DOL regulation & Releases Interpretive bulletin authorizing stae plans proposed

DOL regulation & Releases Interpretive bulletin authorizing stae plans proposed

At the July 2015 White House Conference on Aging, President Obama instructed the Department of Labor to propose guidance “clarifying how states can move forward” with state retirement plan initiatives. On November 16, 2015, DOL released (1) a proposed regulation addressing issues raised by state auto-IRA initiatives and (2) an Interpretive Bulletin (IB) setting forth its view that “certain state laws designed to expand the retirement savings options available to private sector workers through ERISA-covered retirement plans” are not preempted by ERISA. In this article we review DOL’s guidance.


As we have discussed (see our article Update on State plans), several states have undertaken initiatives to mandate or encourage private employers to establish retirement plans for their employees. The ‘talking point’ in support of this effort, as described by DOL, is that “[a]pproximately 68 million US employees do not have access to a retirement savings plan through their employers.”

State plan efforts have taken two paths:

State auto-IRA initiatives. Most states are considering an auto-IRA program, under which, generally, employers must establish a payroll deduction IRA. This ‘employer mandate’ generally applies to all employers above a certain size (in Illinois, e.g., employers with at least 25 employees) who do not ‘offer a plan.’ California, Illinois and Oregon have actually passed auto-IRA legislation, although the implementation of these programs is contingent on, among other things, a determination that they are not subject to ERISA. The proposed regulation addresses these initiatives.

State ERISA plan initiatives. Other states have undertaken to facilitate the adoption of an ERISA plan by smaller employers. Washington State has adopted the Small Business Retirement Savings Marketplace Act, which anticipates the establishment of a state-facilitated “marketplace” of, in effect, state-approved providers of ERISA retirement plans. Massachusetts “has enacted a law to allow nonprofit organizations with fewer than 20 employees to adopt a contributory retirement plan developed and administered by the state.” DOL describes this as the “prototype” approach. Finally, some have suggested that states might establish an ERISA multiple employer plan (MEP) that employers could adopt. (Oversimplifying somewhat, a MEP is a plan for more than one unrelated employer covering non-union employees.) The Interpretive Bulletin addresses these initiatives.

Why these initiatives are of interest to larger employer-sponsors

Larger plan sponsors may be interested in state plan initiatives for two reasons.

First, while these programs generally do not cover employers who ‘offer a plan,’ it is unclear, just what ‘offer a plan’ 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? Thus, depending on how a state program is implemented and the ‘offer a plan’ rule is interpreted, employers who already sponsor an ERISA plan may still have to provide an auto-IRA to non-eligible/covered employees.

Second, it is possible that some of these programs – e.g., a state MEP – may provide a low-cost retirement plan alternative that may be of interest to some large employers.

ERISA issues presented by state plan initiatives

There are two fundamental issues of ERISA interpretation that these state plans present:

ERISA preemption. ERISA preempts (‘supersedes’) state laws that ‘relate to’ an employee benefit plan. Courts have generally interpreted this provision broadly. If a state law establishing, e.g., an auto-IRA or MEP is determined to ‘relate to’ a retirement plan, that law would be ‘superseded’ and thus unenforceable under ERISA. This issue is of concern with respect to both state auto-IRA initiatives and ERISA plan initiatives.

ERISA coverage. Even if the state law is not preempted, if the program established under it (e.g., a mandatory auto-IRA) is determined to be an ERISA plan, it would be subject to ERISA rules with respect to, e.g., fiduciary conduct. State auto-IRA programs are generally intended to avoid the administrative and fiduciary burdens that come with ERISA coverage and are conditioned on ERISA not applying to them. This issue is of concern only with respect to state auto-IRA initiatives; state ERISA plan initiatives assume ERISA coverage.

In addition, with respect to possible state-sponsored MEPs, there is a question as to whether such plans pass DOL’s “nexus” requirement. As DOL explains it:

For a person … to sponsor an employee benefit plan under Title I of ERISA, such person must either act directly as the employer of the covered employees or “indirectly in the interest of an employer” in relation to a plan. … A person will be considered to act “indirectly in the interest of an employer, in relation to a plan,” if such person is tied to the contributing employers or their employees by genuine economic or representational interests unrelated to the provision of benefits.

