[Federal Register Volume 64, Number 117 (Friday, June 18, 1999)]
[Rules and Regulations]
[Pages 33000-33003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15410]
[[Page 32999]]
_______________________________________________________________________
Part VII
_______________________________________________________________________
Department of Labor
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Pension and Welfare Benefits Administration
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29 CFR Part 2509
Interpretive Bulletin 99-1; Payroll Deduction Programs for Individual
Retirement Accounts
Federal Register / Vol. 64, No. 117 / Friday, June 18, 1999/ Rules
and Regulations
[[Page 33000]]
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
29 CFR Part 2509
RIN 1210-AA70
Interpretive Bulletin 99-1; Payroll Deduction Programs for
Individual Retirement Accounts
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Interpretive bulletin.
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SUMMARY: In 1975, the Department of Labor (the Department) issued a
regulation describing circumstances under which the use of an employer
payroll deduction program for forwarding employee monies to an
individual retirement account (IRA) will not constitute an employee
pension benefit plan subject to Title I of the Employee Retirement
Income Security Act of 1974, as amended (ERISA). Since the issuance of
that regulation, the Department has issued several advisory opinions
answering common questions arising under the regulation. This
interpretive bulletin codifies the views of the Department provided in
those advisory opinions and, by restating those views in one, more
readily available document, is intended to assist employers in their
efforts to provide retirement savings opportunities to employees by
means of payroll deduction programs that do not fall within the reach
of Title I of ERISA.
DATES: Effective January 1, 1975.
FOR FURTHER INFORMATION CONTACT: John Keene at (202) 219-8521, Office
of Regulations and Interpretations, Pension and Welfare Benefits
Administration, U.S. Department of Labor, 200 Constitution Ave., NW,
Room N-5669, Washington, DC 20210. This telephone number is not a toll-
free number.
SUPPLEMENTARY INFORMATION: In order to provide a concise and ready
reference to its interpretations of ERISA, the Department publishes its
interpretive bulletins in the Rules and Regulations section of the
Federal Register. Published in this issue of the Federal Register is
ERISA Interpretive Bulletin 99-1, which interprets ERISA section
3(2)(A), 29 U.S.C. 1002(2)(A), and the Department's regulation issued
thereunder at 29 CFR 2510.3-2(d), and which codifies the advisory
opinions previously issued by the Department interpreting these
provisions. The Department is publishing this interpretive bulletin in
an effort to facilitate the use by employers of payroll withholding as
a vehicle for encouraging employee savings through individual
retirement accounts.
The Department has a strong interest in promoting retirement
savings by employees. The Department recognizes that some employers
currently do not provide pension plans for their employees. Although
retirement savings vehicles like the SIMPLE and the SEP, which impose
little in the way of administrative burdens or costs on employers, are
readily available, some employers are reluctant to assume even those
costs for a variety of reasons. The Department believes that it is
important that employees of such employers be encouraged to save
independently for retirement, and it is in the interest of the public
that employers be encouraged to provide opportunities for employee
retirement savings. One relatively inexpensive method that employers
may use to provide employees the opportunity to save for retirement is
making available to employees the possibility of regular payroll
deductions that are transmitted directly by the employer to individual
retirement accounts established by the employees. At present, there are
relatively few such programs in operation, and some employers have
indicated that they are reluctant to create payroll withholding
programs for individual retirement accounts because they are concerned
that such programs would be considered pension plans covered by ERISA
and therefore subject to the requirements of Title I of ERISA. The
Department is concerned that employers may not be aware of or
understand the long-established views of the Department with respect to
the ability of employers to establish and maintain employer payroll
withholding programs without such programs being considered pension
plans under ERISA. This guidance summarizes and restates those views in
order to provide employers the Department's views in one convenient,
easily accessible document.
Background
Section 3(2)(A) of Title I of ERISA provides that ``any plan, fund,
or program * * * established or maintained by an employer or by an
employee organization, or by both,'' shall be a pension plan ``to the
extent that by its express terms or as a result of surrounding
circumstances such plan, fund, or program * * * provides retirement
income to employees, or * * * results in a deferral of income by
employees for periods extending to the termination of covered
employment or beyond, regardless of the method of calculating the
contributions made to the plan, the method of calculating the benefits
under the plan or the method of distributing benefits from the plan.''
