Let’s be honest: regardless of age, we all sometimes dream about retirement. Those daydreams often include things like travel, golf, and a house filled with pets (but maybe that last one’s just me). Unfortunately, for a lot of Americans who aren’t eligible for retirement savings plans through their employer, those dreams are difficult to make a reality.
As a result, over 30 states have recently introduced bills or conducted studies on state-sponsored individual retirement plans (commonly referred to as auto-IRAs), which would increase access to retirement savings for these employees. Of those states, eight (California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, and Washington) have already enacted laws requiring certain employers to automatically enroll employees in individual retirement accounts with an opt-out feature.
DOL Final Rule and the ERISA
This legislation caused concern that state programs would result in employers inadvertently establishing plans that were subject to the Employee Retirement Income Security Act (ERISA). To address this concern, the U.S. Department of Labor (DOL) has published its final rule, which states that employers can establish individual retirement accounts with automatic payroll deductions without being subject to ERISA, so long as the following conditions are met:
- The program is established by state law and implemented and administered by the state, including the investment of employee savings and selection of investment alternatives.
- The state assumes responsibility for the security of payroll deductions and employee savings, ensures employees are notified of their rights under the plan, and creates a plan for enforcement.
- Employee participation is voluntary.
Further, the employer’s role must be limited to administrative activities, including:
- Collecting and remitting payroll deductions
- Providing notices to employees
- Maintaining payroll records
- Providing the state with information necessary to operate the program
- Distributing information about the state program to employees
Although the DOL final rule takes effect October 31, 2016, no state retirement programs are scheduled to be in effect until 2017.
Impact on Employers
Despite the stipulations with regards to ERISA, there are overlapping and inconsistent requirements among states that could make these retirement programs difficult for employers to administer. For example, if an employer has employees who live in one state but work in another, both states’ retirement mandates could apply. Further, these programs are intended to apply to small employers who don’t offer any other retirement plan. However, larger employers could be subject to state mandates for employees who are not eligible for the plan they already offer due to requirements such as waiting periods or hours worked.
The National Payroll Reporting Consortium (NPRC) is leading a coordinated effort among states and industry stakeholders (including Ceridian) to help minimize employer burden in the absence of a federal framework. The objective of this working group is to standardize key elements of state plans such as file specifications, definitions, and communications. States that implement early (Oregon, Illinois, and California) are expected to set the precedent.
Want to Learn More?
You can read the full text of the DOL final rule here.