[Federal Register Volume 81, Number 168 (Tuesday, August 30, 2016)]
[Rules and Regulations]
[Pages 59464-59477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20639]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2510

RIN 1210-AB71


Savings Arrangements Established by States for Non-Governmental 
Employees

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Final rule.

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SUMMARY: This document describes circumstances in which state payroll 
deduction savings programs with automatic enrollment would not give 
rise to the establishment of employee pension benefit plans under the 
Employee Retirement Income Security Act of 1974, as amended (ERISA). 
This document provides guidance for states in designing such programs 
so as to reduce the risk of ERISA preemption of the relevant state 
laws. This document also provides guidance to private-sector employers 
that may be covered by such state laws. This rule affects individuals 
and employers subject to such state laws.

DATES: This rule is effective October 31, 2016.

FOR FURTHER INFORMATION CONTACT: Janet Song, Office of Regulations and 
Interpretations, Employee Benefits Security Administration, (202) 693-
8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

I. Background

    Approximately 39 million employees in the United States do not have 
access to a retirement savings plan through their employers.\1\ Even 
though such employees could set up and contribute to their own 
individual retirement accounts or annuities (IRAs), the great majority 
do not save for retirement. In fact, less than 10 percent of all 
workers contribute to a plan outside of work.\2\
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    \1\ National Compensation Survey, Bureau of Labor Statistics 
(July 2016), Employee Benefits in the United States--March 2016 
(http://www.bls.gov/news.release/pdf/ebs2.pdf). These data show that 
66 percent of 114 million private-sector workers have access to a 
retirement plan through work. Therefore, 34 percent of 114 million 
private-sector workers (39 million) do not have access to a 
retirement plan through work.
    \2\ See The Pew Charitable Trust, ``How States Are Working to 
Address The Retirement Savings Challenge,'' (June 2016) (http://
www.pewtrusts.org/~/media/assets/2016/06/
howstatesareworkingtoaddresstheretirementsavingschallenge.pdf).
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    For older Americans, inadequate retirement savings can mean 
sacrificing or skimping on food, housing, health care, transportation, 
and other necessities. In addition, inadequate retirement savings 
places greater stress on state and federal social welfare programs as 
guaranteed sources of income and economic security for older Americans. 
Accordingly, states have a substantial governmental interest to 
encourage retirement savings in order to protect the economic security 
of their residents.\3\ Concern over the low rate of saving among 
American workers and the lack of access to workplace plans for many of 
those workers has led some state governments to expand access to 
savings programs for their residents and other individuals employed in 
their jurisdictions by creating their own programs and requiring 
employer participation.\4\
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    \3\ See Christian E. Weller, Ph.D., Nari Rhee, Ph.D., and 
Carolyn Arcand, ``Financial Security Scorecard: A State-by-State 
Analysis of Economic Pressures Facing Future Retirees,'' National 
Institute on Retirement Security (March 2014) (www.nirsonline.org/index.php?option=com_content&task=view&id=830&Itemid=48).
    \4\ See, e.g., Kathleen Kennedy Townsend, Chair, Report of the 
Governor's Task Force to Ensure Retirement Security for All 
Marylanders, ``1,000,000 of Our Neighbors at Risk: Improving 
Retirement Security for Marylanders'' (2015).
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A. State Payroll Deduction Savings Initiatives

    One approach some states have taken is to establish state payroll 
deduction savings programs. Through automatic enrollment such programs 
encourage employees to establish tax-favored IRAs funded by payroll 
deductions.\5\ California, Connecticut, Illinois, Maryland, and Oregon, 
for example, have adopted laws along these lines.\6\ These initiatives 
generally require certain employers that do not offer workplace savings 
arrangements to

[[Page 59465]]

automatically deduct a specified amount of wages from their employees' 
paychecks unless the employee affirmatively chooses not to participate 
in the program.\7\ The employers are also required to remit the payroll 
deductions to state-administered IRAs established for the employees. 
These programs also allow employees to stop the payroll deductions at 
any time. The programs, as currently designed, do not require, provide 
for or permit employers to make matching or other contributions of 
their own into the employees' accounts. In addition, the state 
initiatives typically require that employers provide employees with 
information prepared or assembled by the program, including information 
on employees' rights and various program features.
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    \5\ These could include individual retirement accounts described 
in 26 U.S.C. 408(a), individual retirement annuities described in 26 
U.S.C. 408(b), and Roth IRAs described in 26 U.S.C. 408A.
    \6\ California Secure Choice Retirement Savings Trust Act, Cal. 
Gov't Code Sec. Sec.  100000-100044 (2012); Connecticut Retirement 
Security Program Act, P.A. 16-29 (2016); Illinois Secure Choice 
Savings Program Act, 820 Ill. Comp. Stat. 80/1-95 (2015); Maryland 
Small Business Retirement Savings Program Act, Ch. 324 (H.B. 
1378)(2016); Oregon Retirement Savings Board Act, Ch. 557 (H.B. 
2960)(2015).
    \7\ Workplace savings arrangements may include plans such as 
those qualified under or described in 26 U.S.C. 401(a), 401(k), 
403(a), 403(b), 408(k) or 408(p), and may constitute either ERISA or 
non-ERISA arrangements.
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B. ERISA's Regulation of Employee Benefit Plans

    Section 3(2) of ERISA defines the terms ``employee pension benefit 
plan'' and ``pension plan'' broadly to mean, in relevant part ``[A]ny 
plan, fund, or program which was heretofore or is hereafter established 
or maintained by an employer or by an employee organization, or by 
both, 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. . . .'' \8\ The Department and the 
courts have broadly interpreted ``established or maintained'' to 
require only minimal involvement by an employer or employee 
organization.\9\ An employer could, for example, establish an employee 
benefit plan simply by purchasing insurance products for individual 
employees. These expansive definitions are essential to ERISA's purpose 
of protecting plan participants by ensuring the security of promised 
benefits.
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    \8\ 29 U.S.C. 1002(2)(A). ERISA's Title I provisions ``shall 
apply to any employee benefit plan if it is established or 
maintained . . . by any employer engaged in commerce or in any 
industry or activity affecting commerce.'' 29 U.S.C. 1003(a). 
Section 4(b) of ERISA includes express exemption from coverage under 
Title I for governmental plans, church plans, plans maintained 
solely to comply with applicable state laws regarding workers 
compensation, unemployment, or disability, certain foreign plans, 
and unfunded excess benefit plans. 29 U.S.C. 1003(b).
    \9\ Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982); 
Harding v. Provident Life and Accident Ins. Co., 809 F. Supp. 2d 
403, 415-419 (W.D. Pa. 2011); DOL Adv. Op. 94-22A (July 1, 1994).
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    Due to the broad scope of ERISA coverage, some stakeholders have 
expressed concern that state payroll deduction savings programs, such 
as those enacted in California, Connecticut, Illinois, Maryland, and 
Oregon may cause covered employers to inadvertently establish ERISA-
covered plans, despite the express intent of the states to avoid such a 
result. This uncertainty, together with ERISA's broad preemption of 
state laws that ``relate to'' private-sector employee pension benefit 
plans has created a serious impediment to wider adoption of state 
payroll deduction savings programs.\10\
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    \10\ ERISA's preemption provision, section 514(a) of ERISA, 29 
U.S.C. 1144(a), provides that the Act ``shall supersede any and all 
State laws insofar as they . . . relate to any employee benefit 
plan'' covered by the statute. The U.S. Supreme Court has long held 
that ``[a] law `relates to' an employee benefit plan, in the normal 
sense of the phrase, if it has a connection with or reference to 
such a plan.'' Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 
(1983) (footnote omitted). In various decisions, the Court has 
concluded that ERISA preempts state laws that: (1) mandate employee 
benefit structures or their administration; (2) provide alternative 
enforcement mechanisms; or (3) bind employers or plan fiduciaries to 
particular choices or preclude uniform administrative practice, 
thereby functioning as a regulation of an ERISA plan itself.
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C. 1975 IRA Payroll Deduction Safe Harbor

