Loss of ERISA Exemption Could Be Trouble for State Mandated IRAs

NJ State House

State legislatures may need to go back to the drawing board if Congress repeals a Labor Department exemption for mandatory individual retirement accounts.

Under the rule issued by the DOL last summer, mandatory IRAs aren’t considered employee benefit plans subject to the Employee Retirement Income Security Act provided they meet certain conditions.

Five states have enacted mandatory IRA laws to require employers that don’t offer retirement plans to enroll their employees in state-facilitated IRAs. Other states have enacted laws that don’t require employers to enroll employees automatically in the IRAs.

On Feb. 15, however, the U.S. House of Representatives passed and sent to the Senate a resolution repealing the DOL rule.

For the resolution to become law, the Senate would have to pass and President Trump would have to sign it.

The action in the House represents one of several challenges to Obama-era regulations under the Congressional Review Act, Michael Hadley, a partner at Davis & Harman LLP in Washington who practices in the area of employee benefits, told Bloomberg BNA on Feb. 21.

While it is too early to tell whether and when the Senate will take up the resolution, “some states have announced they will go forward with mandatory IRAs regardless,” Hadley said.

“States that do so will either have to move to a voluntary system or ensure their programs contain the consumer protections of ERISA,” he said.

“In fact, some of the state laws prohibit their programs from moving forward if the plan is determined to be an ERISA plan,” he said. “Legislators did not want to have to comply with all the requirements that private employers have to comply with.  Consequently, some of these states would have to go back to their legislatures for a change to their law.”

Hadley also referred to the ongoing rulemaking process for the Oregon mandatory IRA program “as an example of why plan sponsors are very nervous about these state plans,” referring specifically to some confusion over the continued validity of waiting periods for eligibility in employer-sponsored retirement plans.

Rules Writing in Oregon

The Oregon Retirement Savings Board is writing the rules for the Oregon Retirement Savings Plan, the state's mandatory IRA program.

James Sinks, director of communications and stakeholder relations for the Oregon State Treasury, told Bloomberg BNA on Feb. 17 that the state has held an ongoing series of conversations with consumer and business groups about the plan for more than a year, ahead of the first enrollments under a pilot rollout scheduled for this July.

“Different business groups that testified at the hearing were thankful that the Treasury department has been responsive to their concerns and that their points are being considered in the rules,” he said.

For instance, the board announced modifications to the draft rules to recognize the continued validity of employer retirement plan waiting periods, he said. The deadline for written comments is today and the final rules will be considered by the board in mid-March.

This amendment reflects Oregon’s commitment to a “highly transparent process to address the failed status quo that has created a retirement savings crisis in this country, to keep the Oregon program as simple as possible, and to help millions of Oregonians who lack access to an employer-sponsored plan to start saving,” he said.

Allowing states to come up with solutions to expand retirement savings has bipartisan appeal, Sinks said, noting that a letter from 15 state officials to Congressional leaders including Senate Majority Leader Mitch McConnell (R-Ky.) dated Feb. 14 urging a “no” vote on the disapproval resolution was signed by, among others, the state treasurers of Idaho and Utah, reliably Republican states.

See related story, GOP Effort to Stop State Retirement Mandates Clears House.

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