Under provisions of the Internal Revenue Code of 1986, as amended
(Code),1 individual taxpayers may establish individual
retirement accounts or individual retirement annuities (IRAs) that are
tax-favored if operated within the requirements of the Code. With
respect to Title I coverage of such IRAs, the Department has published
a regulation at 29 CFR 2510.3-2(d), establishing a safe harbor under
which an IRA established by employees and funded through payroll
deductions will not be considered to be a ``pension plan'' within the
meaning of section 3(2) of Title I when the conditions of the
regulation are satisfied. The regulation specifies that an IRA will not
be considered a ``pension plan'' when there are no contributions made
by an employer; employees participate in the IRA on a completely
voluntary basis; and the employer's activities with respect to the IRA
must be limited solely to permitting, without endorsement, the IRA
sponsor to publicize its program to employees; collecting contributions
through payroll deductions or dues checkoffs; and remitting those
contributions to the IRA sponsor. Finally, the regulation provides that
the employer may receive no consideration in any form, other than
reasonable compensation for services actually rendered in connection
with the payroll deduction or dues checkoff system. If one or more of
the conditions of the regulation are not met, the employer may be
considered to have established or maintained a pension plan. If an IRA
program is a pension plan under Title I of ERISA, it is subject to
Parts 1, 4, and 5 of Title I of ERISA, dealing with reporting and
disclosure requirements, fiduciary duties, and enforcement rights.
Pursuant to ERISA sections 201(6) and 301(a)(7), 29 U.S.C. 1051(6) and
1081 (a) (7), IRAs are exempt from Parts 2 and 3 of Title I, relating
to participation, vesting, and funding.2
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\1\ See generally Code sections 408, 408A.
\2\ Whether or not an IRA is part of a ``pension plan,'' the
prohibited transaction provisions of section 4975 of the Internal
Revenue Code are applicable to transactions by the IRA.
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As part of the Conference Report on the Taxpayer Relief Act of
1997, Congress expressed its view that ``employers that choose not to
sponsor a retirement plan should be encouraged to set up a payroll
deduction system to help employees save for retirement by making
payroll deduction contributions to their IRAs.'' H.R. Rep. No. 220,
105th
[[Page 33001]]
Cong., 1st Sess. at 755 (1997). The Department is aware that some
employers that would permit payroll deduction contributions to IRAs are
reluctant to do so if ERISA would require employers to permit employees
an unlimited choice of IRA sponsors for the payroll deduction IRAs in
order not to be considered to have established an ERISA plan.
Similarly, some employers desire to limit the choice of IRA sponsors to
one entity, but are concerned that doing so might make their payroll
deduction arrangements ERISA plans. Employers also have raised issues
concerning the extent to which they may encourage employee savings for
retirement without being viewed as endorsing an arrangement contrary to
the limitations in the Department's regulation.
In response to these specific concerns, and as part of the
Department's ongoing efforts to encourage retirement savings, the
Department is hereby summarizing and restating its views on employer
involvement in providing voluntary payroll deduction systems for
contributions to IRAs. This bulletin is intended to supplement 29 CFR
2510.3-2(d) by summarizing and restating the interpretive views of the
Department, as expressed in advisory opinions since promulgation of the
regulation, on various aspects of an employer's involvement in IRA
programs.3 This interpretive bulletin clarifies the
circumstances under which an employer may facilitate employees'
voluntary contributions to IRAs by providing an IRA payroll deduction
program without thereby inadvertently establishing or maintaining an
employee benefit pension plan within the scope of section 3(2) of
ERISA.
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\3\ See Advisory Opinions 77-29A (March 16, 1977), 81-80A (Dec.
18, 1981), 82-13A (Feb. 17, 1982), 82-18A (March 22, 1982), 82-27A
(June 16, 1982), 82-53A (Oct. 4, 1982), 83-1A (Jan. 13, 1983), 83-2A
(Jan. 13, 1983), 83-9A (February 9, 1983), 83-10A (February 9,
1983), 83-25A (May 24, 1983), 90-20A (June 15, 1990).
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Executive Order 12866
Under Executive Order 12866, the Department must determine whether
the regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f)(4), the order
defines a ``significant regulatory action'' as an action that is likely
to result in, among other things, a rule raising novel policy issues
arising out of the President's priorities.
Pursuant to the terms of the Executive Order, the Department has
determined that this regulation, which encourages employers to provide
the opportunity for employees to save for retirement by clarifying the
applicability of certain regulatory compliance issues, is consistent
with the President's priorities in encouraging retirement savings, and
as such is a ``significant regulatory action'' subject to OMB review
under Executive Order section 3(f)(4).
According to the Employee Benefits Supplement to the 1993 Current
Population Survey, over half of the private wage and salary workforce
does not have employment-based retirement coverage. Employment-based
retirement coverage arises from three separate components: access to
coverage made available through employer sponsorship of plans,
eligibility for coverage through satisfaction of age and service
requirements, and acceptance of coverage, where employee participation
in the employer's plan is voluntary.