    Although IRAs generally are not set up by employers or employee 
organizations, ERISA coverage may be triggered if an employer (or 
employee organization) does, in fact, ``establish or maintain'' an IRA 
arrangement for its employees. 29 U.S.C. 1002(2)(A).\11\ In contexts 
not involving state payroll deduction savings programs, the Department 
has previously issued guidance to help employers determine whether 
their involvement in certain voluntary payroll deduction savings 
arrangements involving IRAs would result in the employers having 
established or maintained ERISA-covered plans. That guidance included a 
1975 ``safe harbor'' regulation under 29 CFR 2510.3-2(d) setting forth 
circumstances under which IRAs funded by payroll deductions would not 
be treated as ERISA plans, and a 1999 Interpretive Bulletin clarifying 
that certain ministerial activities will not cause an employer to have 
established an ERISA plan simply by facilitating such payroll deduction 
savings arrangements.\12\
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    \11\ ERISA section 404(c)(2) (simple retirement accounts); 29 
CFR 2510.3-2(d) (1975 IRA payroll deduction safe harbor); 29 CFR 
2509.99-1 (interpretive bulletin on payroll deduction IRAs); Cline 
v. The Industrial Maintenance Engineering & Contracting Co., 200 
F.3d 1223, 1230-31 (9th Cir. 2000).
    \12\ See 29 CFR 2510.3-2(d); 40 FR 34526 (Aug. 15, 1975); 29 CFR 
2509.99-1. The Department has also issued advisory opinions 
discussing the application of the safe harbor regulation to 
particular facts. See, e.g., DOL Adv. Op. 82-67A (Dec. 21, 1982); 
DOL Adv. Op. 84-25A (June 18, 1984).
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    The 1975 regulation provides that certain IRA payroll deduction 
arrangements are not subject to ERISA if four conditions are met: (1) 
The employer makes no contributions; (2) employee participation is 
``completely voluntary''; (3) the employer does not endorse the program 
and acts as a mere facilitator of a relationship between the IRA vendor 
and employees; and (4) the employer receives no consideration except 
for its own expenses.\13\ In essence, if the employer merely allows a 
vendor to provide employees with information about an IRA product and 
then facilitates payroll deduction for employees who voluntarily 
initiate action to sign up for the vendor's IRA, the employer will not 
have established, and the arrangement will not be, an ERISA pension 
plan.
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    \13\ 29 CFR 2510.3-2(d) (1975 IRA Payroll Deduction Safe 
Harbor).
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    With regard to the 1975 IRA Payroll Deduction Safe Harbor's 
condition requiring that an employee's participation be ``completely 
voluntary,'' the Department intended this term to mean that the 
employee's enrollment in the program must be self-initiated. In other 
words, under the safe harbor, the decision to enroll in the program 
must be made by the employee, not the employer. If the employer 
automatically enrolls employees in a benefit program, the employees' 
participation would not be ``completely voluntary'' and the employer's 
actions would constitute the ``establishment'' of a pension plan, 
within the meaning of ERISA section 3(2). This is true even if the 
employee can affirmatively opt out of the program.\14\ Thus, 
arrangements that allow employers to automatically enroll employees--as 
do all existing state payroll deduction savings programs--do not 
satisfy the condition in the safe harbor that the employees' 
participation be ``completely voluntary,'' even if the employees are 
permitted to ``opt out'' of the program. Consequently, such programs 
would fall outside the 1975 safe harbor and could be subject to ERISA.
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    \14\ See generally Proposed rule on Savings Arrangements 
Established by States for Non-Governmental Employees, 80 FR 72006, 
72008 (November 18, 2015) (The completely voluntary condition in the 
1975 safe harbor is ``important because where the employer is acting 
on his or her own volition to provide the benefit program, the 
employer's actions--e.g., requiring an automatic enrollment 
arrangement--would constitute its `establishment' of a plan within 
the meaning of ERISA's text, and trigger ERISA's protections for the 
employees whose money is deposited into an IRA.'').

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[[Page 59466]]

D. 2015 Proposed Regulation

    At the 2015 White House Conference on Aging, the President directed 
the Department to publish guidance to support state efforts to promote 
broader access to workplace retirement savings opportunities for 
employees. On November 18, 2015, the Department published in the 
Federal Register a proposed regulation providing that for purposes of 
Title I of ERISA the terms ``employee pension benefit plan'' and 
``pension plan'' do not include an IRA established and maintained 
pursuant to a state payroll deduction savings program if that program 
satisfies all of the conditions set forth in the proposed rule.\15\ By 
articulating the types of state payroll deduction savings programs that 
would be exempt from ERISA, the proposal sought to create a safe harbor 
for the states and employers and thus remove uncertainty regarding 
Title I coverage of such state payroll deduction savings programs and 
the IRAs established and maintained pursuant to them. In the 
Department's view, courts would be less likely to find that statutes 
creating state programs in compliance with the proposed safe harbor are 
preempted by ERISA.
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    \15\ 80 FR 72006 (November 18, 2015). On the same day that the 
NPRM was published, the Department also published an interpretive 
bulletin (IB) explaining the Department's views concerning the 
application of ERISA to certain state laws designed to expand 
retirement savings options for private-sector workers through ERISA-
covered retirement plans. 80 FR 71936 (codified at 29 CFR 2509.2015-
02). A number of commenters on the NPRM discussed ERISA preemption 
and other issues that the commenters perceived as raised by the 
analysis and conclusions in the IB. Comments on the IB are beyond 
the scope of this regulation and are not discussed in this document.
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    The proposal parallels the 1975 IRA Payroll Deduction Safe Harbor 
in that it requires the employer's involvement to be no more than 
ministerial. 29 CFR 2510.3-2(d).\16\ In both contexts, limited employer 
involvement in the arrangement is the key to finding that the employer 
has not established or maintained an employee pension benefit plan. The 
proposal added the conditions that employer involvement must be 
required under state law, and that the state must establish and 
administer the program pursuant to state law. Significantly, and in 
recognition of the fact that several state initiatives provide for 
automatic enrollment and therefore would not satisfy the Department's 
1975 IRA Payroll Deduction Safe Harbor condition that employee 
participation in such programs be ``completely voluntary,'' the 
proposal also adopted a new condition that employee participation be 
``voluntary.'' Because the new safe harbor requires that the employer's 
involvement in the program be required and circumscribed by state law, 
the 1975 safe harbor's condition that employee participation be 
``completely voluntary'' has been modified to permit state-required 
automatic employee enrollment procedures.
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    \16\ The Department has issued similar safe harbor regulations 
for group and group-type insurance arrangements, 29 CFR 2510.3-1(j) 
and for tax sheltered annuities, 29 CFR 2510.3-2(f).
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    The Department received and analyzed approximately 70 public 
comments in response to the proposed rule. The Department is issuing a 
final rule that contains some changes and clarifications in response to 
questions raised in the public comments. Those changes are described 
herein.

II. Overview of Final Rule

    The final rule largely adopts the proposal's general structure. 
Thus, new paragraph (h) of Sec.  2510.3-2 continues to provide in the 
final rule that, for purposes of Title I of ERISA, the terms ``employee 
pension benefit plan'' and ``pension plan'' do not include an 
individual retirement plan (as defined in 26 U.S.C. 7701(a)(37)) \17\ 
established and maintained pursuant to a state payroll deduction 
savings program if the program satisfies all of the conditions set 
forth in paragraphs (h)(1)(i) through (xi) of the regulation. Thus, if 
these conditions are satisfied, neither the state nor the employer is 
establishing or maintaining a pension plan subject to Title I of ERISA.
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    \17\ The term ``individual retirement plan'' includes both 
traditional IRAs (individual retirement accounts described in 
section 408(a) and individual retirement annuities described in 
section 408(b) of the Code) and Roth IRAs under section 408A of the 
Code.
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    Most of the new safe harbor's conditions focus on the state's role 
in the program. The program must be specifically established pursuant 
to state law. 29 CFR 2510.3-2(h)(1)(i). The program is implemented and 
administered by the state that established the program. 29 CFR 2510.3-
2(h)(1)(ii). The state must be responsible for investing the employee 
savings or for selecting investment alternatives from which employees 
may choose. Id. The state must be responsible for the security of 
payroll deductions and employee savings. 29 CFR 2510.3-2(h)(1)(iii). 
The state must adopt measures to ensure that employees are notified of 
their rights under the program, and must create a mechanism for 
enforcing those rights. 29 CFR 2510.3-2(h)(1)(iv). The state may 
implement and administer the program through its governmental agency or 
instrumentality. 29 CFR 2510.3-2(h)(1)(ii). The state or its 
governmental agency or instrumentality may also contract with others to 
operate and administer the program. 29 CFR 2510.3-2(h)(2)(ii).
    Many of the rule's conditions limit the employer's role in the 
program. The employer's activities must be limited to ministerial 
activities such as collecting payroll deductions and remitting them to 
the program. 29 CFR 2510.3-2(h)(1)(vii)(A). The employer may provide 
notice to the employees and maintain records of the payroll deductions 
and remittance of payments. 29 CFR 2510.3-2(h)(1)(vii)(B). The employer 
may provide information to the state necessary for the operation of the 
program. 29 CFR 2510.3-2(h)(1)(vii)(C). The employer may distribute 
program information from the state program to employees. 29 CFR 2510.3-
2(h)(1)(vii)(D). Employers cannot contribute employer funds to the 
IRAs. 29 CFR 2510.3-2(h)(1)(viii). Employer participation in the 
program must be required by state law. 29 CFR 2510.3-2(h)(1)(ix).
    Other critical conditions focus on employee rights. For example, 
employee participation in the program must be voluntary. 29 CFR 2510.3-
2(h)(1)(v). Thus, if the program requires automatic enrollment, 
employees must be given adequate advance notice and have the right to 
opt out. 29 CFR 2510.3-2(h)(2)(iii). In addition, employees must be 
notified of their rights under the program, including the mechanism for 
enforcement of those rights. 29 CFR 2510.3-2(h)(1)(iv).

