We have been following initiatives by several states, including California, Connecticut, Illinois, Maryland and Oregon, to implement mandatory, private employer payroll deduction auto-IRA programs. In this article we review developments since May, 2017, Congressional action repealing the Obama Administration’s regulatory “path forward” for these programs.
It is DOL’s view that an auto-IRA creates an ERISA plan: “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).” In 2016, the Obama Administration Department of Labor adopted regulations exempting, in effect, these state programs from that rule. In May, 2017, Congress passed Congressional Review Act (CRA) legislation effectively voiding that rule.
Three states – Oregon, California and Illinois – have made considerable progress in designing mandatory auto-IRA programs. The CRA/voiding of DOL’s regulation presents two substantive problems for these states: First, if the auto-IRA program is determined to be an ERISA plan, then it (and the employers covered by it and, even, conceivably the state itself) will be subject to, e.g., ERISA reporting and fiduciary rules.
Second, the program may be subject to a preemption challenge – ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any [ERISA] plan.” The exact scope of this provision is judge-made law, but without DOL’s 2016 regulation (now repealed by the CRA action) states will have a harder time defending these suits.
These states also have a formal problem – the laws authorizing these programs generally require that the mandatory auto-IRA not be subject to ERISA. Let’s take a look at what the states are doing about this issue.
Oregon was, before the CRA action, nearest to implementation, with a pilot program to begin July, 2017. Notwithstanding the CRA, Oregon is going ahead with its program.
Oregon’s authorizing statute doesn’t require any sort of approval of its program by DOL. Rather it simply requires that:
If the [Oregon Retirement Savings Board] determines that the plan developed by the board … would qualify as an employee benefit plan under [ERISA], the board may not establish the plan.
On June 22, 2017, the Oregon State Treasury adopted a “Temporary Administrative Rule” providing that:
If the Employee has not established an IRA after notice and an opportunity to opt out has been sent to the Employee using the contact information on file with the Program, an IRA will be established for such Employee pursuant to directives and procedures established by the Board.
Explaining the addition of this new language, the Oregon State Treasurer stated:
Our DOJ legal counsel, in coordination with outside legal counsel and our plan service provider, has determined that [the] additional language is necessary to clarify responsibilities related to automatic enrollment. The additional rule language clarifies the responsibilities of the Board, and by proxy, the Program Administrator. This rule also mitigates potential questions that may arise from Employees who are auto-enrolled into the Program.
Clearly the idea is that the new language helps to support an argument that, for employees, participation in the Oregon program is “completely voluntary.”
California’s authorizing statute was, with regard to ERISA coverage, more problematic. It originally required that:
The United States Department of Labor has finalized a regulation setting forth a safe harbor for savings arrangements established by states for nongovernmental employees for the purposes of the federal Employee Retirement Income Security Act.
Obviously the CRA action made compliance with this requirement impossible. In response, the California legislature amended the authorizing statute to “remove requirements related to the United States Department of Labor regulation … and require that the program be structured to preclude being classified as an employee benefit plan subject to ERISA.”
California has also pushed back its implementation schedule. According to the state treasurer’s website: “The goal is for the program to begin operations sometime in 2018,” with a phase-in over three years.
Illinois also has a problematic statute, providing:
The Board shall request in writing an opinion or ruling from the appropriate entity with jurisdiction over the federal Employee Retirement Income Security Act regarding the applicability of the federal Employee Retirement Income Security Act to the Program.
There are political issues in Illinois. The original authorizing statute was passed by a Democratic legislature and signed (in his final days in office) by a Democratic governor. Since then, a Republican governor has been elected and state government has been embroiled in a difficult budget debate.
Thus, unlike Oregon and California, there may be less ability to fix issues with the Illinois statute.
Relevance to plan sponsors
The mandatory coverage rule under these state programs is generally targeted at employers that 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 remains – are any of my employees covered by the state plan mandate? In this regard, there are at least three sub-issues:
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 for location B?
2. How are “uncovered” employees treated? What about employees that, e.g., do not meet the plan’s age or service requirements?
3. What sort of employer retirement plans avoid application of the mandatory auto-IRA rule? Will there be any minimum standards – e.g., requiring that the employer plan provide for auto-enrollment?
Oregon – the only state implementing a mandatory IRA program in the near future – is exempting any employer that offers a qualified plan “to some or all of its Employees.” This exemption is good for three years, after which it appears Oregon will re-visit the issue.
Generally, how plan sponsors will be affected by these mandatory state auto-IRA programs will depend on regulatory decisions by the programs’ administrators. And, other than Oregon, the other states considering mandatory auto-IRAs are still working on those rules.