Possible update to state mandatory private sector auto-IRA programs

February 23, 2017

In this article we briefly review two recent developments in the initiative by certain states (and certain large cities) to require private sector employers that do not offer a retirement plan to provide an auto-IRA for their employees.

Background

A number of states are considering implementing programs that would require employers that do not offer a retirement plan to adopt an auto-IRA – a payroll deduction IRA into which all employees would be defaulted, subject to an opt-out right. As discussed further below, the state of Oregon is nearest implementation of such a program, with a target date for a pilot program of July 2017. For more information on specific state auto-IRA programs, see our article Update on state plans – 2016.

Probably the biggest development with respect to these programs is the introduction of Congressional Review Act (CRA) legislation that would, in effect, void Department of Labor regulations exempting these programs from ERISA coverage. We discuss that legislation first, below.

These state proposals are generally targeted at employers that do not currently offer a retirement plan and generally provide some sort of exemption for current plan sponsors. For current plan sponsors, the question will be exactly how that exemption is applied: 1. How are “uncovered” groups treated? Is it sufficient, to avoid application of state plan legislation, to have, say, a 401(k) plan for location A, even though there is no plan at location B? 2. What about employees that, e.g., do not meet the plan’s age or service requirements? 3. Will there be any minimum criteria, e.g., a minimum employer contribution or an auto-enrollment provision?

The current proposed rules under the Oregon program have raised some of these issues, and we discuss the Oregon proposal second, below.

Congressional Review Act repeal of DOL regulations

In August 2016, DOL adopted a regulation that held that, if certain criteria are met, a state mandatory private sector auto-IRA program would not be an ERISA plan. In December 2016 DOL extended that relief to certain cities. On February 15, 2017, the House passed CRA resolutions with respect to those DOL regulations. If the Senate also passes those CRA resolutions, and the President signs them, then the new DOL regulations will be void.

What does that mean? The new DOL regulations eliminated one major obstacle to states adopting mandatory private employer auto-IRA programs – ERISA coverage. All of the states that are exploring adoption of these programs have conditioned implementation on avoiding ERISA coverage, with its attendant ERISA fiduciary and administrative burdens.

The new DOL regulations would also (in all likelihood) avoid the other major obstacle – ERISA preemption. If an auto-IRA is not an ERISA retirement plan, then there is a good argument that laws implementing auto-IRAs do not “relate to” a retirement plan and thus are not preempted by ERISA.

DOL explained, in the preamble to the August 2016 regulation, that the prior (1975) regulation, providing a “safe harbor” exclusion from ERISA coverage of certain payroll deduction IRAs, would not cover proposed state auto-IRA programs because of their auto-enrollment feature:

With regard to the 1975 IRA Payroll Deduction Safe Harbor’s condition requiring that an employee's participation be “completely voluntary,” the Department intended this term to mean that the employee’s enrollment in the program must be self-initiated. In other words, under the safe harbor, the decision to enroll in the program must be made by the employee, not the employer. If the employer automatically enrolls employees in a benefit program, the employees’ participation would not be “completely voluntary” and the employer’s actions would constitute the “establishment” of a pension plan, within the meaning of ERISA section 3(2).

The 1975 regulation is, as noted, only a “safe harbor.” Thus, it is conceivable that a state (or city) could argue, for instance to a court, that (the safe harbor notwithstanding) state mandated private sector auto-IRAs aren’t covered by ERISA. But the risk of ERISA coverage, without the new regulations in place, would be significantly increased.

State efforts to stop CRA legislation

To avoid that situation, 15 state treasurers sent letters to Congressional leaders urging opposition to the CRA action. Those letters stated that: “If passed, these resolutions would make it more difficult for states and municipalities to seek solutions to the growing retirement savings crisis.”

The state Treasurer of Oregon (the state nearest implementation) said: “While OregonSaves won't be derailed by the resolution, removal of the safe harbor would be a step backward and add an unnecessary layer of uncertainty.”

Bottom line: this is still a fluid situation; but final passage of CRAs voiding the new DOL regulations would be a major setback for state efforts to implement state-level auto-IRA programs.

Oregon clarifies that a one-year hold out provision won’t trigger application of auto-IRA requirement

The state of Oregon is getting close to implementing its mandatory auto-IRA program – according to the state Treasurer, a pilot program will begin in July 2017.

The Oregon Retirement Saving Board (ORSB) is currently considering regulations that include an exemption for employers who “offer a Qualified Plan.” That exemption has gone through a number of iterations. The most recent (as of this writing) version of the proposed rules would limit the exemption to employers who offer a plan to employees “within 90 days of hire.”

Given that many (if not most) plans provide for a waiting period in excess of 90 days, it’s not a surprise that the ORSB received a number comments on this 90-day proposal. A staff memo proposes to change this language to eliminate the 90-day language. And the Oregon State Retirement Plan (ORSP) website states: “Businesses that offer a qualified retirement savings option to employees, but with a waiting period, will not be required to facilitate participation to OregonSaves for eligible employees. The language in the draft rules is unclear and will be changed. The rules are not intended to mandate businesses with waiting periods of more than 90 days for their employer plans to facilitate the state’s plan.”

The exemption will, however, it appears only last for three years. According to the staff memo, “[a]t the three-year mark, we could then ask Employers filing for recertification if they offer their Qualified Plan to all Employees. If they do not, we can ask those Employers to file a conditional Certificate of Exemption and work with our plan service provider to develop a process for bringing those Employees excluded from their Employer’s Qualified Plan into the ORSP.”

Thus, it appears that current plan sponsors will, for three years at least, get a pass under the Oregon proposal.

* * *

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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