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U.S. Department of Labor Publishes Interpretive Bulletin and Proposed Safe-Harbor Regulation Regarding State Retirement Savings Plans

On Behalf of | Nov 17, 2015 |

On Monday, November 16, 2015, the U.S. Department of Labor issued two new pieces of regulatory guidance. The DOL released Interpretive Bulletin, IB 2015-02 (the “IB”) explaining the Department’s view as to how ERISA’s preemption and certain other rules would apply to various types of voluntary state retirement programs and issued a proposed regulation, creating a new ERISA exemption safe harbor for state-mandated IRA programs.

By and large, employees do not save enough to be sure they will have sufficient funds in retirement. To address this problem, many states have adopted or are considering options to encourage, facilitate, or possibly even mandate the coverage of their citizens by some type of employment-based retirement vehicle.

The state approaches vary, and ideas include both voluntary programs and those where a state makes programs mandatory for certain employers. Programs may involve the creation of a plan or program subject to ERISA or an arrangement exempt from ERISA.

Concern about whether their programs would be preempted by ERISA has been holding back some states that would like to implement their initiatives. Therefore, the stated purpose of the new IB is to explain the DOL’s views as to which approaches would be subject to ERISA and which would be exempt, and to describe which types of programs would be subject to ERISA preemption. The goal of the proposed regulation is to set forth a new safe harbor under which a state could require certain employers to establish payroll-deduction IRAs for their employees. From a combination of these new pieces of guidance, the DOL believes that there are several ways that states can move past preemption and establish retirement programs that are likely to withstand preemption-based attacks.

Interpretive Bulletin: Some State Options Not Preempted

In the IB, the DOL outlines several approaches – some that would involve ERISA and some that would be exempt from ERISA – that it believes a state could take, without running afoul of ERISA preemption, to make retirement savings more accessible to employees whose employers do not maintain a retirement plan. The IB encourages states to utilize ERISA-covered plans in their initiatives, because employee contributions as well as employer contributions would be allowed, and total contribution levels would be permitted that are greater than those permitted to non-ERISA plans. Also, participants would be protected by the obligations, liability and remedies that are imposed by ERISA . The DOL indicates, however, that some tools are also available that would allow certain state-based retirement savings programs to meet the conditions for ERISA exemption. In either case, the DOL believes that ERISA would not preempt the arrangement merely because of the state involvement so long as certain conditions are met.

One approach discussed in the IB is a “marketplace” operated by the state, which would connect employers with private sector providers of retirement products that are especially suited to small businesses. Prime characteristics of suitable products would include providing good quality and charging low fees. The DOL describes the marketplace approach adopted by Washington State, which the DOL does not believe is preempted by ERISA. Under this approach, the marketplace itself would not be subject to ERISA, and the state would not create or sponsor any specific savings arrangements. The state’s role under this type of arrangement would be to set standards for plans marketed through the marketplace, and employers would be free to use the marketplace, to use products outside the marketplace or to not establish any retirement savings plan at all. The plans created under the marketplace would be either ERISA-covered or ERISA-exempt plans, depending on their characteristics. An employer using the marketplace to create a payroll deduction IRA program that meets the conditions for ERISA exemption under existing safe-harbor regulations would have an ERISA-exempt arrangement. Indeed, the marketplace could be used to create a SIMPLE-IRA with the special rules normally applicable to such plans and the state’s involvement will not in and of itself affect the application of such rules.

Another approach is for a state to create a prototype plan, similar to the prototype plans that many ERISA providers use for their clients. The DOL notes that Massachusetts is using this approach for non-profit employers with fewer than 20 employees. Under this approach, employers will contribute and the plan will be developed and administered by the state. The state can designate low-cost investment options and third-party service providers that it believes are the most suitable. The plans created by employers under such a prototype would be subject to ERISA, but the state and its selected providers could take on some of the fiduciary functions.

