DOL Issues Rules on Savings Programs Established by State Political Subdivisions

Practical Law Legal Update w-005-1116 (Approx. 6 pages)

DOL Issues Rules on Savings Programs Established by State Political Subdivisions

by Practical Law Employee Benefits & Executive Compensation

Proposed Regulations

The proposed regulations would have amended 29 C.F.R. Section 2510.3-2(h), which was added by the August 2016 final regulations, to cover the payroll deduction savings programs of qualified political subdivisions of states that otherwise comply with the requirements of the August 2016 final regulations.

Specifically, the proposed regulations extended the safe harbor of the August 2016 final regulations to qualified political subdivisions that establish and operate payroll deduction savings programs with automatic enrollment. The safe harbor provisions of the proposed regulations would apply in the same manner to payroll deduction savings programs of qualified political subdivisions as they apply to state-based savings programs (SSPs), which means that:

An SSP would not be preempted by ERISA (see Practice Note, ERISA Litigation: Preemption of State Laws).
Plans established under a payroll deduction savings program of a state or a qualified political subdivision of a state would not be considered employee benefit plans under ERISA.

The proposed regulations added a new paragraph (h)(4) to 29 C.F.R. Section 2510.3-2 to define a qualified political subdivision as any governmental unit of a state, including a city, county, or similar governmental body, that:

Has the implicit or explicit authority under state law to require employers' participation in the savings program.
Has a population equal to or greater than the population of the least populated State, (excluding the District of Columbia and US territories).
Is not located in a state that, under state law, establishes an SSP for private-sector employees.

The proposed regulations indicated that the DOL sought further comments on whether and how the safe harbor should be expanded to state political subdivisions.

Final Regulations

The December 2016 final regulations largely adopt the structure of the proposed regulations but with several modifications.

The final regulations amend 29 C.F.R. Section 2510.3-2(h) by adding the term "or qualified political subdivision" wherever the term "State" appears in the regulation. This means that the final regulation's safe harbor provisions generally apply in the same manner to qualified political subdivision payroll deduction savings programs as they apply to SSPs.

The final regulations add new subparagraph (h)(4) to 29 C.F.R. Section 2510.3-2, defining the term "qualified political subdivision" as any governmental unit of a state, including any city, county, or similar governmental body that:

Has implicit or explicit authority under state law to require employers' participation in the payroll deduction savings program.
Has a population equal to or greater than the population of the least populous state. As of 2015, there were approximately 136 general purpose political subdivisions with populations equal to or greater than the population of Wyoming (the least populous state). State does not include:
- the District of Columbia;
- Puerto Rico;
- the Virgin Islands;
- American Samoa;
- Guam; and
- Wake Island.

Unlike the proposed regulations, this requirement applies at the time of the enactment of the political subdivision's payroll deduction savings program, which prevents a city or locality from losing its qualified status because of population fluctuations.

Has no geographic overlap with another political subdivision that has enacted a payroll deduction savings program and is not within a state that has enacted a mandatory SSP for private-sector employees. This requirement applies at the time of the enactment of the political subdivision's payroll deduction savings program. This modified language excludes from the safe harbor political subdivisions located in states that have enacted a mandatory SSP, including:
- California;
- Connecticut;
- Illinois;
- Maryland; and
- Oregon.
Implements and administers a retirement plan for its own employees. A political subdivision satisfies this requirement by administering a defined benefit plan, an individual account plan, or both, for its own employees. This requirement, which was not included in the proposed regulations, also serves to limit the number of political subdivisions potentially eligible for the safe harbor.

The definition provided in subparagraph (h)(4) does not apply for other purposes under ERISA (such as for determining whether an entity is a political subdivision for purposes of the definition of a "governmental plan" in ERISA Section 3(32) (29 U.S.C. § 1002(32))).

In response to comments on the proposed regulations, the final regulations clarify that states and political subdivisions must assume responsibility for the security of payroll deductions. Specifically, subparagraph (h)(1)(iii) requires the state or qualified political subdivision to assume responsibility by:

Requiring that amounts withheld from wages by the employer be transmitted to the program promptly. Under paragraph (h)(5), employer wage withholdings are "deemed to be transmitted promptly" if they are transmitted to the program as of the earliest date on which they can reasonably be segregated from the employer's general assets, but in no event later than the last day of the month following the month in which they would otherwise have been payable to the employee in cash (see Practice Note, Contributions to Defined Contribution Plans: When Contributions Become Plan Assets).
Providing an enforcement mechanism to assure compliance with this requirement.

The state or qualified political subdivision under this program must:

Take measures to ensure that employees are notified of their rights under the program.
Invest the employee savings or select investment alternatives from which employees may choose.

29 C.F.R. Section 2510.3-2(h)(1)(vii) details the scope of the duties to the plan of employers whose employees participate in a retirement savings program established by a state or qualified political subdivision. These responsibilities include collecting and remitting payroll deductions, providing notices to employees, and recordkeeping.

For the safe harbor to apply:

Employer participation in the savings program must be required by state or qualified political subdivision law.
Employee participation in the program must be voluntary.

The final regulation does not bar smaller localities from establishing and maintaining payroll deduction savings programs for private-sector employees that fall outside the DOL's safe harbor regulation.

The DOL also issued a press release and a fact sheet providing an overview of the final regulations.

Practical Implications

By allowing qualified political subdivisions of the states to establish retirement savings programs for private sector employees, the final regulations increase the likelihood that employers in larger political subdivisions that do not sponsor employee benefit pension plans for their employees will be covered by a retirement savings program.

For more information on the SSPs, including the November 2015 proposed regulation that would establish a safe harbor so that certain SSPs providing for individual retirement plans (IRAs) established and maintained under state payroll deduction programs are not considered employee pension benefit plans under ERISA, see Article, Expert Q&A: Impact of DOL’s Proposed Safe Harbor on State-Based Savings Programs on Employers and the Private Retirement Plan Market.

DOL Issues Rules on Savings Programs Established by State Political Subdivisions | Practical Law