III. Changes to Proposal Based on Public Comment

A. Ability To Experiment

    The final rule contains new regulatory text in paragraph (a) of 
Sec.  2510.3-2 making it clear that the rule's conditions on state 
payroll deduction savings programs simply create a safe harbor. A safe 
harbor approach to these arrangements provides to states clear guide 
posts and certainty, yet does not by its terms prohibit states from 
taking additional or different action or from experimenting with other 
programs or arrangements. Although the Department expressed this view 
in the proposal's preamble, commenters requested that this safe harbor 
position be explicitly incorporated into the operative text, just as 
the Department did previously under Sec.  2510.3-1 with respect to 
certain practices excluded from the definition of ``welfare plan.'' 
\18\ The Department

[[Page 59467]]

agrees that the final regulation would be improved by adding regulatory 
text explicitly recognizing that the regulation is a safe harbor. 
Adding such regulatory text clarifies the Department's intent and 
conforms this section with Sec.  2510.3-1 (relating to welfare plans).
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    \18\ See Comment Letter # 58 (Joint Submission from Service 
Employee International Union, National Education Association, 
American Federation of Teachers, American Federation of State County 
and Municipal Employees, and National Conference on Public Employee 
Retirement Systems) (``Although the preamble to the Proposed Rule 
clearly states that it is providing an additional `safe harbor' that 
defined an arrangement that is not subject to ERISA coverage, that 
statement does not appear within the body of the regulation itself. 
It would be helpful to those states that may wish to experiment by 
adopting programs that are not specifically and clearly covered by 
the safe harbor but that are consistent with its meaning and intent 
if the [final rule] were to include such a statement.'').
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    Accordingly, the final rule revises paragraph (a) of Sec.  2510.3-2 
by deleting some outdated text and adding the following sentence: ``The 
safe harbors in this section should not be read as implicitly 
indicating the Department's views on the possible scope of section 
3(2).'' By adding this sentence to paragraph (a) of Sec.  2510.3-2, the 
sentence then modifies all plans, funds and programs subsequently 
listed and discussed in paragraphs (b) through (h) of Sec.  2510.3-
2.\19\ In different contexts in the past, the Department has stated its 
view that various of the programs listed in paragraphs (b) through (g) 
of Sec.  2510.3-2 are safe harbors and do not preclude the possibility 
that plans, funds, and programs not meeting the relevant conditions in 
the regulation might also not be pension plans within the meaning of 
ERISA. Thus, this revision to paragraph (a) merely clarifies this view 
in operative text for these other programs.
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    \19\ The plans, funds, and programs described in 29 CFR 2510.3-2 
are severance pay plans (see paragraph (b)), bonus programs (see 
paragraph (c)), 1975 IRA payroll deduction (see paragraph (d)), 
gratuitous payments to pre-ERISA retirees (see paragraph (e)), tax 
sheltered annuities (see paragraph (f)), supplemental payment plans 
(see paragraph (g)) and certain state savings programs (see new 
paragraph (h)).
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B. Ability To Choose Investments and Control Leakage

    The final rule removes the condition from paragraph (h)(1)(vi) of 
the proposal that would have prohibited states from imposing any 
restrictions, direct or indirect, on employee withdrawals from their 
IRAs. The proposal provided that a state program must not ``require 
that an employee or beneficiary retain any portion of contributions or 
earnings in his or her IRA and does not otherwise impose any 
restrictions on withdrawals or impose any cost or penalty on transfers 
or rollovers permitted under the Internal Revenue Code.'' The purpose 
of this prohibition, as explained in the proposal's preamble, was to 
make sure that employees would have meaningful control over the assets 
in their IRAs.\20\
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    \20\ 80 FR 72006, 72010 (Nov. 18, 2015).
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    The first reason commenters gave for removing this condition was 
that it would interfere with the states' ability to guard against 
``leakage'' (i.e., the use of long-term savings for short-term 
purposes). Absent such prohibition, states might seek to prevent 
leakage by, for example, requiring workers to wait until a specified 
age (e.g., age 55 or 60) before they have access to their money, 
subject to an exception for ``hardship withdrawals.'' Since the states 
deal directly with the effects of geriatric poverty, they have a 
substantial interest in controlling leakage, and the proposal's 
prohibition against withdrawal restrictions could undermine that 
interest.\21\
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    \21\ See Comment Letter # 39 (AARP) (``Increasingly, states are 
realizing that if retired individuals do not have adequate income, 
they are likely to be a burden on state resources for housing, food, 
and medical care. For example, according to a recent Utah study, the 
total cost to taxpayers for new retirees in that state will top $3.7 
billion over the next 15 years.'').
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    The commenters' second reason for removal was that the proposal's 
prohibition would interfere with the states' ability to design programs 
with diversified investment strategies, including investment options 
where immediate liquidity is not possible, but where participants may 
see better performance with lower costs. For instance, some state 
payroll deduction savings programs may wish to use default or 
alternative investment options that include partially or fully 
guaranteed returns but do not provide immediate liquidity. In addition, 
some state payroll deduction savings programs may wish to pool and 
manage default investments using strategies and investments similar to 
those for defined benefit plans covering state employees, which 
typically include lock ups and restrictions ranging from months to 
years. The commenters assert that these long-term investments tend to 
provide greater returns than similar investments with complete 
liquidity (such as daily-valued mutual or bank funds), but would not 
have been permitted under the proposal's prohibition.
    The third reason given by commenters was that the proposal's 
prohibition would interfere with the states' ability to offer lifetime 
income options, such as annuities. One consumer organization commented, 
for instance, that the proposed prohibition ``may have the effect of 
preventing states from requiring an annuity payout (or even permitting 
an annuity payout option). . . .'' \22\ Another commenter stated, ``as 
drafted, the withdrawal restriction can be read to apply at the 
investment-product level, which could impede an arrangement's ability 
to offer an investment that includes lifetime income features. Absence 
of immediate liquidity is an actuarially necessary element for many 
products that guarantee income for life, and there is no policy basis 
for excluding investment options that incorporate such features.'' \23\
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    \22\ Comment Letter # 65 (Pension Rights Center).
    \23\ Comment Letter # 44 (TIAA-CREF).
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    The fourth reason given for removal was that the proposal's 
prohibition was not relevant to determining under ERISA section 3(2) 
whether the state program, including employer behavior thereunder, 
constitutes ``establishment or maintenance'' of an employee benefit 
plan; or the Department's stated goal of crafting conditions that would 
limit employer involvement.
    The Department agrees in many respects with these arguments and has 
removed this prohibition from the final regulation. Although the 
Department included this prohibition in the proposal to make sure that 
employees would have meaningful control over the assets in their IRAs, 
the Department has concluded that determinations regarding the 
necessity for such a prohibition are better left to the states. Based 
on established principles of federalism, it is more appropriately the 
role of the states, and not the Department, to determine what 
constitutes meaningful control of IRA assets in this non-ERISA context, 
subject to any federal law under the Department's jurisdiction--in this 
case, the prohibited transaction provisions in section 4975 of the 
Internal Revenue Code (Code)--applicable to IRAs.

C. Ability To Use Tax Incentives or Credits

    The final rule modifies the condition in the proposal that would 
have prohibited employers from receiving more than their actual costs 
of complying with state payroll deduction savings programs. The 
proposal provided that employers may not receive any ``direct or 
indirect consideration in the form of cash or otherwise, other than the 
reimbursement of actual costs of the program to the employer. . . .'' 
The purpose of this provision was to allow employers to recoup actual 
costs of complying with the state law, but

[[Page 59468]]

nothing in excess of that amount, in order to avoid economic incentives 
that might effectively discourage sponsorship of ERISA plans in the 
future.
    Several commenters urged the Department to moderate that proposal's 
prohibition and grant the states more flexibility to determine the most 
effective ways to compensate employers for their role in the state 
program. The majority of commenters on this issue indicated that states 
should be able to reward employer behavior with tax incentives or 
credits.\24\ The states themselves who commented believe it should be 
within their discretion whether to provide support to employers that 
participate in the state program, and to determine the type and amount 
of that support, particularly where participation in the state program 
is required by the state.\25\ Many commenters also pointed out that it 
would be very difficult if, as the proposal required, the state had to 
determine actual cost for every individual employer before providing a 
reimbursement.\26\ One commenter, for example, stated ``it may be 
exceedingly difficult if not impossible for states to accurately 
calculate the `actual cost' accrued by each participating employer, and 
it may be impractical for the amount of each tax credit to vary by 
employer.'' \27\ The commenters generally recommended that the rule 
clearly establish that states are able to use tax incentives or 
credits, whether or not such incentives or credits vary in amount by 
employer or represent actual costs.
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    \24\ See, e.g., Comment Letter # 65 (Pension Rights Center).
    \25\ See, e.g., Comment Letter # 54 (Oregon Retirement Savings 
Board). See also Comment Letter #37 (Maryland Commission on 
Retirement Security and Savings).
    \26\ See, e.g., Comment Letter # 63 (Tax Alliance for Economic 
Mobility).
    \27\ Comment Letter # 56 (Aspen Institute Financial Security 
Program).
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    The Department does not intend that cost reimbursement be difficult 
or impractical for states to implement. Accordingly, paragraph 
(h)(1)(xi) of the final rule does not require employers' actual costs 
to be calculated. Instead, it provides that the maximum consideration 
the state may provide to an employer is limited to a reasonable 
approximation of the employer's costs (or a typical employer's costs) 
under the program. This would allow the state to provide consideration 
in a flat amount based on a typical employer's costs or in different 
amounts based on an estimate of an employer's expenses. This standard 
accommodates the commenters' request for flexibility and confirms that 
states may use tax incentives or credits, without regard to whether 
such incentives or credits equal the actual costs of the program to the 
employer. In order to remain within the safe harbor under this 
approach, however, states must ensure that their economic incentives 
are narrowly tailored to reimbursing employers for their costs under 
the payroll deduction savings programs. States may not provide rewards 
for employers that incentivize them to participate in state programs in 
lieu of establishing employee pension benefit plans.

