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Final Regulations Issued on Application of ERISA to State-Sponsored Retirement Programs for Private Sector Employees


August 30, 2016

By Sarah A. Kregor

The U.S. Department of Labor (“DOL”) has issued final regulations allowing states to implement state-sponsored retirement plans for private sector employees without running afoul of the Employee Retirement Income Security Act of 1974(“ERISA”).  In recent years, several states have adopted or proposed laws aimed at implementing state-sponsored retirement programs for private sector employees.  These state-sponsored retirement programs would require private sector employers that do not maintain their own retirement plans to remit a percentage of employee wages to a state-run retirement program for employees. For example, the Illinois Secure Choice Savings Program will require employers with 25 or more employees to remit three percent of each employee’s pay to a state-administered savings program.  A list of the other states that have created or proposed such a retirement program is available here.  A threshold issue for such states has been whether ERISA would apply to the programs, which would cause the programs to be subject to complex compliance obligations under federal law. 

As discussed in a prior alert, late last year the DOL issued proposed regulations and interpretive guidance in order to quell concerns about ERISA application and encourage retirement savings initiatives.  The DOL has now finalized its regulations.

The final regulations provide that if a state-sponsored program complies with a “safe harbor” set of requirements, the program will not be subject to Title I of ERISA.  The safe harbor imposes several restrictions on the states that sponsor the programs, including that the state be responsible for the security of the contributions and for selecting investments.  Additionally, employer involvement must be limited to the following activities:

  • Collecting employee contributions through payroll deductions and remitting them to the program;
  • Providing notice to the employees and maintaining records regarding the employer’s collection and remittance of payments;
  • Providing information to the state (or a governmental agency or instrumentality of the state) necessary to facilitate operation of the program; and
  • Distributing to employees program information from the state (or a governmental agency or instrumentality of the state) and permitting the state (or a governmental agency or instrumentality of the state) to publicize the program to employees.

Employers cannot contribute funds to the program or provide bonuses or other monetary incentives to encourage employees to participate in the program.  Employers may not have any discretionary authority, control, or responsibility under the program.  Employers may not receive direct or indirect consideration, other than consideration received directly from the state (or a governmental agency or instrumentality of the state) that does not exceed an amount that reasonably approximates an employer’s costs under the program.  Thus, states can provide tax incentives or credits, but only up to an approximation of an employer’s costs for participating in the program. States can include automatic enrollment provisions in the programs, but employees must be given adequate advance notice of their right to elect to contribute a different amount than the automatic deferral (or no amount at all).

Notably, compliance with the safe harbor does not guarantee that federal courts will agree with the DOL’s view that the programs are exempt from ERISA.  It is therefore still possible that participants in the programs will attempt to gain ERISA rights by challenging the exemption in federal court. 

Please let us know if you have any questions about state-sponsored retirement programs, including, in particular, the Illinois Secure Choice Savings Program.

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