The U.S. Department of Labor has finalized a rule that intendsto assist states in creating workplaceretirement savings plans.

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To date, eight states have already passed legislation creatingvarious forms of state-run workplace retirement savingsprograms.

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Related: A comparison of two state-sponsored retirementplans

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But as more states have explored the possibility of creating astate-sponsored workplace savings program, some legislators andregulators have expressed concern that prospective plans would “runafoul” of the Employee Retirement Income Security Act, said LaborSecretary Thomas Perez in a press call announcing publication of the final rule.

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With publication of the new final rule, Perez said the LaborDepartment believes “we have provided a road map” that will assurestates can sponsor a workplace plan that “doesn’t run afoul withERISA preemption.”

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Due to the broad scope of ERISA, which courts and regulatorshave interpreted to cover any retirement plan established by anemployer, even when the employer only has minimal involvement in aplan, stakeholders voiced concern that employers offering state-runplans would inadvertently establish ERISA-covered plans, andthereby open employers up to potential liability.

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That uncertainty has created a “serious impediment” to wideradoption of state payroll deduction savings programs, according toan explanation in the final rule.

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An existing safe harbor under ERISA allows employers toestablish payroll deductions to IRAs without being subject toliabilities under ERISA.

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Of the conditions in the original safe harbor, an employee’sparticipation must be completely voluntary. If an employerautomatically enrolls workers in an IRA, even when giving theoption for employees to opt out, the plan would not be consideredcompletely voluntary, and would thus be regarded as an ERISAplan.

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But at least five of the new state-administered plans created inthe past two years require employers to automatically enrollemployees.

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The new safe harbor established with the publication of today’sfinal rule amends the original ERISA safe harbor relative tostate-administered plans.

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Now, under the new rule, the original safe harbor’s “completelyvoluntary” provision has been modified to allow states toautomatically enroll employees in a state administered IRA, so longas they have the ability to opt-out of the program.

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Other conditions in the final rule

In order for states to require automatic enrollment instate-administered IRA plans, other provisions must be met forthose plans to be considered outside of ERISA’s regulatorydomain.

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Mandated participation must be established by state law, and theplan must be administered by the state, though state agencies areallowed to contract with service providers to help administer theplan.

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The state — and not the employer — must be responsible forinvesting payroll deductions and selecting the investment optionsemployees choose from.

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The state — and not the employer — must be responsible for thesecurity of payroll deductions and employee savings.

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And the state must adequately notify employees of their rightsunder the program, “and must create a mechanism for enforcing thoserights,” according to the new final rule.

Employers’ limited role

In order to qualify for the amended safe harbor, employerscannot contribute employer funds to the IRAs. And employers’participation must be mandated by state law.

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Employers’ roles must be limited to “ministerial activities,”according to the final rule, such as collecting payroll deductionsand remitting them to the state. Employers can provide notice toemployees of the payroll deductions, and can provide information tothe state for administration of the program. Also, employers candistribute information from the state to workers about the savingsprogram.

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Employee rights

While states can mandate automatic enrollment, employeeparticipation must ultimately be voluntary.

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The ability to opt-out of a state-administered plan must beavailable to qualify for the new safe harbor. “Adequate notice” ofthat right must be provided by the state. And employees must benotified of the “mechanism for enforcement of those rights,”according to the final rule, which does not specify what thatmechanism would be.

Changes in final rule from the proposed rule

The final rule added language clarifying that in issuing a newsafe harbor, states are not limited to designing plans or programsthat operate outside of the safe harbor.

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In other words, the final rule does not “prevent a state fromcreating an ERISA plan,” clarified Perez in the press call.

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The final rule also removes a condition in the proposed rulethat would have limited states from limiting early employeewithdrawals from savings plans.

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The purpose of that provision in the original proposal was toassure employees had control over their retirement assets.

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But commenters suggested that would limit states’ ability toaddress plan leakage. Also, in allowing states to set withdrawalrestrictions in the final rule, program administrators have greaterflexibility to offer annuities and other guaranteed income design.The final rule says that any restrictions on withdrawals are bestleft determined by individual states.

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The final rule also modifies restrictions on how states canreimburse employers for providing payroll deductions, and allowsstates to offer tax incentives and credits for participation.

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The final rule added language clarifying that states can offerprograms only to employers that do not already offer some workplacesavings plan. The proposal’s original language stated plans couldbe offered to non-eligible workers employed where some plan isalready offered. In clarifying the final rule, the Labor Departmentsays that employers will not be incentivized to not offer a planfrom the private sector.

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No dance partner at the federal level

The final rule is a result of a directive President Obama issuedto the Labor Department at a summit on aging in July of 2015.

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President Obama has recommended a federal IRA payroll deductionprogram to address the one-third of workers that are not offered asavings program through their employers in each of his budgetproposals.

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But Republicans in Congress have consistently opposed thateffort, said Perez during the press call.

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In order to circumvent legislative stasis at the federal level,the Labor Department has worked “side-by-side” with states thathave already legislated state-run payroll deduction savingsprograms, said Perez.

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“Today’s rule will pave way for states to create and implementinnovative new ways for workers to save,” added Perez. “At thefederal level, we do not have a dance partner. Republicans want topromote the status quo. The cost of doing nothing is significant,and that’s not good for retirees, and puts additional burdens ontax payers” in the future.

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Along with the publication of today’s final rule, the LaborDepartment has also issued a proposed rule that would expand thenew safe harbor to large municipalities with at least thepopulation of Wyoming, the least populous state.

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The final rule for states will be enacted 60 days from therule’s publication. The proposed rule for cities will be open for a30-day comment period.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.