Will ERISA force early retirement on Illinois' mandatory retirement plan rollout?
As we recently reported, on January 4, 2015, the Governor of Illinois signed the Illinois Secure Choice Savings Program Act into law. The law requires certain employers to provide for automatic payroll deductions in order to create Roth IRA savings accounts for their employees. The program is not to be activated until 2017.
The Illinois legislature conditioned the implementation of the Illinois Secure Choice Savings Program Act on two contingencies: (1) the act must receive an Internal Revenue Service (IRS) ruling providing that the required IRAs qualify for favorable federal tax treatment normally provided to IRAs; and (2) the program must receive a US Department of Labor (DOL) ruling providing that the program is not subject to federal Employee Retirement Income Security Act (ERISA) regulation.
As a practical matter what is probably of most interest to employers is whether the program will be able to obtain a ruling from the DOL providing that the program is not subject to regulation under ERISA. The Illinois program was carefully drafted in an attempt to try to avoid ERISA applicability. Among the design features seeking to avoid ERISA obligation triggers are:
- The state, and not the Employer, will make the typical fiduciary decisions (e.q. entering into provider agreements, making IRA investment decisions, etc.);
- No employer contributions.
The DOL recently gave an opinion addressing the newly activated federal MyRA (my retirement account) program which is comparable to the Illinois Secure Choice Savings Program at the Federal level. The DOL determined that the MyRA accounts did not implicate ERISA compliance. The DOL’s opinion is critical for Illinois because the Illinois program is also aimed at avoiding ERISA applicability. The DOL’s opinion concerning MyRA emphasized the importance of the “voluntary nature” of the program and the absence of any employer funding. At least one of these DOL considerations may prove fatal for the Illinois program, as it automatically enrolls employees in the program, unless the employee opts out. However, Daniel Biss (D), an Illinois state senator who championed the law, stated that while the federal MyRA program may not be perfectly analogous to the Illinois Program, the DOL’s opinion indicates it is open to accepting innovative programs which may extend opportunities for retirement security to more American employees.
Since its passage, the law has faced much scrutiny and criticism. To some critics the fact that no funds have yet been apportioned to implement the program is an indication that the legislators have not fully thought the program through. To other critics the Pandora box that it is opening is of serious concern. The Illinois law could be viewed as opening the door to having 50 different state retirement plan laws. One of ERISA’s original purposes was to spare multi-state employers from problems created by each state having different retirement plan requirements. Oregon and California are among the approximately one dozen states that are actively considering adopting similar programs. With each state potentially submitting state retirement programs for federal approval, federal regulators may decide they are unable or unwilling to review each and every program and may instead set out foolproof parameters to address each of these state initiatives. Furthermore, the more various states decide to move forward with these types of programs, Congress may eventually become pressured to set out national rules governing such programs.
Whether the program will receive the DOL ruling desired by Illinois is yet to be seen. Considering the Secure Choice Program’s numerous uncertainties, employers may want to closely monitor the DOL’s response to the program and the state’s implementation efforts. We will continue to keep you updated as this program continues to develop.