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At least one industry association is considering litigation against Illinois as the state pushes forward with its Secure Choice retirement savings program, which imposes new payroll and reporting duties on all but the smallest employers.
Other legal challenges to Secure Choice could follow when the program launches Nov. 1, sources told Bloomberg Law.
Libertarian and anti-tax advocacy organizations challenged a similar retirement program in California, suspicious of safety net programs administered by the state. And some employer groups are uneasy with compliance burdens and program features that potentially conflict with the Employee Retirement Income Security Act. Last year, President Donald Trump signed a resolution repealing an Obama-era Labor Department “safe harbor” rule that specified state-sponsored Secure Choice schemes are exempt from coverage under ERISA.
“The big obstacle is going to be the lack of federal legislation that frees these plans from ERISA complications,” said Andrew S. Williams, an employee benefits and ERISA partner with Golan Christie Taglia LLP in Chicago.
But supporters of Secure Choice, which aspires to bring 1.2 million Illinoisans into retirement savings vehicles for the first time, insist the ERISA complaints are overblown.
“We have always maintained that Secure Choice employers are not subject to ERISA,” said Jody Blaylock, a financial security policy associate with the advocacy group Illinois Asset Building Group. “While the safe harbor was a helpful clarification, we always believed—with or without—Secure Choice is in good standing.”
State Treasurer Michael W. Frerichs, who is administering the program, said “we have always been aware of the potential for a lawsuit, or that a lawsuit is likely. But we feel confident we are on solid legal footing, and just because someone files a lawsuit doesn’t mean it has merit.”
In January 2015, Illinois was the first state in the country to enact a Secure Choice program. Since then, California, Connecticut, Maryland, New Jersey, Oregon, Vermont, and Washington have passed their own state-facilitated retirement savings programs. Oregon’s program is the only one that is fully operational.
Under Illinois’ program, employers at least 2 years old and with at least 25 workers must either offer their own retirement program or participate in Secure Choice. Employers in Secure Choice would facilitate payroll deductions into each worker’s Roth IRA-style retirement account. Employers aren’t permitted to contribute funds to a worker’s account.
Each new account would be set up to accept 5 percent of an employee’s paycheck, but workers would be free to change their contributions or opt out. Accounts also would travel with workers as they move to different jobs.
Illinois has specific deadlines by which employers must register for Secure Choice. The state’s largest employers, with 500 or more workers, must register by Nov. 1. Employers with between 100 and 499 workers must register by July 1, 2019, and employers with 25 to 99 workers must register by Nov. 1, 2019. Illinois will notify employers directly about the registration requirements, including information about available exemptions.
Illinois signed a nine-year deal with Ascensus, the nation’s largest retirement and college savings service provider, to manage the program. The state recently launched a pilot program involving eight employers with headcounts ranging from 40 to 800, Frerichs said.
The ERISA Industry Committee (ERIC) already has sued Oregon’s program, OregonSaves, and is considering similar action in Illinois.
Will Hansen, ERIC’s senior vice president of retirement and compensation policy, said his group supports Secure Choice programs, but Illinois is implementing its reporting requirements in ways pre-empted by ERISA. He said the state is requiring employers to check a box in their quarterly IL-941 Form, the Illinois Withholding Income Tax Return, indicating whether they are subject to the Secure Choice statute.
“We still think it’s a reporting requirement. We still think it violates ERISA. We are currently weighing our options on how to approach the Illinois issue,” Hansen said.
Oregon’s reporting requirements were less onerous but nonetheless pre-empted, leading ERIC to file a lawsuit in federal court. The parties reached a settlement in March permitting employers to verify their membership with ERIC to confirm their exemption from OregonSaves. The parties also agreed to work with federal regulators to seek changes to existing reporting forms required under ERISA that can provide Oregon with the exemption information.
Illinois could face an existential challenge from taxpayer groups questioning the purpose and necessity of the program.
California was sued in May by the Howard Jarvis Taxpayers Association, which argues the “CalSavers” Secure Choice program is facially invalid under ERISA. A spokeswoman for the HJTA said taxpayer groups in Illinois may adopt a similar strategy in light of the state’s huge unfunded public pension systems.
“In California, we already have several pension programs managed by the state that are not managed well at all,” said Susan Shelly, vice president for communication at HJTA. “And the last thing that’s needed is to automatically enroll working people into some sort of program for an IRA, when they could go down the street to any one of the financial services companies that already market to consumers and small investors.”
In this uncertain climate, Williams predicted a period of heartburn for Illinois employers.
Even if Illinois satisfies the concerns of ERIC and taxpayer groups, the state may run up against the Labor Department and its interpretation of ERISA. He said Illinois employers without exempt retirement plans might be better served by avoiding Secure Choice altogether, and establishing their own 401(k) plan.
“Unless there is some real clarity on the federal level, these plans present a definite risk component to private employers who might think about adopting them,” Williams said. “My guess is that’s not going to get better in the Trump Administration.”
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