DOL Issues Guidance on the Application of ERISA to State-Sponsored Retirement Programs for Private Sector Employees
December 8, 2015
After a recent flurry of activity in state legislatures regarding state mandated automatic savings programs, the Department of Labor (“DOL”) has issued (1) a proposed regulation, and (2) interpretive guidance that addresses how the Employee Retirement Income Security Act of 1974 (“ERISA”) would apply to various types of state legislation aimed at increasing the availability of workplace retirement programs to private sector employees.
Very recently, states such as Illinois, California, and Oregon have created payroll deduction savings programs under which private sector employers that do not maintain their own retirement plans must remit a percentage of employee payroll to a state-sponsored retirement program for employees. An updated list of those states in which such programs have been created or proposed is available here. These state initiatives are a direct response to the growing body of evidence suggesting that private sector workers are not saving nearly enough for retirement, the long-term financial effects of which may fall in large part on federal and state governments.
The Illinois Secure Choice Savings Program (“Illinois Secure Choice”), for example, requires employers with 25 or more employees to remit three percent of each employee’s pay to a state-administered savings program. Illinois Secure Choice, which is still in the process of being implemented, allows employees to opt-out of the program at any time and does not allow employers to make employer contributions to the program (it is limited to employee payroll deductions). Illinois Secure Choice limits employer involvement to simply publicizing the program to employees and forwarding employee payroll contributions. The Illinois legislation specifically relieves participating employers of any fiduciary status with respect to the program. Indeed, the Illinois legislation places all applicable fiduciary duty on a seven member board that is in charge of implementing and administering the program.
Before the DOL issued the proposed rule, state legislators had concerns that savings initiatives like Illinois Secure Choice would be deemed employee pension benefit plans under federal law and thus subject to ERISA. This would mean that, among other things, the employers that are required to remit payroll contributions to the state program would take on fiduciary status under ERISA and thus be subject to complicated compliance obligations under federal law. In Illinois, legislators recognized this potential conundrum and included a provision in the Illinois Secure Choice legislation that would only allow the program to move forward if the DOL issued guidance stating the Illinois Secure Choice was exempt from ERISA. This provision recognized the very real possibility that ERISA preemption principles would impose fiduciary status on individual employers with employees in these types of state-sponsored retirement programs.
The DOL Proposed Safe Harbor
Looking to expand access to workplace retirement plans, and recognizing that Congress was unlikely to issue its own legislation, the DOL issued a proposed rule that excludes state based auto-enrollment retirement plans from ERISA coverage, provided that these programs meet certain requirements. To avoid ERISA coverage, the DOL safe harbor requires that these programs limit employer involvement to:
- Collecting employee payroll deductions and remitting them to the state program;
- Publicizing the program to employees; and
- Communicating with the state to assist in program implementation.
The safe harbor further explains that to avoid ERISA, employers covered by the program may not match or otherwise make employer contributions to employee accounts. The safe harbor also requires that the state retain all discretionary and operational responsibility for the program. Thus the state or an appropriately appointed governing body, rather than employers, is required to select investment providers, secure employee contributions, and notify participants of their rights under the program.
It is clear that the DOL is taking a supportive posture of these state-sponsored retirement initiatives. At the same time, it is important to note that the guidance does not guarantee that federal courts will support the DOL’s view that these programs are exempt from ERISA. This proposed rule is expected to be finalized at some point in 2016.
At the same time that it released the proposed safe harbor exemption from ERISA coverage for mandatory automatic enrollment savings plans, the DOL also released an interpretive bulletin (which became effective as of November 18, 2015) that offers guidelines for other state retirement program initiatives that are subject to ERISA. The guidance describes three possible structures of state-based retirement programs for private sector and non-profit employers that would be subject to ERISA. The three structures include the following:
- State-sponsored multiple employer plan: Under this type of program, a state would sponsor a single multiple employer defined contribution or defined benefit arrangement that employers could participate in. The DOL explained that the state’s interest in the health and welfare of its citizens would provide sufficient nexus to support a plan that includes multiple employers who do not otherwise share an employment-related common bond (which is typically required for multiple employer plans under ERISA). Under this type of plan, the state would be the primary fiduciary for ERISA purposes, and participating employers would have limited fiduciary responsibility for the remittance of contributions toward the plan.
- State-sponsored prototype plan: Under this type of arrangement, a state would develop a prototype plan that employers could adopt. The employers would be subject to ERISA if they adopted the state’s prototype plan, but the state and associated providers would retain certain fiduciary functions.
- State-established savings/retirement plan marketplace: Under this approach, a state would establish a marketplace designed to connect employers with state-selected savings/retirement plan providers. Employers sponsoring plans selected from the marketplace would be subject to ERISA, depending on the type of savings arrangement, but those employers would benefit from the state’s selection of suitable low-cost providers.
The DOL’s proposed safe harbor and interpretive bulletin give states a roadmap for structuring a number of different types of initiatives designed to increase private sector employees’ access to workplace retirement programs, all while allowing small employers to either avoid the direct application of ERISA or reduce the level of responsibility they have under ERISA. And the guidance gives those states that have already taken action in this area (such as Illinois, California, Oregon, Connecticut, Massachusetts, and Washington) a significant boost.