DOL Extends ERISA coverage exemption for mandatory private sector auto-IRAs

In December 2016, the Department of Labor finalized its proposal to extend the exemption from ERISA coverage for state mandatory private sector auto-IRA programs to certain state subdivisions, such as cities and counties.


Auto-IRAs are, generally, payroll deduction IRA savings programs into which employees are defaulted (e.g., at a 3% contribution rate), with the ability to opt-out or reduce the contribution rate at any time. Several states have adopted legislation mandating that private employers (other than those that “offer a retirement plan”) provide their employees with an auto-IRA. California, Illinois and Oregon are nearing implementation; Connecticut and Maryland adopted authorizing legislation in May 2015. (For a review of the current state of the state plan movement, see our article Update on state plans – 2016.)

Generally, implementation of these state mandatory auto-IRA programs is conditioned on the programs not being covered by ERISA. As we discuss in more detail in our article DOL finalizes rule for state-run plans, in August, 2016, DOL finalized a regulation exempting, where certain conditions are met, these sorts of state programs from ERISA coverage.

At the same time, DOL proposed a regulation that would similarly exempt from ERISA coverage the auto-IRA programs of certain larger state subdivisions (such as cities and counties). In that regard, in October, 2016, the New York City Comptroller came out with its “New York City Nest Egg” proposal, which included a mandatory auto-IRA program. And, according to DOL, the cities of Seattle and Philadelphia have also expressed interest.

>h2>The new regulation

Under the final regulation, a “qualified political subdivision” may maintain a mandatory private employer auto-IRA program. To be a qualified political subdivision, the city/county:

  1. Must have legal authority to require employers’ participation in the payroll deduction savings program. This rule excludes “special purpose” entities such as, e.g., a water authority.

  2. Must have a population equal to or greater than the population of the least populous state. (Currently, the smallest state, Wyoming, has a population of around 600,000.)

  3. May not have any “geographic overlap” with any other program of a political subdivision or be located in a state with a statewide program.

  4. Must implement and administer a retirement plan for its own employees. DOL considers this requirement – the maintenance by, e.g., a city of a retirement plan for its own employees – as limiting the qualified political subdivisions to those with a “demonstrated capacity to operate a payroll deduction savings program.”

Requirements 2-4 need only be satisfied at the time the program is adopted.

Relevance to plan sponsors

As we noted, the state auto-IRA programs that have thus far been proposed generally do not cover employers who “offer a plan.” The one city that has published an auto IRA-proposal (see our article New York City private sector retirement plan proposal) includes a similar exclusion.

It’s not entirely clear, however, just what “offer a plan” means in this context. Specifically, would an employer that offers a plan nevertheless be required to provide 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?

Where there is a possibility that they will be covered by one of these state auto-IRA statutes, sponsors will be concerned about what rules apply to them and their employees. A particular area of concern is the issue of overlapping jurisdictions.

Overlapping/conflicting obligations

With regard to this issue of overlapping/conflicting obligations, the new regulation is interesting in several respects. First, by limiting the cities/counties that may establish an auto-IRA program (e.g., to those with a population equal to or greater than Wyoming’s), the regulation reduces (but by no means eliminates) the chance of an overlap. DOL estimates that there currently are only 88 political subdivisions that meet all the requirements of the new rule.

Second, the rule eliminates the possibility of the most obvious overlaps, prohibiting, e.g., a city from adopting a program where the state in which it is located has already adopted one.

But, third, the regulation does not address more complicated overlap issues – e.g., where residents in one state (or city) with one sort of program work in a different state (or city) with a different program. The preamble to the final regulation on state programs begged this question of conflicts between jurisdictions: “The states are in the best position to determine the appropriate connection between employers and employees covered under the program and the states that establish such programs, and to know the limits on their ability to regulate extraterritorial conduct. Inasmuch as existing legal principles establish the extent to which the states can regulate employers, the final rule simply requires that the program be specifically established pursuant to state law and that the employer’s participation be required by state law.”

What about ERISA preemption?

One final consideration: the possibility of these sorts of overlapping/conflicting state retirement program requirements was, in fact, one of the rationale’s for the adoption of a comprehensive set of federal rules under ERISA. And in that regard, ERISA includes a robust state law preemption provision, stating that ERISA “shall supersede any and all State laws insofar as they . . . relate to any employee benefit plan.” (Emphasis added.)

The new regulation (as applied to states in August 2016 and now extended to certain cities/counties in 2017) does not purport to address the issue of ERISA preemption – that issue has generally been reserved for the courts. It only deals with whether or not these state and city programs are “ERISA plans.” With respect to the issue of preemption, however, DOL stated in the preamble to the August 2016 regulation that that regulation “reduced [the] risk of an ERISA preemption challenge.”

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The Obama Administration has supported these state (and city/county) efforts to implement mandatory auto-IRAs. This regulation project began after President Obama, at the July 2015 White House Conference on Aging, instructed DOL to propose guidance “clarifying how states can move forward” with state retirement plan initiatives.

We do not know, at this point, what will be the attitude of the Trump Administration and the new Trump DOL towards these programs. Some have argued that, in this regulation and in related guidance issued when it was first proposed, DOL favored state-based over private sector solutions to the problem of extending retirement savings to small businesses. Thus, in the related Interpretive Bulletin exempting states from the nexus requirement otherwise applicable to Open MEPs, DOL argued that “a state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers.”

And while Republicans in Congress have vigorously resisted proposals for a federal mandatory auto-IRA program, as these state programs have proliferated some support for a federal solution is emerging.

Thus, with respect to these programs (and a number of other key retirement savings policy issues), we are in a fluid situation.

We will continue to follow this issue.