Access to coverage is currently shown to differ significantly by
employer size. Approximately 82% of private wage and salary workers
employed by employers with 100 or more employees have access to
coverage. However, only 18% of employers of fewer than 25 employees,
and 45% of employers of 25 to 99 employees sponsor retirement plans. As
a result, about 30 million employees of small business do not have
access to employment-based retirement coverage. Furthermore, only about
12% of these employees choose to close this gap in retirement coverage
with an individual retirement account.
Small employers who do not sponsor retirement plans typically offer
a few principal reasons for their decision, including the
administrative complexity and burden associated with retirement plans,
and the risk of commitment to an ongoing expense in the face of the
financial uncertainties of the small business environment. Although
this interpretive bulletin is not expected to impact access to
employer-provided retirement coverage, it may benefit both employers
and employees. First, it offers improved access to the Department's
views concerning the regulatory requirements for payroll deduction
programs for individual retirement accounts. This may ease concerns
about the administrative complexity of offering access to individual
retirement savings vehicles, which normally requires only a very
limited financial commitment on the part of an employer in the form of
affording payroll deductions.
The interpretive bulletin may also facilitate individual savings
for retirement by those employees whose access to employer-sponsored
retirement coverage is most limited, by encouraging employers to make
individual retirement saving programs available in a manner convenient
to the employees. Although many employees without access to employer-
sponsored coverage are currently permitted to make use of an IRA as an
alternative method to save for retirement, the Department believes that
employees may be more likely to make use of an individual retirement
savings vehicle that is offered in an employment setting and features
regular withholding, than one which requires making individual
arrangements with an IRA sponsor.
Small Business Regulatory Enforcement Fairness Act
The interpretive bulletin being issued here is subject to the
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and has been transmitted to Congress and
the Comptroller General for review.
Paperwork Reduction Act
The interpretive bulletin being issued here is not subject to the
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.) because it does not contain an ``information collection request''
as defined in 44 U.S.C. 3502(3).
List of Subjects in 29 CFR Part 2509
Employee Benefit Plans, Pensions.
For the reasons set forth above, Part 2509 of Title 29 of The Code
of Federal Regulations is amended as follows:
Part 2509--Interpretive Bulletins Relating to the Employee
Retirement Income Security Act of 1974
1. The authority citation for part 2509 continues to read as
follows:
Authority: 29 U.S.C. 1135. Sections 2509.75-10 and 2509.75-2
issued under 29 U.S.C. 1052, 1053, 1054. Secretary of Labor's Order
No. 1-87 (52 FR 13139).
2. Add a new Sec. 2509.99-1 to read as follows:
Sec. 2509.99-1 Interpretive Bulletin Relating to Payroll Deduction
IRAs.
(a) Scope. This interpretive bulletin sets forth the Department
of Labor's (the Department's) interpretation of section 3(2)(A) of
the Employee Retirement Income Security Act of 1974, as amended,
(ERISA) and 29 CFR 2510.3-2(d), as applied to payroll deduction
programs established by employers 1 for the purpose of
enabling employees to make voluntary contributions to individual
retirement accounts or individual retirement annuities (IRAs)
[[Page 33002]]
described in section 408(a) or (b) or section 408A of the Internal
Revenue Code (the Code).
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\1\ The views expressed in this Interpretive Bulletin with
respect to payroll deduction programs of employers are also
generally applicable to dues checkoff programs of employee
organizations.
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(b) General. It has been the Department's long-held view that an
employer who simply provides employees with the opportunity for
making contributions to an IRA through payroll deductions does not
thereby establish a ``pension plan'' within the meaning of section 3
(2) (A) of ERISA. In this regard, 29 CFR 2510.3-2 (d) sets forth a
safe harbor under which IRAs will not be considered to be pension
plans when the conditions of the regulation are satisfied. Thus, an
employer may, with few constraints, provide to its employees an
opportunity for saving for retirement, under terms and conditions
similar to those of certain other optional payroll deduction
programs, such as for automatic savings deposits or purchases of
United States savings bonds, without thereby creating a pension plan
under Title I of ERISA. The guidance provided herein is intended to
clarify the application of the IRA safe harbor set forth at 29 CFR
2510.3-2 (d) and, thereby, facilitate the establishment of payroll
deduction IRAs.
