Savings Arrangements Established by State Political Subdivisions for Non-Governmental Employees

SUMMARY: In this document, the Department proposes to amend a regulation that describes how states may design and operate payroll deduction savings programs, using automatic enrollment, for private-sector employees without causing the states or private-sector employers to establish employee pension benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA). The proposed amendments would expand the current regulation beyond states to cover programs of qualified state political subdivisions that otherwise comply with the current regulation. This rule would affect individuals and employers subject to such programs.

DATES: Written comments should be received on or before September 29, 2016.

ADDRESSES: You may submit comments, identified by RIN 1210-AB76, by one of the following methods:

* Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

* Email: e-ORI@dol.gov. Include RIN in the subject line of the message.

* Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210, Attention: Savings Arrangements Established by State Political Subdivisions for Non-Governmental Employees.

Instructions: All submissions must include the agency name and Regulatory Identification Number (RIN) for this rulemaking. Persons submitting comments electronically are encouraged to submit only by one electronic method and not to submit paper copies. Comments will be available to the public, without charge, online at www.regulations.gov and www.dol.gov/ebsa and at the Public Disclosure Room, Employee Benefits Security Administration, U.S. Department of Labor, Suite N-1513, 200 Constitution Avenue NW., Washington, DC 20210. WARNING: Do not include any personally identifiable or confidential business information that you do not want publicly disclosed. Comments are public records and are posted on the Internet as received, and can be retrieved by most internet search engines.

FOR FURTHER INFORMATION CONTACT: Janet Song, Office of Regulations and Interpretations, Employee Benefits Security Administration, (202) 693-8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

I. Background

Elsewhere in today's Federal Register , the Department issued a final regulation describing conditions that would allow state governments to establish payroll deduction savings programs, with automatic enrollment, for private-sector employees without the state or the employers of those employees being treated as establishing employee pension benefit plans under ERISA. The final regulation is published in response to legislation in some states, and strong interest by others, to encourage retirement savings by giving private-sector employees broader access to savings arrangements through their employers. The final regulation is effective as of October 31, 2016.

As noted in the preamble to the final regulation, concerns that tens of millions of American workers do not have access to workplace retirement savings arrangements have led some states to establish programs that allow private-sector employees to contribute payroll deductions to tax-favored individual retirement accounts described in 26 U.S.C. 408(a) or individual retirement annuities described in 26 U.S.C. 408(b), including Roth IRAs described in 26 U.S.C. 408A (IRAs), offered and administered by the states. California, Connecticut, Illinois, Maryland, and Oregon, for example, have adopted laws along these lines. /1/ These initiatives generally require certain employers that do not offer workplace savings arrangements to automatically deduct a specified amount of wages from their employees' paychecks unless the employee affirmatively chooses not to participate in the program. The employers are also required to remit the payroll deductions to state-administered IRAs established for the employees. These programs also allow employees to stop the payroll deductions at any time. None of the initiatives require employers to make matching or other contributions of their own to employee accounts. Some expressly bar such contributions and others do not address this matter. In addition, the state initiatives typically require that employers provide employees with information prepared or assembled by the program, including information on employees' rights and various program features.

FOOTNOTE 1 California Secure Choice Retirement Savings Trust Act, Cal. Gov't Code SUBSEC 100000-100044 (2012); Connecticut Retirement Security Program Act, P.A. 16-29 (2016); Illinois Secure Choice Savings Program Act, 820 Ill. Comp. Stat. 80/1-95 (2015); Maryland Small Business Retirement Savings Program Act, Ch. 324 (H.B. 1378) (2016); Oregon Retirement Savings Board Act, Ch. 557 (H.B. 2960) (2015). END FOOTNOTE

As indicated in the preamble to the final rule, some states expressed concern that these payroll deduction savings programs could cause either the state or covered employers to inadvertently establish ERISA-covered plans, despite the express intent of the states to avoid such a result. This concern is based on ERISA's broad definition of "employee pension benefit plan" and "pension plan," which are defined in relevant part as "any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program provides retirement income to employees." /2/ The Department and the courts have broadly interpreted "established or maintained" to require only minimal involvement by an employer or employee organization. /3/ An employer could, for example, establish an employee benefit plan simply by purchasing insurance products for individual employees. These expansive definitions are essential to ERISA's purpose of protecting plan participants by ensuring the security of promised benefits. Although ERISA does not govern plans established by states for their own employees, it governs nearly all plans established by private-sector employers for their employees.

