Savings Arrangements Established by States for Non-Governmental Employees

SUMMARY: This document describes circumstances in which state payroll deduction savings programs with automatic enrollment would not give rise to the establishment of employee pension benefit plans under the Employee Retirement Income Security Act of 1974, as amended (ERISA). This document provides guidance for states in designing such programs so as to reduce the risk of ERISA preemption of the relevant state laws. This document also provides guidance to private-sector employers that may be covered by such state laws. This rule affects individuals and employers subject to such state laws.

EFFECTIVE DATE: This rule is effective October 31, 2016.

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

Approximately 39 million employees in the United States do not have access to a retirement savings plan through their employers. /1/ Even though such employees could set up and contribute to their own individual retirement accounts or annuities (IRAs), the great majority do not save for retirement. In fact, less than 10 percent of all workers contribute to a plan outside of work. /2/

FOOTNOTE 1 National Compensation Survey, Bureau of Labor Statistics (July 2016), Employee Benefits in the United States--March 2016 (http://www.bls.gov/news.release/pdf/ebs2.pdf). These data show that 66 percent of 114 million private-sector workers have access to a retirement plan through work. Therefore, 34 percent of 114 million private-sector workers (39 million) do not have access to a retirement plan through work. END FOOTNOTE

FOOTNOTE 2 See The Pew Charitable Trust, "How States Are Working to Address The Retirement Savings Challenge," (June 2016) (http://www.pewtrusts.org/ [approx.] /media/assets/2016/06/howstatesareworkingtoaddresstheretirementsavingschallenge.pdf). END FOOTNOTE

For older Americans, inadequate retirement savings can mean sacrificing or skimping on food, housing, health care, transportation, and other necessities. In addition, inadequate retirement savings places greater stress on state and federal social welfare programs as guaranteed sources of income and economic security for older Americans. Accordingly, states have a substantial governmental interest to encourage retirement savings in order to protect the economic security of their residents. /3/ Concern over the low rate of saving among American workers and the lack of access to workplace plans for many of those workers has led some state governments to expand access to savings programs for their residents and other individuals employed in their jurisdictions by creating their own programs and requiring employer participation. /4/

FOOTNOTE 3 See Christian E. Weller, Ph.D., Nari Rhee, Ph.D., and Carolyn Arcand, "Financial Security Scorecard: A State-by-State Analysis of Economic Pressures Facing Future Retirees," National Institute on Retirement Security (March 2014) (www.nirsonline.org/index.php?option=com_content&task=view&id=830&Itemid=48). END FOOTNOTE

FOOTNOTE 4 See, e.g., Kathleen Kennedy Townsend, Chair, Report of the Governor's Task Force to Ensure Retirement Security for All Marylanders, "1,000,000 of Our Neighbors at Risk: Improving Retirement Security for Marylanders" (2015). END FOOTNOTE

A. State Payroll Deduction Savings Initiatives

One approach some states have taken is to establish state payroll deduction savings programs. Through automatic enrollment such programs encourage employees to establish tax-favored IRAs funded by payroll deductions. /5/ California, Connecticut, Illinois, Maryland, and Oregon, for example, have adopted laws along these lines. /6/ 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. /7/ 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. The programs, as currently designed, do not require, provide for or permit employers to make matching or other contributions of their own into the employees' accounts. 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 5 These could include individual retirement accounts described in 26 U.S.C. 408(a), individual retirement annuities described in 26 U.S.C. 408(b), and Roth IRAs described in 26 U.S.C. 408A. END FOOTNOTE

FOOTNOTE 6 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

FOOTNOTE 7 Workplace savings arrangements may include plans such as those qualified under or described in 26 U.S.C. 401(a), 401(k), 403(a), 403(b), 408(k) or 408(p), and may constitute either ERISA or non-ERISA arrangements. END FOOTNOTE

B. ERISA's Regulation of Employee Benefit Plans

Section 3(2) of ERISA defines the terms "employee pension benefit plan" and "pension plan" broadly to mean, in relevant part "[A]ny 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. . . ." /8/ The Department and the courts have broadly interpreted "established or maintained" to require only minimal involvement by an employer or employee organization. /9/ 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.

FOOTNOTE 8 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 exemption 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 9 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

Due to the broad scope of ERISA coverage, some stakeholders have expressed concern that state payroll deduction savings programs, such as those enacted in California, Connecticut, Illinois, Maryland, and Oregon may cause covered employers to inadvertently establish ERISA-covered plans, despite the express intent of the states to avoid such a result. This uncertainty, together with ERISA's broad preemption of state laws that "relate to" private-sector employee pension benefit plans has created a serious impediment to wider adoption of state payroll deduction savings programs. /10/

FOOTNOTE 10 ERISA's preemption provision, section 514(a) of ERISA, 29 U.S.C. 1144(a), provides that the Act "shall supersede any and all State laws insofar as they . . . relate to any employee benefit plan" covered by the statute. The U.S. Supreme Court has long held that "[a] law `relates to' an employee benefit plan, in the normal sense of the phrase, if it has a connection with or reference to such a plan." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983) (footnote omitted). In various decisions, the Court has concluded that ERISA preempts state laws that: (1) mandate employee benefit structures or their administration; (2) provide alternative enforcement mechanisms; or (3) bind employers or plan fiduciaries to particular choices or preclude uniform administrative practice, thereby functioning as a regulation of an ERISA plan itself. END FOOTNOTE

C. 1975 IRA Payroll Deduction Safe Harbor

Although IRAs generally are not set up by employers or employee organizations, ERISA coverage may be triggered if an employer (or employee organization) does, in fact, "establish or maintain" an IRA arrangement for its employees. 29 U.S.C. 1002(2)(A). /11/ In contexts not involving state payroll deduction savings programs, the Department has previously issued guidance to help employers determine whether their involvement in certain voluntary payroll deduction savings arrangements involving IRAs would result in the employers having established or maintained ERISA-covered plans. That guidance included a 1975 "safe harbor" regulation under 29 CFR 2510.3-2(d) setting forth circumstances under which IRAs funded by payroll deductions would not be treated as ERISA plans, and a 1999 Interpretive Bulletin clarifying that certain ministerial activities will not cause an employer to have established an ERISA plan simply by facilitating such payroll deduction savings arrangements. /12/

FOOTNOTE 11 ERISA section 404(c)(2) (simple retirement accounts); 29 CFR 2510.3-2(d) (1975 IRA payroll deduction safe harbor); 29 CFR 2509.99-1 (interpretive bulletin on payroll deduction IRAs); Cline v. The Industrial Maintenance Engineering & Contracting Co., 200 F.3d 1223, 1230-31 (9th Cir. 2000). END FOOTNOTE

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

Final rule.

CFR Part: "29 CFR Part 2510"

RIN Number: "RIN 1210-AB71"

Citation: "81 FR 59464"

Federal Register Page Number: "59464"

"Rules and Regulations"