Employees aren’t saving enough for retirement. A primary reason is that it can be prohibitively expensive for employers to set up 401(k) plans. In response, five states have enacted laws that require certain employers to set up auto-enrollment IRAs for their employees.
Problem: ERISA preemption of those laws. Solution: Final regulations, which became effective Oct. 31, 2016, set up a safe harbor that shields these laws from ERISA. (81 F.R. 59464, 8-30-16)
New ERISA safe harbor. ERISA’s broad preemption provision, which applies to any employee retirement plan, has been an obstacle to states that have enacted laws that require employers that don’t offer retirement plans to auto enroll employees into IRAs. California, Connecticut, Illinois, Maryland and Oregon have such laws, although the details vary widely.
The key to this safe harbor is that it applies only if state law requires you to participate in an auto-enrollment IRA program. You will establish an ERISA-covered plan if you voluntarily participate. Heads up: The final regs allow states to decide whether employers can remain in the program if they no longer meet the criteria for mandatory participation (e.g., by dropping below a certain employee threshold). If a state continues to allow participation, you’re covered. Flip side: If a state doesn’t allow continued participation, you may create an ERISA-covered plan by staying in the program. To date, no state has addressed this issue.
STILL SAFE SAILING: If you sail out of this safe harbor’s protective shores, you can avoid ERISA by converting your state-mandated plan into adeduction IRA program. This older ERISA safe harbor, which dates to 1975, remains valid and tracks the new safe harbor in all respects, except that employees can’t be auto enrolled; their participation must be completely voluntary.
Under the new safe harbor, employees’ IRAs that are established and maintained under a state payroll deduction savings program aren’t subject to ERISA if these criteria are met:
- The savings program is specifically established under a state’s law.
- The state selects the investment options, invests employees’ contributions, notifies employees, sets up a mechanism to ensure the security of employees’ contributions and provides employees with a method to enforce their rights.
- Employees participate in the program voluntarily. The regs clarify that employees are participating voluntarily if they opt out and receive their full pay.
- Your role is limited to withholding and remitting employees’ contributions, notifying employees and distributing information to them, maintaining records and providing information to the state. What’s out: You can’t contribute into employees’ IRAs.