The third approach discussed by the DOL in its new IB is the most interesting of all. This approach involves an open-network state-sponsored multiple employer plan (“MEP”), to which various participating employers could subscribe and which would be treated as a single plan under ERISA. Several providers have wanted to establish MEPs for use by unrelated employers (sometimes called open MEPs), and have the MEP treated as a single plan. The DOL has been resistant to these proposals in the private sector unless the employers that will be using them are part of an organization created for other purposes. The DOL has indicated, however, that a state’s nexus to its employers is sufficient to permit a state-sponsored MEP. Under this approach, the state would create and operate the MEP as a single plan subject to ERISA (requiring only a single Form 5500 Annual Return/Report), and the employers who wish to do so would enroll their employees. The state and/or state-selected providers would be the primary ERISA fiduciaries. The state could limit the employers’ fiduciary responsibilities, although the employers would retain the responsibility for enrolling employees, depositing employee deferrals and any employer contribution and for prudently selecting and monitoring the arrangement.

In the DOL’s view, these state arrangements would not be preempted by ERISA because they do not mandate any employee benefit structures or administration, they do not provide any alternate enforcement mechanisms to an ERISA plan, and they do not force employers or plan fiduciaries to choose any particular program or preclude uniform administrative practices. Further, each of these arrangements involves a state “acting as a participant in a market rather than as a regulator.” The DOL cautions, however, that in order to avoid ERISA preemption, a state enacting such an arrangement must avoid establishing standards or remedies that would be inconsistent with ERISA and may not require employers to participate in the arrangement or mandate the adoption of any particular plan by an employer.

Proposed Regulation: A New Safe Harbor ERISA Exemption

In contrast to the IB described above, the new safe harbor created by the proposed regulation does allow a state to mandate that employers without an existing retirement plan establish a voluntary payroll deduction IRA arrangement for employees. In fact, the safe harbor only applies if the employer’s participation in and facilitation of the program is required by state law. The arrangement could require automatic enrollment of employees at a prescribed contribution level, with the employee having the ability to increase or decrease the amount or even opt out altogether. The safe harbor also allows the state, governmental agency or instrumentality to operate the arrangement, either directly or by contract with a private sector recordkeeper and/or other provider as long as such designee remains fully responsible for the operation and administration of the program. In the event a state program permits employees to choose from multiple IRA providers, the DOL has indicated that under the safe harbor the state may designate one of those choices as a default investment when an employee fails to otherwise designate a provider. Under the proposed regulation, in order to take advantage of ERISA exemption, the state must assume responsibility for the security of the payroll deductions and the employees’ savings in the IRA, and the state is required to implement means that ensure that employees will be informed of their rights under the program and to create a procedure for enforcement of those rights.

In addition, to be eligible for the safe harbor, the DOL’s proposed regulation requires that a state mandate certain features of its program – such as the automatic-enrollment feature – in order to make it clear that the employer is not designing the program. The state’s role in mandating the program’s features is crucial because for an employer to create an automatic enrollment feature or any other aspect of the program would be considered an act of sponsorship that would preclude the program’s ERISA exemption. In order to qualify for the safe harbor, a state-mandated IRA program may allow for very little employer involvement whatsoever and certainly may not permit employer contributions on behalf of employees or any other bonus or monetary incentive related to enrollment and participation. A program meeting the conditions for safe-harbor ERISA exemption may only allow employers to “act as a conduit for information regarding the program,” which would specifically include: (i) the collection and remittance of employee payroll contributions and providing related notices to employees and maintaining related records; (ii) providing information to the state needed to assist in the program’s operation; (iii) distributing program information to employees; and (iv) permitting the state to publicize the program to employees. Under the proposed regulations, the employer may not receive any direct or indirect compensation in connection with the state-sponsored retirement program, other than the reimbursement of its actual costs for those permitted activities.

The new safe harbor differs from the existing safe harbor for non-ERISA programs in that the current safe harbor is contingent on the “completely voluntary” participation of each employee. Specifically, automatic enrollment (with the ability of the participant to opt out) is not allowed under the current safe harbor. Under the newly proposed safe harbor, however, it will only be necessary for a participant’s enrollment to be “voluntary,” and that objective can be achieved in an automatic enrollment environment so long as the participant can change the amount contributed or opt out entirely. Also, the participant must be free to withdraw the funds from the account or transfer it to another IRA or plan without restrictions, and there must not be any cost or penalty on “transfers or rollovers permitted under the Internal Revenue Code.”

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