DOL Guidance Addresses State Savings Programs:

In the DOL’s ERISA Interpretive Bulletin 2015-02 (the “IB”), which became effective on November 18, 2015 (without a public comment period), the DOL begins by explaining that “concern over adverse social and economic consequences of inadequate retirement savings levels has prompted several states to adopt or consider legislation to address this problem.” The IB provides the DOL’s views on ERISA’s application to state laws that are intended to expand the retirement savings options available to private sector workers through state-sponsored or state-facilitated retirement plans.

The IB explains that one of the challenges states face in expanding retirement savings opportunities for private sector employees is their uncertainty about ERISA’s potential preemption of such efforts. Given ERISA’s broad preemption of state laws that “relate to” private sector employee benefit plans, one might think that ERISA would preempt any state law under which employers establish and maintain ERISA-covered employee benefit pension plans. (The main purpose of ERISA preemption is to ensure that employee benefit plans will be governed by only a single set of rules, rather than also to state laws.) While acknowledging that thought, the IB’s overall message is that “ERISA preemption principles leave room for states to sponsor or facilitate ERISA-based retirement savings options for private sector employees, provided employers participate voluntarily and ERISA’s requirements, liability provisions, and remedies fully apply to the state programs.”

The IB then summarizes certain current state law approaches in this area:

  • Marketplace Approach: State law requires the state to contract with a private sector entity to establish a program that connects employers with certain retirement plans available in the private sector market. Only products that the state determines are suited to small employers, provide good quality, and charge low fees are included in the state’s “marketplace.” Employers are not required to use the marketplace or to establish any retirement plan for their employees. The marketplace arrangement would not itself be an ERISA-covered plan. Rather, as plan sponsors, employers would determine whether to adopt ERISA-covered plans (e.g., 401(k) plans) or non-ERISA plans (e.g., certain payroll-deduction IRAs).
  • Prototype Plan Approach: Employers would adopt a state-sponsored prototype plan, under which the plan documents provide that the state (or its designee) is the plan’s “named fiduciary” and “plan administrator” under ERISA. However, adopting employers would assume the same fiduciary obligations associated with sponsoring any ERISA-covered plan.
  • Multiple Employer Plan (“MEP”) Approach: This generally involves permitting employers that meet specified eligibility criteria to join the state multiple employer plan. The plan documents would provide that the plan is subject to ERISA and is intended to comply with Internal Revenue Code’s tax qualification requirements. The plan would have a separate trust holding contributions made by the participating employers, the employer’s employees, or both. The state (or a designated governmental agency or instrumentality) would be the plan sponsor under ERISA, as well as the named fiduciary and plan administrator responsible for administering the plan, selecting service providers, communicating with employees, paying benefits, and providing other plan services. To participate in the plan, employers would have to execute a participation agreement. According to the IB, the DOL would consider this approach to constitute a single ERISA plan.

The IB notes that based on certain decisions of the U.S. Supreme Court, ERISA preempts the following state laws: (1) laws that mandate employee benefit structures or their administration; (2) laws that provide alternative enforcement mechanisms; and (3) laws that bind employers or plan fiduciaries to particular choices or preclude uniform administrative practice. The IB explains that although the three approaches described above involve ERISA plans, “they do not appear to undermine ERISA’s exclusive regulation of ERISA-covered plans.” In particular, those approaches “do not mandate employee benefit structures or their administration, provide alternative regulatory or enforcement mechanisms, bind employers or plan fiduciaries to particular choices, or preclude uniform administrative practice in any way that would regulate ERISA plans.”

Furthermore, according to the IB, even if state laws establishing the three approaches described above reference employee benefit plans in a literal sense, they do not constitute laws that “relate to” ERISA plans. That is because they are completely voluntary from the employer’s perspective, the state programs would be subject to ERISA, and state law would not impose any outside regulatory requirements beyond ERISA. The IB can be viewed here:

On a related note, on the same day the DOL published the IB, it also published a proposed regulation. This guidance describes safe-harbor conditions under which states and employers can avoid creation of ERISA plans as a result of state laws requiring private sector employers to implement state-administered payroll deduction IRA programs (i.e. so-called “auto-IRA laws”). Several states have already adopted such programs, under which a state requires certain employers that do not sponsor a retirement plan to establish payroll-deduction IRAs for their employees, and states establish a system for the investment of such IRA assets. The proposed regulation is intended to decrease the chance of courts ruling that ERISA preemption applies to these state laws. Courts have generally concluded that a state cannot require employers to offer an ERISA-covered plan. However, the proposed regulation clarifies that state auto-IRA laws will not be subject to ERISA if several requirements are satisfied (e.g., the state is responsible for investing employees’ contributions or for selecting investment alternatives; the state is responsible for the security of employees’ payroll deductions). The DOL is accepting comments on the proposed regulation until January 19, 2016 and will likely finalize it in 2016. Here is a link to the proposed regulation: