DOL finalizes rule for state-run plans

August 31, 2016

In our recent Update on state plans, we noted that states considering mandated private employer auto-IRA programs generally have conditioned implementation of these programs on their being determined not to be ERISA retirement plans. In November 2015 the Department of Labor proposed a regulation providing a “path forward” for these programs, specifying conditions under which the programs would not be covered by ERISA. On August 25, 2016 DOL finalized that regulation, and in this article we briefly review the final regulation.


As we discussed in our recent article, several states are considering requiring employers that do not currently maintain a retirement plan to provide their employees an auto-enrollment payroll deduction IRA. As of this writing no state has actually implemented such a program, but some, e.g., California, Illinois and Oregon, are getting close, and two new states, Connecticut and Maryland, passed auto-IRA legislation in May 2016.

A critical issue for these states is whether these auto-IRA programs will be considered ERISA retirement plans, subject, e.g., to ERISA’s reporting, disclosure and fiduciary rules. Generally, state authorizing legislation provides that if the auto-IRAs will be considered ERISA plans, then the program will not be implemented.

Under a 1975 regulation, employers may, under certain conditions, facilitate a payroll deduction IRA. But DOL has interpreted that regulation to require that the employee affirmatively elect to participate. Thus, under that 1975 regulation, auto-enrollment would trigger ERISA coverage. Under the new regulation, just finalized by DOL, however, employer-facilitated IRAs may provide for auto-enrollment, provided they are mandated by a state program and certain conditions are met.

Why are these state initiatives of interest to plan sponsors? While state auto-IRA programs generally do not cover employers who “offer a plan,” it is unclear just what that means. Specifically, must an employer that maintains a plan provide, e.g., an auto-IRA to (i) employees in an uncovered group, (ii) employees who do not meet the plan’s age and service requirements or (iii) part-time or seasonal employees? Moreover, must the plan that is offered meet any “minimum standards,” e.g., provide a minimum level of benefits? (We discuss this issue further in our recent article.)

The final regulation

The final regulation creates a safe harbor, excluding from ERISA coverage state auto-IRA programs that meet the following 11 criteria:

  1. The program is established pursuant to state law.
  2. The program is administered by the state (or by a governmental agency or instrumentality of the state), and the state (or agency or instrumentality) is responsible for investment or for selecting investment alternatives.
  3. The state (or agency or instrumentality) assumes responsibility for the security of payroll deductions and employee savings.
  4. The state (or agency or instrumentality) adopts measures to ensure that employees are notified of their rights and creates an enforcement mechanism.
  5. Participation is voluntary for employees. A default-in/opt-out program would qualify as “voluntary.”
  6. All rights of the employee are enforceable only by the employee or by the state (or agency or instrumentality).
  7. The involvement of the employer is limited to: collecting and remitting employee contributions; providing notice to the employees and maintaining records; providing information to the state (or agency or instrumentality); and distributing program information to employees from the state and permitting the state to publicize the program.
  8. The employer contributes no funds to the program and provides no monetary incentive to employees to participate.
  9. The employer’s participation in the program is required by state law.
  10. The employer has no discretionary authority, control, or responsibility under the program.
  11. The employer receives no direct or indirect consideration other than consideration (e.g., a tax credit) received directly from the state (or agency or instrumentality) that does not exceed an amount that reasonably approximates the employer’s (or a typical employer’s) costs under the program.

* * *

While this regulation will generally allow the state auto-IRA initiatives that have been adopted or are being contemplated to move forward, a couple of issues remain.

ERISA preemption

ERISA preempts (“supersedes”) state laws that “relate to” an employee benefit plan. If a state law establishing, e.g., an auto-IRA is determined to “relate to” a retirement plan, that law would be “superseded” and thus unenforceable under ERISA.

Whether a state auto-IRA program is preempted by ERISA will, ultimately, be decided by the courts. In the preamble, DOL states that: “In the Department’s view, courts would be less likely to find that statutes creating state programs in compliance with the proposed safe harbor are preempted by ERISA.” That is certainly true: if a state’s auto-IRA program were treated as an ERISA plan, then the legislation authorizing it would be much more likely to be treated as “relating to” an employee benefit plan. There remains, nevertheless and even after publication of this regulation, a possibility that a state auto-IRA programs will be found to be preempted by a court.

Fiduciary issue

Since the proposal of this regulation (in November 2015) DOL finalized its conflict of interest regulation. The latter regulation, among other things, imposed a variety of fiduciary obligations on persons advising IRA holders. A really good question is: how will those new fiduciary rules play out in the state auto-IRA context.

In the regulation’s preamble, in response to questions from commenters, DOL discussed this issue, without offering much specific guidance:

With regard to commenters who asked how the prohibited transaction provisions in section 4975 of the Code would apply to the state programs covered by the safe harbor, the final rule does not adopt any special provisions for, or accord any special treatment or exemptions to, IRAs established and maintained pursuant to state payroll deduction savings programs.

* * *

With the finalization of this regulation, we would expect that states that have adopted auto-IRA programs will now move forward with implementation. We will continue to follow this issue.

October Three Consulting, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

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