FOOTNOTE 2 29 U.S.C. 1002(2)(A). ERISA's Title I provisions "shall apply to any employee benefit plan if it is established or maintained . . . by any employer engaged in commerce or in any industry or activity affecting commerce." 29 U.S.C. 1003(a). Section 4(b) of ERISA includes express exemptions from coverage under Title I for governmental plans, church plans, plans maintained solely to comply with applicable state laws regarding workers compensation, unemployment, or disability, certain foreign plans, and unfunded excess benefit plans. 29 U.S.C. 1003(b). END FOOTNOTE

FOOTNOTE 3 Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982); Harding v. Provident Life and Accident Ins. Co., 809 F. Supp. 2d 403, 415-419 (W.D. Pa. 2011); DOL Adv. Op. 94-22A (July 1, 1994). END FOOTNOTE

With certain exceptions, ERISA preempts state laws that relate to ERISA-covered employee benefit plans. /4/ Thus, if a state program were to require employers to take actions that effectively caused them to establish ERISA-covered plans, the state law underlying the program would likely be preempted. Similarly, ERISA would likely preempt a state law mandating private-sector employers to enroll their employees in an ERISA plan established by the state.

FOOTNOTE 4 ERISA section 514(a), 29 U.S.C. 1144(a). END FOOTNOTE

A. The Department's Rulemaking Regarding State Payroll Deduction Savings Initiatives

The Department responded to the states' concerns by publishing in today's Federal Register a final safe harbor regulation describing specific circumstances in which state payroll deduction savings programs with automatic enrollment would not give rise to the establishment of employee pension benefit plans under ERISA. As a result, the final regulation helps states (but not political subdivisions) establish and operate payroll deduction savings programs so as to reduce the risk of ERISA preemption by avoiding the establishment of ERISA-covered plans.

B. Public Comments on Political Subdivisions

In both the 2015 proposed rule, and the current final rule, the Department defines the term "State" to have the same meaning as given to that term in section 3(10) of ERISA. /5/ That section, in relevant part, provides that the term State "includes any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, [and] Wake Island." The effect of the definition is to limit the scope of the safe harbor to the fifty states and these other jurisdictions.

FOOTNOTE 5 On November 18, 2015, the Department published in the Federal Register a proposed regulation providing that for purposes of Title I of ERISA the terms "employee pension benefit plan" and "pension plan" do not include an IRA established and maintained pursuant to a state payroll deduction savings program if that program satisfies all of the conditions set forth in the proposed rule. 80 FR 72006. On the same day that proposal was published, the Department also published an interpretive bulletin explaining the Department's views concerning the application of ERISA section 3(2)(A), 29 U.S.C. 1002(2)(A), section 3(5), 29 U.S.C. 1002(5), and section 514, 29 U.S.C. 1144 to certain state laws designed to expand retirement savings options for private-sector workers through state-sponsored ERISA-covered retirement plans. 80 FR 71936 (codified at 29 CFR 2509.2015-02). Although discussed in the context of a state as the responsible governmental body, in the Department's view the principles articulated in the Interpretive Bulletin regarding marketplace arrangements and sponsorship of ERISA-covered plans also apply with respect to laws of a political subdivision, provided applicable conditions in the bulletin can be and are satisfied by the political subdivision. END FOOTNOTE

--This is a summary of a Federal Register article originally published on the page number listed below--

Proposed rule.

CFR Part: "29 CFR Part 2510"

RIN Number: "RIN 1210-AB76"

Citation: "81 FR 59581"

Federal Register Page Number: "59581"

"Proposed Rules"