D. Ability To Focus on Employers That Do Not Offer Savings Arrangements

    The final rule modifies paragraph (h)(2)(i) of the proposal, which 
stated that a state program meeting the regulation's conditions would 
not fail to qualify for the safe harbor merely because the program is 
``directed toward those employees who are not already eligible for some 
other workplace savings arrangement.'' Even though this refers to a 
provision (directing the program toward such employees) that is not a 
requirement or condition of the safe harbor but is only an example of a 
feature that states may incorporate when designing their automatic IRA 
programs, some commenters maintained that this language in paragraph 
(h)(2)(i) could encourage states to focus on whether particular 
employees of an employer are eligible to participate in a workplace 
savings arrangement. They maintained that such a focus could be overly 
burdensome for certain employers because they may have to monitor their 
obligations on an employee-by-employee basis, with some employees being 
enrolled in the state program, some in the workplace savings 
arrangement, and others migrating between the two arrangements. Such 
burden, they maintained, could also give employers an incentive not to 
offer a retirement plan for their employees. The Department sees merit 
in these comments and also understands that the relevant laws enacted 
thus far by the states have been directed toward those employers that 
do not offer any workplace savings arrangement, rather than focusing on 
employees who are not eligible for such programs. Thus, the final rule 
provides that such a program would not fail to qualify for the safe 
harbor merely because it is ``directed toward those employers that do 
not offer some other workplace savings arrangement.'' This language 
will reduce employer involvement in determining employee eligibility 
for the state program, and it accurately reflects current state laws.

E. Ability of Governmental Agencies and Instrumentalities To Implement 
and Administer State Programs

    The final rule clarifies the role of governmental agencies and 
instrumentalities in implementing and administering state programs. 
Some conditions in the proposal referred to ``State'' while other 
conditions referred to ``State . . . or . . . governmental agency or 
instrumentality of the State.'' This confused some commenters who 
wondered whether the Department intended to limit who could satisfy 
particular conditions by use of these different terms. The commenters 
pointed out that state legislation creating payroll deduction savings 
programs typically also creates boards to design, implement and 
administer such programs on a day-to-day basis and grants to these 
boards administrative rulemaking authority over the program. The 
commenters requested clarification on whether the state laws 
establishing the programs would have to specifically address every 
condition in the safe harbor, or whether such boards would be able to 
address any condition not expressly addressed in the legislation 
through their administrative rulemaking authority.
    In response to these comments, the final regulation uses the phrase 
``State (or governmental agency or instrumentality of the State)'' 
throughout to clarify that, so long as the program is specifically 
established pursuant to state law, a state program is eligible for the 
safe harbor even if the state law delegates a wide array of 
implementation and administrative authority (such as authority for 
rulemaking, contracting with third-party vendors, and investing) to a 
board, committee, department, authority, State Treasurer, office (such 
as Office of the Treasurer), or other similar governmental agency or 
instrumentality of the state. See, e.g., Sec.  2510.3-2(h)(1) (iii), 
(iv), (vi), (vii), (xi), and (h)(2)(ii). In addition, the phrase ``by a 
State'' was removed from paragraph (h)(1)(i) and the word ``implement'' 
was added to paragraph (h)(1)(ii) for further clarification. A 
conforming amendment also was made to paragraph (h)(2)(iii) to reflect 
the fact that state legislatures may delegate authority to set or 
change the state program's automatic contribution and escalation rates 
to a governmental agency or instrumentality of the state as noted 
above.

[[Page 59469]]

IV. Comments Not Requiring Changes to Proposal

A. Applicability of Prohibited Transaction Protections--Code Sec.  4975

    A number of commenters sought clarification on whether, and to what 
extent, the protections in the prohibited transaction provisions in 
section 4975 of the Code would apply to the state programs covered by 
the safe harbor. These commenters expressed concern regarding a 
perceived lack of federal consumer protections under the proposed safe 
harbor for state payroll deduction savings programs, because such safe 
harbor arrangements would be exempt from ERISA coverage (including all 
of ERISA's protective conditions).\28\
---------------------------------------------------------------------------

    \28\ Comment Letter # 29 (Securities Industry Financial 
Management Association); Comment Letter # 55 (U.S. Chamber of 
Commerce); Comment Letter # 62 (Investment Company Institute).
---------------------------------------------------------------------------

    The safe harbor in the final rule is expressly conditioned on the 
states' use of IRAs, as defined in section 7701(a)(37) of the Code. 29 
CFR 2510.3-2(h)(1). Such IRAs are subject to applicable provisions of 
the Code, including Code section 4975. Section 4975 of the Code 
includes prohibited transaction provisions very similar to those in 
ERISA, which protect participants and beneficiaries in ERISA plans by 
identifying and disallowing categories of conduct between plans and 
disqualified persons, as well as conduct involving fiduciary self-
dealing. These prohibited transaction provisions are primarily enforced 
through imposition of excise taxes by the Internal Revenue Service.
    Consequently, the final regulation protects employees from an array 
of transactions involving disqualified persons that could be harmful to 
employees' savings. For instance, absent an available prohibited 
transaction exemption,\29\ the safe harbor effectively prohibits a sale 
or exchange, or leasing, of any property between an IRA and a 
disqualified person; the lending of money or other extension of credit 
between an IRA and a disqualified person; the furnishing of goods, 
services, or facilities between an IRA and a disqualified person; a 
transfer to, or use by or for the benefit of, a disqualified person of 
the income or assets of an IRA; any act by a disqualified person who is 
a fiduciary whereby he or she deals with the income or assets of an IRA 
in his or her own interest or for his or her own account; and any 
consideration for his or her own personal account by any disqualified 
person who is a fiduciary from any party dealing with the IRA in 
connection with a transaction involving the income or assets of the 
IRA. 26 U.S.C. 4975(c)(1)(A)-(F).
---------------------------------------------------------------------------

    \29\ See Code section 4975(d) (enumerating several statutory 
prohibited transaction exemptions); Code section 4975(c)(2) 
(authorizing Secretary of the Treasury to grant exemptions from the 
prohibited transaction provisions in Code section 4975) and 
Reorganization Plan No. 4 of 1978 (5 U.S.C. App. at 237 (2012) 
(generally transferring the authority of the Secretary of the 
Treasury to grant administrative exemptions under Code section 4975 
to the Secretary of Labor).
---------------------------------------------------------------------------

    Section 4975 imposes a tax on each prohibited transaction to be 
paid by any disqualified person who participates in the prohibited 
transaction (other than a fiduciary acting only as such). 26 U.S.C. 
4975(a). The rate of the tax is equal to 15 percent of the amount 
involved for each prohibited transaction for each year in the taxable 
period. Id. If the transaction is not corrected within the taxable 
period, the rate of the tax may be equal to 100 percent of the amount 
involved. 26 U.S.C. 4975(b). The term ``disqualified person'' includes, 
among others, a fiduciary and a person providing services to an IRA.
    With regard to commenters who asked how the prohibited transaction 
provisions in section 4975 of the Code would apply to the state 
programs covered by the safe harbor, the final rule does not adopt any 
special provisions for, or accord any special treatment or exemptions 
to, IRAs established and maintained pursuant to state payroll deduction 
savings programs. The prohibited transaction rules in section 4975 of 
the Code apply to, and protect, the assets of these IRAs in the same 
fashion, and to the same extent, that they apply to and protect the 
assets of any traditional IRA or tax-qualified retirement plan under 
Code section 401(a). To the extent persons operating and maintaining 
these programs are fiduciaries within the meaning of Code section 
4975(e)(3), or provide services to an IRA, such persons are 
``disqualified persons'' within the meaning of Code section 
4975(e)(2)(A) and (B), respectively. Their status under these sections 
of the Code is controlling for prohibited transaction purposes, not 
their status or title under state law. Accordingly, section 4975 of the 
Code prohibits them from, among other things, dealing with assets of 
IRAs in a manner that benefits themselves or any persons in whom they 
have an interest that may affect their best judgment as fiduciaries. 
Thus, persons with authority to manage or administer these programs 
under state law should exercise caution when carrying out their duties, 
including for example selecting a program administrator or making 
investments or selecting an investment manager or managers, to avoid 
prohibited transactions. Whether any particular transaction would be 
prohibited is an inherently factual inquiry and would depend on the 
facts and circumstances of the particular situation.
    State programs concerned about prohibited transactions may submit 
an individual exemption request to the Department. Any such request 
should be made in accordance with the Department's Prohibited 
Transaction Exemption Procedures (29 CFR part 2570). The Department may 
grant an exemption request if it finds that the exemption is 
administratively feasible, in the interests of plans and of their 
participants and beneficiaries (and/or IRAs and of their owners), and 
protective of the rights of the participants and beneficiaries of such 
plans (and/or the owners of such IRAs).

