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DOL’s Proposed Safe Harbor for State Savings Programs: A Closer Look

Following President Obama’s directive at the 2015 White House Conference on Aging in July, the Department of Labor (DOL) published proposed regulations Nov. 16 that create a new state payroll deduction savings program safe harbor so that those programs are not subject to ERISA.

The safe harbor only allows for the automatic enrollment of participants into an IRA-based state program, leaving private payroll deduction IRA arrangements still subject to the older, more limited rules. This gives the state auto-IRA program an unfair advantage over similar private auto-IRA programs without any reasonably apparent policy justification.

Since these programs are not covered under ERISA, the state must require employers over a certain size to offer the program to employees without being subject to ERISA preemption. However, the state is not allowed to require employers to contribute to the arrangement. This guidance will facilitate the implementation of laws enacted in recent years in California, Illinois and Oregon.

Three ERISA-Based Options

In addition, the DOL issued an interpretive bulletin that would give states three options to create an ERISA-covered program that would also not be subject to ERISA preemption. However, if a state chooses to create an ERISA-covered program, the state would be prohibited from requiring employers to use that program. According to the interpretive bulletin, states can choose to create:

  • a marketplace approach;

  • a prototype plan approach; or

  • a multiple employer plan (MEP) approach.

The interpretative bulletin cited the recently enacted Washington state law as an example of the marketplace approach. The Washington law created a program that connects eligible employers with qualifying savings plans available in the private sector market. The law sets standards for the arrangements included on the marketplace, leaving the choice up to the eligible employers as to what arrangement to choose. The DOL would not consider the marketplace program itself to be subject to ERISA because it is a voluntary program that merely serves as a conduit to different types of savings arrangements.

The interpretative bulletin cited a law that Massachusetts enacted in 2012 as an example of the prototype plan approach. The Massachusetts law created a state sponsored 401(k) plan for small non-profit employers. This prototype would allow each eligible employer to adopt and ERISA-covered plan with employer contributions. The prototype would specify that the employer is the named fiduciary and plan administrator responsible for complying with ERISA, but may allow the employer to delegate these responsibilities to the state (which then could delegate a third party contracting with the state to operate the plan).

MEP ‘Opening’

Finally, the interpretative bulletin laid out guidance in case a state wants to establish a MEP or a defined benefit plan for employers. While to date no states have passed legislation creating such an arrangement, under the DOL’s guidance the state itself would be the plan sponsor, the named fiduciary and the plan administrator (but could also delegate those responsibilities to third parties). Participating employers would be required to execute a participation agreement and would have limited fiduciary responsibilities (like prudently selecting the arrangement and a duty to monitor its operation). The DOL’s reasoning to allow this arrangement while preventing private sector “open” MEPs is because “the state has a unique representational interest in the health and welfare of its citizens.”

Andrew Remo is the American Retirement Association’s Director of Congressional Affairs.