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States are continuing to develop initiatives to mandate employer-based retirement savings programs – generally a payroll deduction IRA with a default contribution/opt-out. 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 state plan legislation in May 2016.
These state programs generally include an exemption for employers that already sponsor a retirement plan. Typically, however, some employees are excluded from participation in employer-sponsored plans, e.g., because they do not meet age and service requirements. Part-time and seasonal employees may be excluded. And some operations may not be covered by any plan. A big question – perhaps the biggest question for current plan sponsors – is: will a state mandate coverage of these excluded employees?
In this article we begin with some background and a more general discussion the state plan issue. We then review initiatives in five states: California, Connecticut, Illinois, Maryland and Oregon. With respect to each state, we briefly discuss the current status of the state plan initiative and its coverage provisions.
Bottom line: each of these states’ authorizing statutes includes language broadly exempting current plan sponsors. But there is concern that these exemptions will – when interpreted and applied by the various state plan retirement boards – be narrowed.
As discussed in the 2015 Government Accountability Office report on the issue (Retirement Security – Federal Action Could Help State Efforts to Expand Private Sector Coverage), roughly half of American workers are not covered by a workplace retirement savings plan. Coverage is lowest amongst lower paid employees and employees working for small employers (under 50 employees). Coverage by a workplace plan and automatic enrollment are primary drivers of retirement savings. And the critical obstacles preventing the adoption of new plans by smaller employers are the “administrative burden and potential fiduciary risk” that adopting an ERISA-covered plan carries with it.
In this context, the Administration and some policymakers have proposed federal legislation that would mandate workplace coverage (where there is no ERISA retirement plan) by an auto-enrollment payroll deduction IRA. Those proposals have been stymied by (generally Republican) opposition.
In the absence of federal action, some states have begun their own initiatives. These state proposals provide for automatic enrollment (subject to an opt-out) at a minimum contribution level (e.g., 3%) in a payroll deduction IRA. (In this article we will not be discussing state initiatives, e.g., in Washington and New Jersey, to establish a retirement plan “marketplace” for small employers or the Massachusetts legislation establishing a program for non-profit employers.)
Just to connect the dots – the whole point of using IRAs as the retirement savings vehicle in all these proposals is to avoid ERISA coverage and ERISA’s “administrative burden and potential fiduciary risk.” Thus, many state retirement programs are conditioned on ERISA not applying to them.
On November 16, 2015, the Department of Labor released a proposed regulation addressing issues raised by state auto-IRA initiatives, providing a “safe harbor,” generally exempting state auto-IRA initiatives from ERISA-coverage provided certain requirements are met. DOL’s May 2016 Regulatory Agenda shows this proposal as being finalized in September 2016 (we note that, generally, these finalization targets are honored more in the breach than the observance). (We discuss the proposed regulation in detail in our article DOL proposes regulation and releases Interpretive Bulletin authorizing state plans.)
State plan legislation is generally targeted at employers who do not offer their employees a retirement plan and typically includes an exemption for employers that do (already) offer a retirement plan. For plan sponsors, with respect to each state plan initiative, the key question will be – are any of my employees covered by the state plan mandate? In this regard, there are at least three sub-issues:
How do you treat “uncovered” groups? 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?
How do you treat “uncovered” employees? What about employees that, e.g., do not meet the plan’s age or service requirements?
What sort of employer retirement plans avoid application of the mandatory auto-IRA rule? (Former) Senator Harkin’s (D-IA) USA Retirement Funds and some federal auto-IRA proposals have set minimum standards for what sort of employer plans get employers out of the mandate. Must the plan cover some minimum group of employees? Provide a minimum benefit? Provide for auto-enrollment?
We discuss the coverage provisions of legislation in key states below. To repeat what we said at the top: As a general matter, state retirement plan proposals contain broad language that, in most cases, appears to exempt any employer who maintains any plan. But there is widespread concern that that exemption language can and may be read, e.g., by the implementing authority (typically a state retirement plan “board”) more narrowly. We will probably have to wait until actual implementation of one of these programs to see whether it will be extended to cover, e.g., part-time or un-covered employees of employers who maintain an ERISA retirement plan.