B. Prescribing a Further Connection Between the State, Employers, and 
Employees

    A number of commenters provided comments on whether the safe harbor 
should require some connection between the employers and employees 
covered by a state payroll deduction savings program and the state that 
establishes the program, and if so, what kind of connection. Some 
commenters favor limiting the safe harbor to state programs that cover 
only employees who are residents of the state and employed by an 
employer whose principal place of business also is within that 
state.\30\ These commenters were focused primarily on burdens on small 
employers, particularly those operating near state lines with employees 
in multiple jurisdictions. Other commenters reject the idea that the 
Department's safe harbor should interfere with what is essentially a 
question of state law and prerogative. These commenters maintain that 
the extent to which a state can regulate employers is already 
established under existing legal principles.\31\ The Department agrees 
with the latter commenters. The states are in the best position to 
determine the appropriate connection between employers and employees 
covered under the program and the states that establish such programs, 
and to know the limits on their ability to regulate extraterritorial

[[Page 59470]]

conduct. Inasmuch as existing legal principles establish the extent to 
which the states can regulate employers, the final rule simply requires 
that the program be specifically established pursuant to state law and 
that the employer's participation be required by state law. 29 CFR 
2510.3-2(h)(1)(i) and (ix). These two conditions define and limit the 
safe harbor to be coextensive with the state's authority to regulate 
employers.
---------------------------------------------------------------------------

    \30\ See, e.g., Comment Letter #16 (Empower Retirement) and 
Comment Letter #31 (American Benefits Council).
    \31\ Comment Letter #11 (Connecticut Retirement Security Board) 
(``[T]he Department need not establish its own limitations, as the 
United States Constitution already places limits on the ability of 
states to regulate extraterritorial conduct.'' Citing Healy v. Beer 
Inst., Inc., 491 U.S. 324, 336 (1989); Allstate Ins. Co. v. Hague, 
449 U.S. 302, 310 (1981)).
---------------------------------------------------------------------------

C. Assuming Responsibility for the Security of Payroll Deductions

    A number of commenters provided comments on paragraph (h)(1)(iii) 
of the proposal, which in relevant part provides that a state must 
``assume[] responsibility for the security of payroll deductions . . . 
.'' Many commenters representing states were concerned that this 
condition might be construed to hold states strictly liable for payroll 
deductions, even in extreme cases such as, for example, fraud or theft 
by employers.
    This condition does not make states guarantors or hold them 
strictly liable for any and all employers' failures to transmit payroll 
deductions. Rather, this condition would be satisfied if the state 
established and followed a process to ensure that employers transmit 
payroll deductions safely, appropriately and in a timely fashion.
    Nor does this condition contemplate only a single approach to 
satisfy the safe harbor. For instance, some states have freestanding 
wage withholding and theft laws, as well as enforcement programs (such 
as audits) to protect employees from wage theft and similar problems. 
Such laws and programs ordinarily would satisfy this condition of the 
safe harbor if they are applicable to the payroll deductions under the 
state payroll deduction savings program and enforced by state agents. 
Other states, however, have adopted, or are considering adopting, 
timing and enforcement provisions specific to their payroll deduction 
savings programs.\32\ In the Department's view, the safe harbor would 
permit this approach as well.
---------------------------------------------------------------------------

    \32\ Connecticut Retirement Security Program, P.A. 16-29, 
Sec. Sec.  7(e) and 10(b) (2016).
---------------------------------------------------------------------------

    Some commenters requested that the Department expand paragraph 
(h)(1)(iii) by adding several conditions to require states to adopt 
various consumer protections, such as conditions requiring deposits to 
be made to IRAs within a maximum number of days, civil and criminal 
penalties for deposit failures, and education programs for employees 
regarding how to identify employer misuse of payroll deductions. The 
Department encourages the states to adopt consumer protections along 
these lines, as necessary or appropriate. The Department declines the 
commenters' suggestion to make them explicit conditions of the safe 
harbor, however, as each state is best positioned to calibrate the type 
of consumer protections needed to secure payroll deductions. 
Accordingly, the final rule adopts the proposal's provision without 
change.

D. Requiring Employer's Participation To Be ``Required by State Law''

1. In General
    A number of commenters raised concerns with paragraph (h)(1)(x) of 
the proposal, which in relevant part states that the employer's 
participation in the program must be ``required by State law[.]'' 
Several commenters representing states and financial service providers 
requested that the Department not include this condition in the final 
rule. These commenters believe the safe harbor should extend to 
employers that choose whether or not to participate in a state payroll 
deduction savings program with automatic enrollment, as long as the 
state--and not the employer--thereafter controls and administers the 
program. Another commenter asserted that automatic enrollment ``goes to 
whether a plan is `completely voluntary' or `voluntary' for an employee 
and should not be used as a material measure of how limited an 
employer's involvement is, especially in this case where the employer 
has no say in whether automatic enrollment is provided for under the 
state-run arrangement.''
    It is the Department's view that an employer that voluntarily 
chooses to automatically enroll its employees in a state payroll 
deduction savings program has established a pension plan under ERISA 
and should not be eligible for a safe harbor exclusion from ERISA. 
ERISA broadly defines ``pension plan'' to encompass any ``plan, fund, 
or program'' that is ``established or maintained'' by an employer to 
provide retirement income to its employees. Under ERISA's expansive 
test, when an employer voluntarily chooses to provide retirement income 
to its employees through a particular benefit arrangement, it 
effectively establishes or maintains a plan. This is no less true when 
the employer chooses to provide the benefits through a voluntary 
arrangement offered by a state than when it chooses to provide the 
benefits through the purchase of an insurance policy or some other 
contractual arrangement. In either case, the employer made a voluntary 
decision to provide retirement benefits to its employees as part of a 
particular plan, fund, or program that it chose to the exclusion of 
other possible benefit arrangements.
    In such circumstances, the employer, by choosing to participate in 
the state program, is effectively making plan design decisions that 
have direct consequences to its employees. Decisions subsumed in the 
employer's choice include, for example, the intended benefits, source 
of funding, funding medium, investment strategy, contribution amounts 
and limits, procedures to apply for and collect benefits, and form of 
distribution. By contrast, an employer that is simply complying with a 
state law requirement is not making any of these decisions and 
therefore reasonably can be viewed as complying with the safe harbor 
and not establishing or maintaining a pension plan under section 3(2) 
of ERISA.\33\ The state has required the employer to participate and 
automatically enroll its employees; the employer neither voluntarily 
elects to do this nor significantly controls the program. Limited 
employer involvement in the program is the key to a determination that 
the employer has not established or maintained an employee pension 
benefit plan. The employer's participation must be required by state 
law--if it is voluntary, the safe harbor does not apply.
---------------------------------------------------------------------------

    \33\ One commenter asserted that the proposal contrasted with 
the Department's prior positions on ERISA preemption, and cited the 
Department's amicus brief in Golden Gate Rest. Ass'n v. San 
Francisco, 546 F.3d 639 (9th Cir. 2008). Because arrangements that 
comply with the safe harbor are being determined by regulation not 
to be ERISA plans, the Department sees its position in the Golden 
Gate case as distinguishable from its position here. The commenter 
also argued that the Supreme Court opinion in Fort Halifax Packing 
Co. v. Coyne, 482 U.S. 1 (1987), where the court found that a state 
law requiring employers to make severance payments to employees 
under certain circumstance was not preempted by ERISA because it did 
not require establishment of an ongoing administrative scheme, was 
not support for the Department's proposal. Although such an ongoing 
scheme may be a necessary element of a plan, it is not, as evidenced 
by the Department's earlier safe harbors, sufficient to establish an 
employee benefit plan under ERISA where other conditions--such as 
being established or maintained by an employer or employee 
organization, or both--are absent.
---------------------------------------------------------------------------

    The 1975 IRA Payroll Deduction Safe Harbor is still available, 
however, to interested parties who voluntarily choose to facilitate 
employees' participation in a state program, if the conditions of that 
safe harbor are met and if permitted under the state payroll deduction 
savings program. As discussed above, the 1975 IRA Payroll

[[Page 59471]]