This requirement has generally prevented, e.g., third-party administrators from establishing MEPs that unrelated employers can adopt.

Proposed regulation and state auto-IRA initiatives

The proposed regulation addresses the issues presented by state auto-IRA initiatives. It creates a safe harbor, excluding from ERISA coverage (consequently, excluding from ERISA preemption) state programs that meet the following 12 criteria:

  1. The program is established by a state.

  2. The program is administered by the state, and the state is responsible for investment or for selecting investment alternatives. The state may, however, “use one or more service or investment providers to operate and administer the program, provided that the State … retains full responsibility for the operation and administration of the program.”

  3. The state assumes responsibility for the security of payroll deductions and employee savings.

  4. The state 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. The program does not impose any restrictions on IRA withdrawals.

  7. All rights of the employee are enforceable only by the employee or by the state.

  8. 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; and distributing program information to employees from the state and permitting the state to publicize the program.

  9. The employer contributes no funds to the program and provides no monetary incentive to employees to participate.

  10. The employer’s participation in the program is required by state law. This requirement is interesting: to qualify for the safe harbor, the program must be mandatory. A state may, however, direct its program “toward those employees who are not already eligible for some other workplace savings arrangement.”

  11. The employer has no discretionary authority, control, or responsibility under the program.

  12. The employer receives no direct or indirect consideration.

This proposal would generally allow the state auto-IRA initiatives that have been adopted or are being contemplated to move forward. And it is likely to encourage other states to consider adopting similar initiatives.

Interpretive Bulletin and state ERISA plan initiatives

State ERISA plan initiatives are less common than state auto-IRA initiatives, but DOL has indicated a desire to encourage states to ‘embrace ERISA.’ As we noted, there are two issues in this area: First, the question of whether a state-sponsored or facilitated ERISA plan is preempted because the state law authorizing it ‘relates to’ an ERISA plan. And second, whether a state-sponsored MEP passes DOL’s ‘nexus’ test.

With regard to the first issue – preemption – the IB states that:

In the Department’s view, ERISA preemption principles leave room for states to sponsor or facilitate ERISA-based retirement savings options for private sector employees, provided employers participate voluntarily and ERISA’s requirements, liability provisions, and remedies fully apply to the state programs. [Emphasis added.]

Under this approach, a voluntary state-sponsored or facilitated marketplace, prototype or MEP would generally not be preempted.

Probably the more controversial element of the IB is DOL’s finding that a state MEP meets the nexus requirement. In this regard, DOL states that:

In the Department’s view, a state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP and their employees, such that the state should be considered to act indirectly in the interest of the participating employers. Having this unique nexus distinguishes the state MEP from other business enterprises that underwrite benefits or provide administrative services to several unrelated employers.

The position taken by DOL is controversial because private organizations have been asking for permission to establish this sort of open-MEP for some time. DOL is, in effect, privileging state open-MEPs, based on the special relationship a state has with its citizens, while not providing relief for ‘private’ open-MEPs.

Effect of DOL guidance

The proposed regulation would be effective 60 days after finalization. The IB is, in effect, effective immediately.

The scope of ERISA preemption and coverage will ultimately be determined by the courts. Thus, it is conceivable that, notwithstanding that a state law complies with the proposed regulation’s safe harbor or meets the requirements of the IB, a court could find that it ‘relates to’ an employee benefit plan and thus is preempted. In this regard, courts will give some deference to DOL’s position, and they may give more deference to the regulation (if it is finalized) than to the IB.

* * *

Because they will be mandatory, plan sponsors will probably be most concerned with state auto-IRA initiatives. Final clearance of those initiatives – the ‘path forward’ – must await finalization of DOL’s proposed regulation. If that regulation is finalized, sponsors will want to consider whether mandates in the states in which they do business apply to them.

We will continue to follow this issue.