November 16, 2015
DOL Releases Rules for State-Run Retirement Plans
The U.S. Department of Labor (DOL) Employee Benefit Security Administration (EBSA) released a regulatory guidance package on November 16 designed to facilitate state-sponsored retirement plans for non-governmental employees.
As we have previously reported, a number of states have passed (or are considering) legislation to require private-sector employers that do not sponsor retirement plans to provide payroll deduction contributions into a state-sponsored retirement plan. The Council composed a Benefits Blueprint summary outlining the latest state retirement plan initiatives earlier this year and a chart prepared by Davis & Harman LLP summarizing the laws in California, Illinois, and Oregon is now available on the Council’s website.
Although these state initiatives are generally intended to apply to small employers, there is also the potential that there could be related responsibilities imposed on larger employers regarding certain employees who are not eligible for an employer-sponsored plan. The Council remains concerned about the potential of state plans to erode ERISA’s preemption standard, disrupting multi-state employer plans that rely upon a strong federal framework.
The EBSA release includes proposed regulations that specifically provide a new safe harbor that would allow states to mandate a payroll deduction IRA for employees that are not otherwise eligible for a workplace savings plan. Importantly, the DOL stated the arrangement would not establish an employee benefit plan under ERISA and would not be subject to ERISA preemption. The DOL has acknowledged that a court could decide that ERISA preemption applies, but notes that the objective of the safe harbor is to reduce the risk of such state programs being preempted if they are ever challenged.
The proposed regulations add a new safe harbor which exceeds the existing 1975 safe harbor for payroll deduction IRA programs established by employers that are “completely” voluntary. “Completely voluntary” has been interpreted as ruling out the use of automatic enrollment in the existing safe harbor. Therefore, the proposed new safe harbor uses “voluntary” instead of “completely voluntary” and the DOL explains that the new state safe harbor plans can include automatic enrollment.
The preamble also indicates that the DOL is not expressing any view regarding the application of the provisions of the Internal Revenue Code (which would be controlled by the Treasury Department). Presumably, the DOL is referring to certain requirements contained in both ERISA and the tax code that would apply to IRA arrangements even if they are not ERISA plans (including excise taxes for prohibited transactions). The state can contract with commercial service providers, such as investment managers and recordkeepers, to operate and administer the program. Comments on the proposed regulations are due on or before January 19, 2016.
The DOL also released an Interpretative Bulletin, effective November 18, 2015, allowing states to create or facilitate three types of ERISA-covered plans:
- The first would allow states to contract with a private sector entity to establish a program that connects eligible employers with qualifying savings plans available in the private sector market.
- The second would be a state-sponsored “prototype plan” in which a state-administered prototype plan could designate the state or a state designee as “named fiduciary” and “plan administrator” of the plan (taking on fiduciary liability).
- The third type of plan would be a state-sponsored multiple employer plan (state MEP) that could be either a defined contribution or defined benefit plan.
Under this guidance, a state could design a defined contribution MEP so that the participating employers could have limited fiduciary responsibilities but would still have the duty to prudently select the arrangement and to monitor its operation. If structured properly, any participating employer would not be the “sponsor” of the plan and also would not act as plan administrator or named fiduciary, according to the guidance. The DOL also took the position that “a state has a unique representational interest in the health and welfare of its citizens” and “the state should be considered to act indirectly in the interest of the participating employers,” which distinguishes the state MEP from other business enterprises that underwrite benefits or provide administrative services to several unrelated employers. This explains why they are effectively allowing states to sponsor open MEPs (allowing groupings of unrelated employers) but do not allow private-sector open MEPs.
A DOL fact sheet on the guidance package is available.
The Council will soon schedule a Benefits Briefing webinar to discuss state plan issues. For more information, contact Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice president, global retirement and compensation policy, at (202) 289-6700.