Deduction Safe Harbor has terms and conditions substantially similar to 
those in the safe harbor being adopted today, but it does not permit 
automatic enrollment, even if accompanied by an option to opt out. 
Thus, if a state payroll deduction savings program permits employees of 
employers that are not subject to the state's automatic enrollment 
requirement to affirmatively choose to participate in the program, 
neither such participation nor the employer's facilitation of that 
participation would result in the employer having established an ERISA-
covered plan, as long as the employer and state program satisfy the 
conditions in the 1975 IRA Payroll Deduction Safe Harbor.
    Some commenters asserted that the Department was arbitrary in 
interpreting the 1975 safe harbor to prohibit automatic enrollment. 
However, as discussed at greater length in the NPRM, the Department's 
interpretation of the ``completely voluntary'' provision in the safe 
harbor is a reasonable reading of the safe harbor condition supported 
by legal authorities interpreting the concept of ``completely 
voluntary'' in other contexts. The interpretation of the safe harbor is 
also consistent with a legitimate policy concern about employers 
implementing ``opt-out'' provisions in employer-endorsed IRA 
arrangements without having to comply with ERISA duties and consumer 
protection provisions. That concern is not present with respect to 
state programs that require employers to auto-enroll employees in a 
state sponsored IRA program.
    One commenter asserted that the Department's analysis in the 
proposal of whether an automatic payroll deduction savings program 
operated by a state is an ERISA plan conflicts with the analysis in the 
interpretive bulletin relating to whether a state can sponsor a 
multiple employer plan. This comment misapprehends the Department's 
position in this rulemaking. If the state and the employer comply with 
the safe harbor conditions, the Department's view is that no ERISA plan 
is established. Although the interpretive bulletin indicates that a 
state may under some circumstances act for (in the interest of) a group 
of voluntarily participating employers in establishing an ERISA-covered 
multiple employer plan, the bulletin does not mean a state would be 
similarly acting for employers when it requires that they participate 
in a program requiring the offering of a savings arrangement that is 
not an ERISA plan.
2. Special Treatment for Reduction in Size of Employer
    Several commenters raised the issue whether the final rule could or 
should address situations in which an employer that was once required 
to participate in a state program ceases to be subject to the state 
requirement due to a change in its size. These commenters noted that 
most state payroll deduction IRA laws contain an exemption for small 
employers. In California and Connecticut, for instance, employers with 
fewer than 5 employees are not subject to the state law 
requirement.\34\ In Illinois, the exemption is available to employers 
with fewer than 25 employees.\35\ Thus, as the commenters noted, an 
employer that is subject to the requirement could subsequently drop 
below a state's threshold number of employees, and into the exemption, 
simply by having one employee resign. The commenters asked whether an 
employer that falls below the minimum number of employees could 
continue to make payroll deductions for existing employees (or 
automatically enroll new employees) under the program and still meet 
the conditions of the Department's safe harbor.
---------------------------------------------------------------------------

    \34\ Cal. Gov't Code Sec.  100000(d) (2012); Conn. P.A. 16-29, 
Sec.  1(7) (2016).
    \35\ 820 Ill. Comp. Stat. 80/5 (2015).
---------------------------------------------------------------------------

    The situation identified by the commenters results from the 
operation of the particular state law and is properly a matter for the 
states to address. For example, a state law with the type of small 
employer exemption discussed above could require that an employer, once 
subject to the participation requirement, remains subject to it (either 
permanently or at least for the balance of the year or some other 
specified period of time), without regard to future fluctuations in 
workforce size. A state might also require an employer to maintain 
payroll deductions for employees who were enrolled when the employer 
was subject to the requirement, but not require the employer to make 
deductions for new employees until after its work force has regained 
the minimum number of employees. An employer that ceases to be subject 
to a state participation requirement, but that continues the payroll 
deductions or automatically enrolls new employees into the state 
program, would be acting outside the boundaries of the new safe harbor. 
However, its continued participation in the program would reflect its 
voluntary decision to provide retirement benefits pursuant to a 
particular plan, fund, or program. Accordingly, it would thereby 
establish or maintain an ERISA-covered plan.
    Nevertheless, if the state allows but does not require an exempted 
small employer to enroll employees in the program, the employer may be 
able to do so without establishing an ERISA plan if the employer 
complies with the conditions of the Department's 1975 IRA Payroll 
Deduction Safe Harbor, which ensure minimal employer involvement in the 
employees' completely voluntary decision to participate in particular 
IRAs. To comply with these conditions, the employer would not be able 
to make payroll deductions for employees without their affirmative 
consent.
    In the event that an employer establishes its own ERISA-covered 
plan under a state program, that plan would be subject to ERISA's 
reporting, disclosure, and fiduciary standards. In such circumstances, 
the employer generally would be considered the ``plan sponsor'' and 
``administrator'' of its plan, as defined in section 3(16) of 
ERISA.\36\ The Department would not, however, view the establishment of 
an ERISA plan by an employer participating in the state program as 
affecting the availability of the safe harbor for other participating 
employers.
---------------------------------------------------------------------------

    \36\ Commenters requested that this regulation provide a method 
for employers or states that inadvertently take actions causing an 
arrangement or program to fail to satisfy the safe harbor to cure 
that failure and qualify for the safe harbor. Commenters also 
requested that this regulation allow employers to cure ERISA 
failures that might result from the creation of an ERISA plan. 
Although these issues are beyond the scope of this regulation, if 
problems arise relating to these topics for particular state 
programs, the Department invites states and other interested persons 
to ask the Department to consider whether some additional guidance 
or relief would be appropriate.
---------------------------------------------------------------------------

E. Extending the Safe Harbor to Political Subdivisions

    A number of commenters urged the Department to expand the safe 
harbor to cover payroll deduction savings programs established by 
political subdivisions of states. The proposal was limited to payroll 
deduction savings programs established by ``States.'' For this purpose, 
the proposal defined the term ``State'' by reference to section 3(10) 
of ERISA. Section 3(10) of ERISA, in relevant part, defines the term 
``State'' as including ``any State of the United States, the District 
of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, 
[and] Wake Island.'' Thus, the proposed safe harbor was not available 
to payroll deduction savings programs established by political 
subdivisions of states, such as cities and counties.

[[Page 59472]]

    These commenters argued that the proposal would be of little or no 
use for employees of employers in political subdivisions in states that 
choose not to have a state-wide program, even though there is strong 
interest in a payroll deduction savings program at a political 
subdivision level, such as New York City, for example.\37\ These 
commenters asked the Department to consider extending the safe harbor 
in the proposal essentially to large political subdivisions (in terms 
of population) with authority and capacity to maintain such 
programs.\38\ Others, however, are concerned that such an expansion 
might lead to overlapping and possibly conflicting requirements on 
employers, both within and across states.
---------------------------------------------------------------------------

    \37\ See, e.g., Comment Letter #57 (The Public Advocate for the 
City of New York) (``The United States Department of Labor's 
proposed rule reflects the Department's clear understanding of the 
dire need for policymakers to develop retirement security solutions 
for millions of Americans. However, we are concerned that by not 
including cities in its proposed rule, in particular those with 
populations over a certain size--such as one million residents--the 
Department could significantly thwart the positive objectives of the 
proposed rule.'').
    \38\ See, e.g., Comment Letter #36 (AFL-CIO) (``With respect to 
political subdivisions of a state, we suggest the Department 
establish minimum eligibility requirements to ensure that the 
political entity has the administrative capacity and sophistication 
necessary to administer a retirement savings arrangement, protect 
the rights of participating workers, and ensure the security of 
workers' payroll deductions and retirement savings. The Department 
could use easily measured proxies for administrative capacity and 
sophistication. For example, total population of a political 
subdivision as measured by the most recent decennial census or an 
interim population estimate published by the U.S. Census Bureau 
would be an appropriate proxy. The eligibility threshold could be 
set at or near the total population of the smallest of the 50 
states, such as 500,000.'').
---------------------------------------------------------------------------

    The Department agrees with commenters that there may be good 
reasons for expanding the safe harbor, but believes its analysis of the 
issue would benefit from additional public comments. Accordingly, in 
the Proposed Rules section of today's Federal Register, the Department 
published a notice of proposed rulemaking seeking to amend paragraph 
(h) of Sec.  2510.3-2 to cover certain state political subdivision 
programs that otherwise comply with the conditions in the final rule. 
The proposal seeks public comment on not only whether, but also how to 
amend paragraph (h) of Sec.  2510.3-2 to include political subdivisions 
of states. Commenters are encouraged to focus on how broadly or 
narrowly an amended safe harbor might define the term ``qualified 
political subdivision'' taking into account the impact of such an 
expansion on employers, employees, political subdivisions, and states 
themselves.\39\
---------------------------------------------------------------------------

    \39\ Some commenters asked whether states could join together in 
multi-state programs. Nothing in the safe harbor precludes states 
from agreeing to coordinate state programs or to act in unison with 
respect to a program.
---------------------------------------------------------------------------

