State Payroll Deduction Auto-IRAs Authorized by DOL
Author: Rena Pirsos, XpertHR Legal Editor
September 1, 2016
In the interest of encouraging retirement savings to protect the economic security of older Americans, the Department of Labor's Employee Benefits Security Administration (EBSA) has issued a final rule guiding states on how to design payroll deduction savings initiatives with automatic employee enrollment (auto-IRAs) without being preempted by the Employee Retirement Income Security Act (ERISA). The final rule also provides guidance to the employers that eventually may be required to offer such programs to employees.
Concern over the low rate of retirement savings among Americans and a lack of access to workplace plans for many workers has led some state governments to create their own savings programs that employers are required to administer. For example, California, Connecticut, Illinois, Maryland and Oregon have developed, or are developing, programs requiring employers that do not offer employees other retirement savings arrangements to automatically enroll employees in tax-favored IRAs funded by payroll deductions, unless the employees affirmatively opt out.
The broad scope of ERISA coverage, and that statute's preemption of state laws creating private-sector employee benefit plans, has prevented wider state adoption of auto-IRAs. Some states and other stakeholders have expressed concern that state payroll deduction savings programs may cause ERISA-covered employers to inadvertently establish ERISA-triggering plans.
To get around these impediments and facilitate state adoption of auto-IRA programs, the final rule provides an ERISA safe harbor under which, if certain conditions are satisfied, neither a state nor an employer will be deemed to be establishing or maintaining a pension plan subject to ERISA by setting up a payroll deduction savings program. Most of the conditions relate to the states' roles and responsibilities in these programs.
Conditions for the states include that the programs must:
- Be established and administered by the state;
- Provide for a limited employer role; and
- Be voluntary for employees.
In addition, states must invest the employees' savings and take responsibility for selecting employees' investment options.
In states that pass a law requiring employers to offer an auto-IRA program, the safe harbor requires employers to:
- Limit their activities to those that are ministerial, such as making payroll deductions and remitting the deductions to the program;
- Distribute to employees official state notices about the program;
- Keep records of the payroll deductions and remittances made;
- Provide information needed by the state to operate the program; and
- Not contribute their own funds to the IRAs.
Other conditions of the ERISA safe harbor relate to employee rights (i.e., the right to opt out; the right to receive advance notice and full program information; and the right to seek enforcement action).
The final rule does not prohibit states from taking additional or different action or from experimenting with other programs or arrangements. States may provide economic incentives to employers that offer an auto-IRA program if they are "narrowly tailored" to reimbursing employers for their administrative costs. States are prohibited from rewarding employers as an incentive to participate in a state program in lieu of establishing employee pension benefit plans.
The final rule, which takes effect October 31, 2016, clears the way for more states to pass laws requiring employers to offer auto-IRAs if they do not offer other retirement savings plan options. Employers that do not currently offer their employees a retirement savings plan should keep abreast of potential state legislation in this area.