December 22, 2016

Final Rule Allows Large Cities and Other Subdivisions to Establish Savings Programs for Private Sector Employees

Update: On April 13, 2017, President Trump signed House Joint Resolution 67, which nullified this DOL rule. See our hot topic.

The Department of Labor (DOL) published a final rule on December 20, 2016, that extends the DOL-established state safe harbor (described in final regulations published on August 30, 2016) for establishing payroll-deduction savings programs for private sector employees to “qualified political subdivisions” (e.g., large cities and counties). Compliance with the safe harbor allows programs enacted by states and eligible political subdivisions to be exempt from the Employee Retirement Income Security Act. The final rule is effective January 19, 2017.

The safe harbor conditions applicable to qualified political subdivisions are largely the same that apply to state programs that require employers without a workplace retirement savings mechanism to automatically deduct amounts from employees’ wages for remittance to state-administered programs that establish individual employee retirement accounts. Employees must be allowed to opt out of such programs and employer contributions are prohibited.

A qualified political subdivision is defined in the final rule as any state governmental unit that satisfies the state safe harbor, and four additional criteria. Under the final rule, the political subdivision must meet the following criteria:

  • Have the authority (implicit or explicit) to implement a program requiring employer participation;
  • Have a population equal to or greater than the least populated state (approximately 600,000 residents);
  • Not be located in a state that already enacted a mandatory program (CA, CT, IL, MD, OR), or overlap in the geographic area of another political subdivision that enacted a mandatory program before the subdivision; and
  • Implement and administer (or oversee administration of) a retirement plan for its own employees.

The final rule clarifies that compliance with the tests in the latter three criteria is determined on the enactment date of the subdivision’s program. Political subdivisions in states with voluntary retirement programs for private sector workers (MA, NJ, WA) may be eligible for the safe harbor.

The DOL estimates only 51 political subdivisions are eligible for the safe harbor, including three (Seattle, Philadelphia, and New York City) that have expressed interest in it.

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Serena Simons

Serena Simons

SVP, National Retirement Compliance Practice Leader

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Melanie Walker

SVP, National Compliance Practice