V. Regulatory Impact Analysis

A. Executive Order 12866 Statement

    Under Executive Order 12866, the Office of Management and Budget 
(OMB) must determine whether a regulatory action is ``significant'' and 
therefore subject to the requirements of the Executive Order and 
subject to review by the OMB. Section 3(f) of the Executive Order 
defines a ``significant regulatory action'' as an action that is likely 
to result in a rule (1) having an annual effect on the economy of $100 
million or more, or adversely and materially affecting a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or state, local or tribal governments or communities 
(also referred to as an ``economically significant'' action); (2) 
creating serious inconsistency or otherwise interfering with an action 
taken or planned by another agency; (3) materially altering the 
budgetary impacts of entitlement grants, user fees, or loan programs or 
the rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal requirements, the 
President's priorities, or the principles set forth in the Executive 
Order.
    OMB has determined that this regulatory action is not economically 
significant within the meaning of section 3(f)(1) of the Executive 
Order. However, it has determined that the action is significant within 
the meaning of section 3(f)(4) of the Executive Order. Accordingly, OMB 
has reviewed the final rule and the Department provides the following 
assessment of its benefits and costs.
    Several states have adopted or are considering adopting state 
payroll deduction savings programs to increase access to retirement 
savings for individuals employed or residing in their jurisdictions. As 
stated above, this document amends existing Department regulations by 
adding a new safe harbor describing the circumstances under which such 
payroll deduction savings programs, including programs featuring 
automatic enrollment, would not give rise to the establishment or 
maintenance of ERISA-covered employee pension benefit plans. State 
payroll deduction savings programs that meet the requirements of the 
safe harbor would be established by states, and state law would require 
certain private-sector employers to participate in such programs. By 
making clear that state payroll deduction savings programs with 
automatic enrollment that conform to the safe harbor in the final rule 
do not give rise to the establishment of ERISA-covered plans, the 
objective of the safe harbor is to reduce the risk of such state 
programs being preempted if they were challenged.
    In analyzing benefits and costs associated with this final rule, 
the Department focuses on the direct effects, which include both 
benefits and costs directly attributable to the rule. These benefits 
and costs are limited, because as stated above, the final rule merely 
establishes a safe harbor describing the circumstances under which such 
state payroll deduction savings programs would not give rise to ERISA-
covered employee pension benefit plans. It does not require states to 
take any actions nor employers to provide any retirement savings 
programs to their employees.
    The Department also addresses indirect effects associated with the 
rule, which include potential benefits and costs directly associated 
with the scope and provisions of the state laws creating the programs, 
and include the potential increase in retirement savings and potential 
cost burden imposed on covered employers to comply with the 
requirements of the state programs. Indirect effects vary by state 
depending on the scope and provisions of the state law, and by the 
degree to which the rule might influence state actions.
1. Direct Benefits
    As discussed earlier in this preamble, some state legislatures have 
passed laws designed to expand workers' access to workplace savings 
arrangements, including states that have established state payroll 
deduction savings programs. Through automatic enrollment such programs 
encourage employees to establish IRAs funded by payroll deductions. As 
noted, California, Connecticut, Illinois, Maryland, and Oregon, for 
example, have adopted laws along these lines. In addition, some states 
are looking at ways to encourage employers to provide coverage under 
state-administered 401(k)-type plans, while others have adopted or are 
considering approaches that combine several retirement alternatives 
including IRAs and ERISA-covered plans.
    One of the challenges states face in expanding retirement savings 
opportunities for private-sector employees is uncertainty about ERISA 
preemption of such efforts. ERISA

[[Page 59473]]

generally would preempt a state law that required employers to 
establish or maintain ERISA-covered employee benefit pension plans. The 
Department therefore believes that states and other stakeholders would 
benefit from clear guidelines to determine whether state saving 
initiatives would effectively require employers to create ERISA-covered 
plans. The final rule would provide a new ``safe harbor'' from coverage 
under Title I of ERISA for state savings arrangements that conform to 
certain requirements. State initiatives within the safe harbor would 
not result in the establishment of employee benefit plans under ERISA. 
The Department expects that the final rule would reduce legal costs, 
including litigation costs, by (1) removing uncertainty about whether 
such state savings arrangements are covered by Title I of ERISA, and 
(2) creating efficiencies by eliminating the need for multiple states 
to incur the same costs to determine their non-plan status.
    The Department notes that the final rule would not prevent states 
from identifying and pursuing alternative policies, outside of the safe 
harbor, that also would not require employers to establish or maintain 
ERISA-covered plans. Thus, while the final rule would reduce 
uncertainty about state activity within the safe harbor, it would not 
impair state activity outside of it.
    Some comments expressed concern about whether the safe harbor rule 
requires employers to participate in states' savings arrangements, and 
whether it implicitly indicates the Department's views on arrangements 
that do not fully conform to the conditions of the safe harbor. To 
address these concerns, the Department added regulatory text in the 
final rule explicitly recognizing that the regulation is a safe harbor 
and as such, does not require employers to participate in state payroll 
deduction savings programs or arrangements nor does it purport to 
define every possible program that could fall outside of Title I of 
ERISA.
2. Direct Costs
    The final rule does not require any new action by employers or the 
states. It merely establishes a safe harbor describing certain 
circumstances under which state-required payroll deduction savings 
programs would not give rise to an ERISA-covered employee pension 
benefit plan. States may incur legal costs to analyze the rule and 
determine whether their laws fall within the final rule's safe harbor. 
However, the Department expects that these costs will be less than the 
costs that would be incurred in the absence of the final rule.
3. Uncertainty
    The Department is confident that the final safe harbor rule, by 
clarifying that certain state payroll deduction savings programs do not 
require employers to establish ERISA-covered plans, will benefit states 
and many other stakeholders otherwise beset by greater uncertainty. 
However, the Department is unsure as to the magnitude of these 
benefits. The magnitude of the final rule's benefits, costs and 
transfer impacts will depend on the states' independent decisions on 
whether and how best to take advantage of the safe harbor and on the 
cost that otherwise would have attached to uncertainty about the legal 
status of the states' actions. The Department cannot predict what 
actions states will take, stakeholders' propensity to challenge such 
actions' legal status, either absent or pursuant to the final rule, or 
courts' resultant decisions.
4. Indirect Effects of Safe Harbor Rule: Impact of State Initiatives
    As discussed above, the impact of state payroll deduction saving 
programs is directly attributable to the state legislation that creates 
such programs. As discussed below, however, under certain 
circumstances, these effects could be indirectly attributable to the 
final rule. For example, it is conceivable that more states could 
create payroll deduction savings programs due to the guidelines 
provided in the final rule and the reduced risk of an ERISA preemption 
challenge, and therefore, the increased prevalence of such programs 
would be indirectly attributable to the final rule. If this issue were 
ultimately resolved in the courts, the courts could make a different 
preemption decision in the rule's presence than in its absence. 
Furthermore, even if a potential court decision would be the same with 
or without the rulemaking, the potential reduction in states' 
uncertainty-related costs could induce more states to pursue these 
workplace savings initiatives. An additional possibility is that the 
rule would not change the prevalence of state payroll deduction savings 
programs, but would accelerate the implementation of programs that 
would exist anyway. With any of these possibilities, there would be 
benefits, costs and transfer impacts that are indirectly attributable 
to this rule, via the increased or accelerated creation of state 
programs.
    Commenters expressed concern that states will incur substantial 
costs to implement their payroll deduction savings programs. One state 
estimates that it will incur $1.2 million in administrative and 
operating costs during the initial start-up years.\40\ To administer 
its opt-out process, the same state estimates it will incur $465,000 in 
one-time mailing and form production costs.\41\ Another state estimated 
that it will take several years before its savings arrangement becomes 
self-sufficient and it would require a subsidy of between $300,000 and 
$500,000 a year for five to seven years.\42\ Commenters also raised 
concerns about the states' potential fiduciary liability associated 
with establishing state payroll deduction savings programs.
---------------------------------------------------------------------------

    \40\ Department of Finance Bill Analysis, California Department 
of Finance (May 2, 2012).
    \41\ Id.
    \42\ Voluntary Employee Accounts Program Study, Maryland 
Supplemental Requirement Plans (2008).
---------------------------------------------------------------------------

    The Department is aware of these potential costs, and although the 
commenters raise valid concerns, the costs are not directly 
attributable to the final rule; they are attributable to the state 
legislation creating the payroll deduction savings program. In enacting 
their programs, states are responsible for estimating the associated 
costs during the legislative process and determining whether the 
arrangement is self-sustainable and whether the state has sufficient 
resources to bear the associated costs and financial risk. States can 
design their programs to address these concerns, and presumably, will 
enact state payroll deduction legislation only after determining that 
the benefits of such programs justify their costs.
    Employers may incur costs to update their payroll systems to 
transmit payroll deductions to the state or its agent, develop 
recordkeeping systems to document their collection and remittance of 
payments under the program, and provide information to employees 
regarding the state savings arrangement. As with states' operational 
and administrative costs, some portion of these employer costs would be 
indirectly attributable to the rule if more state payroll deduction 
savings programs are implemented in the rule's presence than would be 
in its absence. Because the employers' administrative burden to 
participate in the state program is generally limited to withholding 
the required contribution from employees' wages, remitting 
contributions to the state program, and providing information about the 
program to employees in order to satisfy the safe harbor, most 
associated costs for employers would be minimal.

