500 for singles and $71,00 for couples filing jointly.
Can Low-Income People Afford to Save?
The key question about maximizing this tax credit, aimed primarily at the working poor, is how many low-income folks can afford to set aside about 10% of their small salaries for retirement to take advantage of the largesse? Even if there are significant long-term benefits to saving and investing, putting food on the table will come first.
Interestingly, especially for the frum community, the best candidates for this credit may be working spouses of young graduate students, including, of course, Kollel Yungeleit. These student households often have minimal taxable income but, if they don’t have children, may still be able to save for retirement and take advantage of the government match, thanks to student loans and stipends covering other shortfalls.
Many of this credit’s logistics, rules, and ramifications for early withdrawals, etc., also remain to be seen, but it has a lot of potential to shake things up.