(c) Employee Communications. (1) It is the Department's view
that, so long as an employer maintains neutrality with respect to an
IRA sponsor in its communications with its employees, the employer
will not be considered to ``endorse'' an IRA payroll deduction
program for purposes of 29 CFR 2510.3-2(d).2 An employer
may encourage its employees to save for retirement by providing
general information on the IRA payroll deduction program and other
educational materials that explain the advisability of retirement
savings, including the advantages of contributing to an IRA, without
thereby converting the program under which the employees' wages are
withheld for contribution into the IRAs into an ERISA covered plan.
However, the employer must make clear that its involvement in the
program is limited to collecting the deducted amounts and remitting
them promptly to the IRA sponsor and that it does not provide any
additional benefit or promise any particular investment return on
the employee's savings.
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\2\ The Department has specifically stated, in its Advisory
Opinions, that an employer may demonstrate its neutrality with
respect to an IRA sponsor in a variety of ways, including (but not
limited to) by ensuring that any materials distributed to employees
in connection with an IRA payroll deduction program clearly and
prominently state, in language reasonably calculated to be
understood by the average employee, that the IRA payroll deduction
program is completely voluntary; that the employer does not endorse
or recommend either the sponsor or the funding media; that other IRA
funding media are available to employees outside the payroll
deduction program; that an IRA may not be appropriate for all
individuals; and that the tax consequences of contributing to an IRA
through the payroll deduction program are generally the same as the
consequences of contributing to an IRA outside the program. The
employer would not be considered neutral, in the Department's view,
to the extent that the materials distributed to employees identified
the funding medium as having as one of its purposes investing in
securities of the employer or its affiliates or the funding medium
in fact has any significant investments in such securities. If the
IRA program were a result of an agreement between the employer and
an employee organization, the Department would view informational
materials that identified the funding medium as having as one of its
purposes investing in an investment vehicle that is designed to
benefit an employee organization by providing more jobs for its
members, loans to its members, or similar direct benefits (or the
funding medium's actual investments in any such investment vehicles)
as indicating the employee organization's involvement in the program
in excess of the limitations of 29 CFR 2510.3-2(d).
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(2)The employer may also do the following without converting a
payroll deduction IRA program into an ERISA plan: An employer may
answer employees' specific inquiries about the mechanics of the IRA
payroll deduction program and may refer other inquiries to the
appropriate IRA sponsor. An employer may provide to employees
informational materials written by the IRA sponsor describing the
sponsor's IRA programs or addressing topics of general interest
regarding investments and retirement savings, provided that the
material does not itself suggest that the employer is other than
neutral with respect to the IRA sponsor and its products; the
employer may request that the IRA sponsor prepare such informational
materials and it may review such materials for appropriateness and
completeness. The fact that the employer's name or logo is displayed
in the informational materials in connection with describing the
payroll deduction program would not in and of itself, in the
Department's view, suggest that the employer has ``endorsed'' the
IRA sponsor or its products, provided that the specific context and
surrounding facts and circumstances make clear to the employees that
the employer's involvement is limited to facilitating employee
contributions through payroll deductions.3
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\3\ For example, if the employer whose logo appeared on the
promotional materials provided a statement along the lines of in the
first sentence of footnote 5, the employer would not be considered
to have endorsed the IRA product.
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(d) Employer Limitations on the number of IRA sponsors offered
under the program. The Department recognizes that the cost of
permitting employees to make IRA contributions through payroll
deductions may be significantly affected by the number of IRA
sponsors to which the employer must remit contributions. It is the
view of the Department that an employer may limit the number of IRA
sponsors to which employees may make payroll deduction contributions
without exceeding the limitations of 29 CFR 2510.3-2(d), provided
that any limitations on, or costs or assessments associated with an
employee's ability to transfer or roll over IRA contributions to
another IRA sponsor is fully disclosed in advance of the employee's
decision to participate in the program. The employer may select one
IRA sponsor as the designated recipient for payroll deduction
contributions, or it may establish criteria by which to select IRA
sponsors, e.g., standards relating to the sponsor's provision of
investment education, forms, availability to answer employees'
questions, etc., and may periodically review its selectees to
determine whether to continue to designate them. However, an
employer may be considered to be involved in the program beyond the
limitations set forth in 29 CFR 2510.3-2(d) if the employer
negotiates with an IRA sponsor and thereby obtains special terms and
conditions for its employees that are not generally available to
similar purchasers of the IRA. The employer's involvement in the IRA
program would also be in excess of the limitations of the regulation
if the employer exercises any influence over the investments made or
permitted by the IRA sponsor.
