September 1, 2016

DOL Green Lights State Savings Programs for Private Sector Employees

Update: On May 17, 2017, President Trump signed House Joint Resolution 66, which nullified this DOL rule. See our hot topic.

On August 30, 2016, the Department of Labor (DOL) issued a final rule, effective October 31, 2016, providing states with a safe harbor under which they can create programs that require employers to establish payroll-deduction IRAs for employees. The final rule treats these programs as not covered by the Employee Retirement Income Security Act (ERISA) and therefore not preempted by ERISA. The final rule makes a few clarifying changes to the 2015 proposed rule to provide additional flexibility and ease administration for states and employers. (See https://www.segalco.com/publications-videos/hot-topics/guidance-on-state-savings-programs-for-private-sector-employees/#Multiemployer for a “hot topic” discussing the proposed rule and a related Interpretive Bulletin.) At the same time, the DOL proposed an amendment to the final rule that would allow large cities or counties to establish similar programs under specific circumstances. Comments on the proposed rule are due September 29, 2016.

Eight states – California, Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts, and Washington – have already passed legislation that could eventually require private employers to offer employees the option to make pretax contributions to a payroll-deduction IRA. While these state programs differ in in their design and stage of development, all faced uncertainty as to whether they would be preempted by ERISA. With the issuance of the final rule, the states now know how to finalize their programs to avoid a preemption challenge, at least from the DOL. The DOL warns that the courts will be the one to determine whether the safe harbor exception is proper under ERISA.

On August 30, 2016, the Department of Labor (DOL) issued a final rule, effective October 31, 2016, providing states with a safe harbor under which they can create programs that require employers to establish payroll-deduction IRAs for employees. The final rule treats these programs as not covered by the Employee Retirement Income Security Act (ERISA) and therefore not preempted by ERISA. The final rule makes a few clarifying changes to the 2015 proposed rule to provide additional flexibility and ease administration for states and employers. (See https://www.segalco.com/publications-videos/hot-topics/guidance-on-state-savings-programs-for-private-sector-employees/#PublicSector for a “hot topic” discussing the proposed rule and a related Interpretive Bulletin.) At the same time, the DOL proposed an amendment to the final rule that would allow large cities or counties to establish similar programs under specific circumstances. Comments on the proposed rule are due September 29, 2016.

Eight states – California, Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts, and Washington – have already passed legislation that could eventually require private employers to offer employees the option to make pretax contributions to a payroll-deduction IRA. While these state programs differ in in their design and stage of development, all faced uncertainty as to whether they would be preempted by ERISA. With the issuance of the final rule, the states now know how to finalize their programs to avoid a preemption challenge, at least from the DOL. The DOL warns that the courts will be the one to determine whether the safe harbor exception is proper under ERISA.

On August 30, 2016, the Department of Labor (DOL) issued a final rule, effective October 31, 2016, providing states with a safe harbor under which they can create programs that require employers to establish payroll-deduction IRAs for employees. The final rule treats these programs as not covered by the Employee Retirement Income Security Act (ERISA) and therefore not preempted by ERISA. The final rule makes a few clarifying changes to the 2015 proposed rule to provide additional flexibility and ease administration for states and employers. (See https://www.segalco.com/publications-videos/hot-topics/guidance-on-state-savings-programs-for-private-sector-employees/#StaffPlans for a “hot topic” discussing the proposed rule and a related Interpretive Bulletin.) At the same time, the DOL proposed an amendment to the final rule that would allow large cities or counties to establish similar programs under specific circumstances. Comments on the proposed rule are due September 29, 2016.

Eight states – California, Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts, and Washington – have already passed legislation that could eventually require private employers to offer employees the option to make pretax contributions to a payroll-deduction IRA. While these state programs differ in in their design and stage of development, all faced uncertainty as to whether they would be preempted by ERISA. With the issuance of the final rule, the states now know how to finalize their programs to avoid a preemption challenge, at least from the DOL. The DOL warns that the courts will be the one to determine whether the safe harbor exception is proper under ERISA.

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Serena Simons

Serena Simons

SVP, National Retirement Compliance Practice Leader