A final rule from the Labor Department could breathe new life into the drive by the states to give more private sector employees access to retirement savings plans through their employers.
The rule issued on Aug. 25 establishes a safe harbor from coverage under the Employee Retirement Income Security Act for those state-directed initiatives that meet the enumerated list of conditions.
A program that qualifies for an ERISA safe harbor under the final rule will not be subject to ERISA coverage as an “employee pension benefit plan,” and courts will be less likely to find that the laws creating these programs are preempted by ERISA, the DOL said.
Under ERISA Section 3(2), an “employee pension benefit plan” is any “plan, fund, or program” that is “established or maintained by an employer” that “provides retirement income to employees.” In addition, ERISA broadly preempts state laws that “relate to” private-sector employee pension benefit plans.
A handful of states, including Connecticut, Illinois and Maryland require private sector employers in their jurisdiction that do not currently offer their employees a retirement plan to establish accounts for them.
In general, an employer covered under these state programs must automatically deduct a specified percentage of wages from its employees’ paychecks. The employer has to then remit these payroll deductions to state-administered IRAs established for the employees.
However, concerns had been expressed that these laws “may cause covered employers to inadvertently establish ERISA-covered plans, despite the express intent of the states to avoid such a result,” the DOL said.
The safe harbor provides a path for more states to look closely at instituting these programs, by removing the cloud that ERISA issues have put over those initiatives, Michael Hadley, a partner at Davis & Harman LLP in Washington, told Bloomberg BNA on Aug. 29. (See related article, States Dive Headfirst Into Retirement Coverage Debate – But Will Their Initiatives Run Afoul of Federal Law?)
Clearly Delineated Roles
The state and the employers subject to these programs have very distinctly defined roles under the safe harbor final rule.
Thus, the program must be established specifically pursuant to state law and be implemented and administered by the state, which is responsible for investing the employee savings or for selecting investment alternatives for employees to choose. The state must require employers to participate. Participation in the program must be voluntary for all employees, however.
In addition, the state must assume responsibility for the security of payroll deductions and employee savings and adopt measures to ensure that employees are notified of their rights under the program and create a mechanism for enforcing those rights.
Employer involvement in the program must be limited to:
Collecting employee contributions through payroll deductions and remitting them to the program;
Providing notice to the employees and maintaining records regarding the employer’s collection and remittance of payments under the program;
Providing information to the state necessary to facilitate the operation of the program; and
Distributing program information to employees from the state and permitting the state to publicize the program to employees.
The employer cannot contribute funds to the program or provide bonuses or other monetary incentives to employees to participate in the program, nor exercise any discretionary authority, control or responsibility under the program.
Nothing in the safe harbor prohibits a state from imposing the mandate on an employer that already offers a plan, Hadley said. “In fact, a state might be able to impose the mandate on an employer that has a retirement plan that doesn’t meet some standard the state thinks is important,” he said.
The final rule also removes a condition that was in the November 2015 proposed rule prohibiting a state from imposing any withdrawal restrictions on the IRA. Hadley gave the example of a state plan that offers an annuity, which usually includes a surrender charge and other charges to keep the annuity economically viable.
While this provision was removed from the final rule in order to facilitate lifetime income investments that may not be fully liquid, “states could go beyond that and impose a variety of restrictions unrelated to generating retirement income,” he said. The final rule would seem to allow a state to prohibit any withdrawal from an IRA until age 65, he said.
The final rule also did not respond to concerns of employers in multiple states that they could be subject to overlapping and inconsistent requirements depending on which state their employees reside in, he said.
Separately, DOL released on Aug. 25 a proposed rule to enable some cities and other “political subdivisions” to create their own retirement savings programs.
See related story, State-Run Retirement Programs Get Green Light From DOL
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