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On January 4, 2015, Illinois Governor Pat Quinn signed into law the Illinois Secure Choice Savings Program Act. Illinois thereby became the second state (after California) to enact legislation providing for a state-sanctioned retirement program for private sector employees. In December 2014, the Department of Labor provided the Department of the Treasury with a letter discussing the applicability of ERISA to the Administration’s myRA program.
Both of these initiatives – state retirement plans for private employers and the myRA – are part of the effort to expand retirement savings by creating programs that operate outside of the current employer-sponsored retirement plan system. And, as we discuss below, the DOL myRA letter may have implications for how state programs, like the one in Illinois, will be treated under ERISA and whether they are implemented at all.
In this article we review both new Illinois law and the DOL myRA letter and the issues they present for sponsors.
The Illinois Secure Choice Program generally requires that employers that do not “offer a qualified retirement plan” automatically enroll employees in a Roth-IRA-based payroll deposit retirement savings arrangement.
The legislation anticipates that the Secure Choice Program’s Board will establish processes for employer payroll deductions and contributions under the Program. Thus, it appears, the intention is for the Program to do most of the administrative work, with the employer’s primary obligations being to (1) sign up employees and (2) transmit contributions. We note, however, that, e.g., with respect to Auto-IRA legislation considered at the federal level, many view this process as more complicated than it looks and likely to create administrative work for employers.
Like the California Secure Choice legislation, the Illinois Secure Choice Program is something of a work in progress. According to the statute: “the Program shall be implemented, and enrollment of employees shall begin, within 24 months after the effective date of this Act.” The effective date of the act is June 1, 2015, so the target implementation date is June 1, 2017.
The Program is, however, dependent on a couple of contingencies:
The Board may not implement the Program if the IRA arrangements offered under the Program fail to qualify for the favorable federal income tax treatment ordinarily accorded to IRAs under the Internal Revenue Code or if it is determined that the Program is an employee benefit plan and State or employer liability is established under [ERISA].
In this regard, the legislation directs the Program’s Board to request a written opinion from the appropriate federal agency (presumably DOL) regarding the applicability of ERISA. (On this issue, see our discussion of the DOL myRA letter, below.)
We would also note that, like the California program, the infrastructure for the Illinois program must still be built, and it’s entirely possible – if recent experience is any guide – that Program officials will find that project difficult.
Unlike the California program (which is reported to be voluntary), the Illinois program is mandatory: it applies to all employers that have at least 25 employees, have been in business for at least 2 years and do not offer a qualified retirement plan. For sponsors who already offer a plan, the big question will be: does the Illinois Program apply to employees not eligible to participate in the employer-sponsored plan? Will, e.g., employees not in a group covered by the plan or temporary or seasonal employees have to be included in the Program? We will have to look for guidance from the State of Illinois (or, conceivably, the Secure Choice Program Board) for an answer to this question.
Under the Illinois Program:
Covered employees will be defaulted in at a contribution rate of 3%, with the option to elect a different contribution rate or to opt out.
The default investment will be a target date fund. The board may also establish a “conservative principal protection fund,” a growth fund and a “secure return fund” (the primary objective of which is the preservation of principal).
Employers will not be fiduciaries and will not have any responsibility for administration or investments.
We reiterate, the main question for sponsors with respect to the Illinois Secure Choice Program is: under what circumstances must an employer that offers an employer plan also implement the Secure Choice Program for employees not eligible for the employer plan? If the new law is interpreted broadly to apply to any non-eligible employee, then sponsors with operations in Illinois will, in effect, have a new, state-mandated retirement plan to deal with.
As a general matter, the Administration’s myRA program, essentially a retirement savings bond, is a federal program, administered by the Department of the Treasury, targeted at individuals. Some employer involvement is, however, anticipated:
Employers may make _myRA_s available through payroll deduction. Indeed, according to DOL, “[i]nitially, employees may make contributions only via payroll deduction.” There is, however, no default contribution; employees must initiate contributions.
Employers will provide information and forms produced by the Treasury Department.
Employers may actively encourage participation in the myRA program, including making computers and technical support available, holding employee meetings encouraging eligible employees to participate and answering employees’ questions about the program.
An employer would not, however, make employer contributions to a myRA.
DOL’s view as to the application of ERISA to the myRA program is worth quoting at length:
[G]iven the character of the program, including its voluntary nature, its establishment, sponsorship, and administration by the federal government, and the absence of any employer funding or role in its administration or design, the Department is of the view that an employer would not be establishing or maintaining an “employee pension benefit plan” within the meaning of section 3(2) of ERISA based solely on the facts that employees participate through payroll withholding contributions and that the employer distributes information, facilitates employee enrollment, and otherwise encourages employees to make deposits to myRA accounts owned and controlled by employees.
This conclusion is somewhat unusual. As DOL noted in its letter, “[a]n endorsement of an IRA product or provider by an employer ordinarily is a significant consideration in determining whether the employer has established or maintained a pension plan under ERISA.” But, DOL concluded:
[W]e do not believe Congress intended in enacting ERISA that a federal government retirement savings program created and operated by the U.S. Department of the Treasury would be subject to the extensive reporting, disclosure, fiduciary duty, or other requirements of ERISA, which were established to ensure against the possibility that employees’ expectation of a promised benefit would be defeated through poor management by the plan sponsor and other plan fiduciaries. (Emphasis added.)
With regard to the myRA program itself, it is certainly good news that DOL will, in effect, exempt from ERISA limited employer involvement with the program.
More broadly, however, the letter is interesting for its implications for programs like the Illinois Secure Choice Savings Program. Does DOL’s reasoning – that, because the myRA is a federal government program, ERISA does not apply – also apply to programs created and operated by states, such as the Illinois Program?
Whether state programs, like the ones in Illinois and California, are subject to ERISA – either ERISA’s substantive rules (e.g., ERISA fiduciary rules) or ERISA’s preemption provision – is one of the basic questions yet to be answered. If they are, it is likely that these programs will not be implemented. If, however, DOL (following its reasoning in the myRA letter) is prepared to say that, because these programs are established, sponsored, and administered by a state government, they are not subject to ERISA, the effort to implement state private-sector retirement plans is likely to gain momentum.
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We will continue to follow these issues.