(e) Administrative fees. The employer may pay any fee the IRA
sponsor imposes on employers for services the sponsor provides in
connection with the establishment and maintenance of the payroll
deduction process itself, without exceeding the limitations of 29
CFR 2510.3-2(d). Further, the employer may assume the internal costs
(such as for overhead, bookkeeping, etc) of implementing and
maintaining the payroll deduction program without reimbursement from
either employees or the IRA sponsor without exceeding the limits of
the regulation. However, if an employer pays, in connection with
operating an IRA payroll deduction program, any administrative,
investment management, or other fee that the IRA sponsor would
require employees to pay for establishing or maintaining the IRA,
the employer would, in the view of the Department, fall outside the
safe harbor and, as a result, may be considered to have established
a ``pension plan'' for its employees.
(f) Reasonable Compensation for Services. 29 CFR 2510.3-2(d)
provides that an employer may not receive any consideration in
connection with operating an IRA payroll deduction program, but may
be paid ``reasonable compensation for services actually rendered in
connection with payroll deductions or dues checkoffs.'' Employers
have asked whether ``reasonable compensation'' under section 2510.3-
2(d) includes payments from an IRA sponsor to an employer for the
employer's cost of operating the IRA payroll deduction program. It
is the Department's view that the IRA sponsor may make such
payments, to the extent that they constitute compensation for the
actual costs of the program to the employer. However, ``reasonable
compensation'' does not include any profit to the employer. See 29
CFR 2510.3-1(j), relating to group or group-type insurance programs.
For example, if an IRA sponsor offers to pay an employer an amount
equal to a percentage of the assets contributed by employees to IRAs
through payroll deduction, such an arrangement might exceed
``reasonable compensation'' for the services actually rendered by
the employer in connection with the IRA payroll deduction program.
An employer will also be considered to have received consideration
that is not ``reasonable compensation'' if the IRA sponsor agrees to
make or to permit particular investments of IRA contributions in
consideration for the employer's agreement to make a payroll
deduction program available to its employees, or if the IRA sponsor
agrees to extend credit to or for the benefit of the employer in
return for the employer's making payroll deduction available to the
employees.
(g) Additional rules when employer is IRA sponsor or affiliate
of IRA sponsor. Under
[[Page 33003]]
certain circumstances, an employer that offers IRAs in the normal
course of its business to the general public or that is an affiliate
4 of an IRA sponsor may provide its employees with the
opportunity to make contributions to IRAs sponsored by the employer
or the affiliate through a payroll deduction program, without
exceeding the limitations of Sec. 2510.3-2(d). If the IRA products
offered to the employees for investment of the payroll deduction
contributions are identical to IRA products the sponsor offers the
general public in the ordinary course of its business, and any
management fees, sales commissions, and the like charged by the IRA
sponsor to employees participating in the payroll deduction program
are the same as those charged by the sponsor to employees of non-
affiliated employers that establish an IRA payroll deduction
program, the Department has generally taken the position that this
alone will not cause the employer to be sufficiently involved in the
IRA program as an employer or to have received consideration of the
type prohibited under Sec. 2510.2(d)(iv) to warrant the program
being considered outside the safe harbor of the
regulation.5 Under such circumstances, the employer, in
offering payroll deduction contribution opportunities to its
employees, would appear to be acting generally as an IRA sponsor,
rather than as the employer of the individuals who make the
contributions.6
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\4\ For purposes of this interpretive bulletin, the definition
of ``affiliate'' in ERISA section 407(d)(7) applies.
\5\ While the funding medium offered by an employer that is an
IRA sponsor or an affiliate of an IRA sponsor might be considered an
employer security when offered to its own employees, the fact that
informational materials provided to employees identify the funding
medium as having as one of its purposes investing in securities of
the employer would not, in the Department's view, involve the
employer beyond the limits of 29 CFR 2510.3-2(d). Neither would the
fact that the funding medium may actually be so invested. However,
the Department would consider that an employer may have exceeded the
limitation of 2510.3-2(d) if the informational materials the
employer provides to employees suggest that the employer, in
providing the IRA payroll deduction program for purposes of
investing in employer securities, is acting as an employer in
relation to persons who participate in the program, rather than as
an IRA sponsor acting in the course of its ordinary business of
making IRA products available to the public.
\6\ However, if an employer that is an IRA sponsor waives
enrollment and management fees for its employees' IRAs, and it
normally charges those fees to members of the public who purchase
IRAs, the employer would be considered to be so involved in the
program as to be outside the safe harbor of the regulation.
Signed at Washington, DC, this 14th day of June, 1999.
Richard M. McGahey,
Assistant Secretary, Pension and Welfare Benefits Administration, U.S.
Department of Labor.
[FR Doc. 99-15410 Filed 6-17-99; 8:45 am]
BILLING CODE 4510-20-P