The remainder of this article reviews the current status and coverage provisions of five state retirement plan initiatives: California, Connecticut, Illinois, Maryland and Oregon.
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Status: California adopted the California Secure Choice Retirement Savings Trust Act in 2012, and the California Secure Choice Retirement Investment Savings Board has been studying the state retirement plan issue since then. The 2012 legislation required, among other things, a feasibility study. In 2016, the sponsor of the original legislation introduced a bill to implement a program, with “implementation on January 1, 2017.”
Coverage: The 2016 legislative proposal generally mandates coverage for employers “that do not offer an employer-sponsored retirement plan or automatic enrollment payroll deduction IRA” and provides that:
Employers shall retain the option at all times to set up any type of employer-sponsored retirement plan, such as a defined benefit plan or a 401(k), Simplified Employee Pension (SEP) plan, or Savings Incentive Match Plan for Employees (SIMPLE) plan, or to offer an automatic enrollment payroll deduction IRA, instead of having a payroll deposit retirement savings arrangement to allow employee participation in the California Secure Choice Retirement Savings Program.
Status: Public Act No. 16-29 was signed into law on May 27, 2016, adopting the Connecticut Retirement Security Program. The Program is generally effective in 2018 and provides (for covered employees) for contributions to a Roth IRA (default rate = 3%).
Coverage: The Program is mandatory for all employers with five or more employees. It does not, however, apply to:
A qualified employer that (i) maintains a retirement plan or retirement arrangement described under Section 219(g)(5) of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as amended from time to time, or (ii) any other retirement arrangement approved by the authority ….
Status: On January 4, 2015, (then) Illinois Governor Pat Quinn signed into law the Illinois Secure Choice Savings Program Act. Since then, the Illinois Secure Choice Savings Board has been meeting with a view to implementing the Illinois program. The Program is 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].
Presumably, final implementation of the Illinois Program is contingent on finalization of the DOL proposed regulation. (In comments submitted with respect to the DOL proposed regulation, the Board stated: “The [DOL proposed regulation] will enable Illinois to move forward with implementation of the Illinois Secure Choice Savings Program.”)
Coverage: The Illinois program is mandatory: it applies to any employer that has at least 25 employees, has been in business for at least 2 years and “has not offered a qualified retirement plan, including, but not limited to, a plan qualified under Section 401(a), Section 401(k), Section 403(a), Section 403(b), Section 408(k), Section 408(p), or Section 457(b) of the Internal Revenue Code of 1986 in the preceding 2 years.”
Status: Legislation establishing the Maryland Small Business Retirement Savings Program and Trust was signed into law on May 10, 2016. The Program will consist of “payroll deposit IRA arrangements” as determined by the Program’s Board.
Coverage: The Program applies to all “covered employers,” defined as employers who pay “covered employees” through a “payroll system or service.” “Covered employees” do not include employees “eligible to participate in a qualifying retirement plan.” “Qualifying retirement plan” is not defined. “Covered employer” does not include an employer “that currently offers an employer-offered savings arrangement.” Covered employers who provide a payroll deduction IRA in accordance with the Program get a waiver of an otherwise applicable Maryland corporation filing fee. It is (very) unclear how this Program will work, whether there is a significant penalty for non-compliance and whether exempt employers will get the incentive (a waived filing fee) for compliance.
Status: A bill authorizing the establishment of the Oregon Retirement Savings Board, with a mandate to explore the establishment of an Oregon Retirement Savings Plan, was signed into law in 2015, with a stated objective “that individuals may begin making contributions to the plan no later than July 1, 2017.”
Coverage: The legislation provides that the Plan adopted by the Board would “[r]equire an employer to offer its employees the opportunity to contribute to the plan through payroll deductions unless the employer offers a qualified retirement plan, including but not limited to a plan qualified under section 401(a), section 401(k), section 403(a), section 403(b), section 408(k), section 408(p) or section 457(b) of the Internal Revenue Code.”
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We will continue to follow this issue.