[[Page 59474]]

    Although such costs would be limited for employers, several 
commenters expressed concern that these costs would be incurred 
disproportionately by small employers and start-up companies, which 
tend to be least likely to offer pensions. According to one survey 
submitted with a comment, about 60% of small employers do not use a 
payroll service.\43\ The commenters assert that these small employers 
may incur additional costs to use external payroll companies to comply 
with their states' payroll deduction savings programs. However, some 
small employers may decide to use a payroll service to withhold and 
remit payroll taxes independent of their state's program requirements. 
Therefore, the extent to which these costs can be attributable to 
states' initiatives could be smaller than what commenters estimated. 
Moreover, most state payroll deduction savings programs exempt the 
smallest companies,\44\ which could mitigate such costs.
---------------------------------------------------------------------------

    \43\ National Small Business Association, April 11, 2013, ``2013 
Small Business Taxation Survey.'' This survey says 23% of small 
employers that handle payroll taxes internally have no employee. 
Therefore, only about 46%, not 60%, of small employers are in fact 
affected by state initiatives, based on this survey. The survey does 
not include small employers that use payroll software or on-line 
payroll programs, which provide a cost effective means for such 
employers to comply with payroll deduction savings programs.
    \44\ For example, California Secure Choice would affect 
employers with 5 or more employees, Illinois Secure Choice would 
affect employers with 25 or more employees, and Connecticut 
Retirement Security would affect employers with 5 or more employees. 
Cal. Gov.t Code Sec.  100000(d) (2012); 820 Ill. Comp. Stat. 80/5 
(2015); Conn. P.A. 16-29 Sec.  1(7) (2016).
---------------------------------------------------------------------------

    Additional cost-related comments addressed penalties that employers 
are subject to pay if they fail to comply with the requirements of 
their states' programs.\45\ The commenter argued that those penalties 
would be more detrimental to small employers because profit margins of 
small employers are often very thin. However, the costs associated with 
those penalties are due to a failure to comply with state law. In 
addition, the final rule accommodates commenters and allows states to 
use tax incentives or credits as long as their economic incentives are 
narrowly tailored to reimbursing the costs of states' payroll deduction 
savings programs. If states reimburse employers for costs incurred to 
comply with their payroll deduction savings programs, the employers' 
cost burden can be substantially reduced.
---------------------------------------------------------------------------

    \45\ For example, according to a comment letter, the Illinois 
Secure Choice Savings Program allows for a penalty for noncompliance 
in the first year of $250 per employee per year, which then 
increases to $500 for noncompliance per employee for each subsequent 
year.
---------------------------------------------------------------------------

    While several comments focused on the cost burden imposed on small 
employers, an organization representing small employers expressed 
support for state efforts to establish state payroll deduction savings 
arrangements, because such arrangements provide a convenient and 
affordable option for small businesses and their employees to save for 
retirement. This commenter further states that small business owners 
want to offer the benefit of retirement savings to their employees 
because it would help them attract and retain talented employees.
    The Department believes that well-designed state-level initiatives 
have the potential to effectively reduce gaps in retirement security. 
Relevant variables such as pension coverage,\46\ labor market 
conditions,\47\ population demographics,\48\ and elderly poverty,\49\ 
vary widely across the states, suggesting a potential opportunity for 
progress at the state level. Many workers throughout these states 
currently may save less than would be optimal because of (1) behavioral 
biases (such as myopia or inertia), (2) labor market conditions that 
prevent them from accessing plans at work, or (3) they work for 
employers that simply do not offer retirement plans.\50\ Some research 
suggests that automatic contribution policies are effective in 
increasing retirement savings and wealth in general by overcoming 
behavioral biases or inertia.\51\ Well-designed state initiatives could 
help many savers who otherwise might not be saving enough or at all to 
begin to save earlier than they might have otherwise. Such workers will 
have traded some consumption today for more in retirement, potentially 
reaping net gains in overall lifetime well-being. Their additional 
savings may also reduce fiscal pressure on publicly financed retirement 
programs and other public assistance programs, such as the Supplemental 
Nutritional Assistance Program, that support low-income Americans, 
including older Americans.
---------------------------------------------------------------------------

    \46\ See, e.g.,, Craig Copeland, ``Employment-Based Retirement 
Plan Participation: Geographic Differences and Trends, 2013,'' 
Employee Benefit Research Institute, Issue Brief No. 405 (October 
2014) (available at www.ebri.org). See also a report from the Pew 
Charitable Trusts, ``How States Are Working to Address The 
Retirement Savings Challenge,'' (June 2016).
    \47\ See, e.g., U.S. Bureau of Labor Statistics, ``Regional and 
State Employment and Unemployment--JUNE 2015,'' USDL-15-1430 (July 
21, 2015).
    \48\ See, e.g., Lindsay M. Howden and Julie A. Meyer, ``Age and 
Sex Composition: 2010,'' U.S. Bureau of the Census, 2010 Census 
Briefs C2010BR-03 (May 2011).
    \49\ Constantijn W. A. Panis & Michael Brien, ``Target 
Populations of State-Level Automatic IRA Initiatives,'' (August 28, 
2015).
    \50\ According to National Compensation Survey, March 2015, 
about 69% of private-sector workers have access to retirement 
benefits--including Defined Benefit and Defined Contribution plans--
at work.
    \51\ See Chetty, Friedman, Leth-Petresen, Nielsen & Olsen, 
``Active vs. Passive Decisions and Crowd-out in Retirement Savings 
Accounts: Evidence from Denmark,'' 129 Quarterly Journal of 
Economics 1141-1219 (2014); See also Madrian and Shea, ``The Power 
of Suggestion: Inertia in 401(k) Participation and Savings 
Behavior,'' 116 Quarterly Journal of Economics 1149-1187 (2001).
---------------------------------------------------------------------------

    However, several commenters were skeptical about potential benefits 
of state payroll deduction savings arrangements. These commenters 
believe the potential benefits--primarily increases in retirement 
savings--would be limited because the proposed safe harbor rule does 
not allow employer contributions to state payroll deduction programs.
    The Department believes that well-designed state initiatives can 
achieve their intended, positive effects of fostering retirement 
security. However, the initiatives might have some unintended 
consequences as well. Those workers least equipped to make good 
retirement savings decisions arguably stand to benefit most from state 
initiatives, but also arguably could be at greater risk of suffering 
adverse unintended effects. Workers who would not benefit from 
increased retirement savings could opt out, but some might fail to do 
so. Such workers might increase their savings too much, unduly 
sacrificing current economic needs. Consequently they might be more 
likely to cash out early and suffer tax losses (unless they receive a 
non-taxable Roth IRA distribution), and/or to take on more expensive 
debt to pay necessary bills. Similarly, state initiatives directed at 
workers who do not currently participate in workplace savings 
arrangements may be imperfectly targeted to address gaps in retirement 
security. For example, some college students might be better advised to 
take less in student loans rather than open an IRA, and some young 
families might do well to save more first for their children's 
education and later for their own retirement. This concern was shared 
by some commenters who stated that workers without retirement plan 
coverage tend to be younger, lower-income or less attached to the 
workforce, which implies that these workers are often financially 
stressed or have other savings goals. These comments imply that the 
benefits of state payroll deduction savings arrangements could be 
limited and in some cases potentially harmful for certain workers. The 
Department notes

[[Page 59475]]

that the states are responsible for designing effective programs that 
minimize these types of harm and maximize benefits to participants.
    Some commenters also raised the concern that state initiatives may 
``crowd-out'' ERISA-covered plans. According to one comment, the 
proposed rule could inadvertently encourage large employers operating 
in multiple states to switch from ERISA-covered plans to state-run 
arrangements in order to reduce costs, especially if they are required 
to cover employees currently ineligible to participate in ERISA-covered 
plans under state-run arrangements. Some commenters were concerned 
about employers' burden to monitor their obligations under the state 
laws particularly when employers operate in multiple states. These 
commenters raised the possibility that large employers would incur 
substantial costs to monitor the participation status of ineligible 
workers, such as part-time or seasonal workers. The final rule 
clarifies that state payroll deduction savings programs directed toward 
employers that do not offer other retirement plans fall within this 
safe harbor rule. However, employers that wish to provide retirement 
benefits are likely to find that ERISA-covered programs, such as 401(k) 
plans, have advantages for them and their employees over participation 
in state programs. Potential advantages include significantly greater 
tax preferences, greater flexibility in plan selection and design, 
opportunity for employers to contribute, ERISA protections, and larger 
positive recruitment and retention effects. Therefore it seems unlikely 
that state initiatives will ``crowd-out'' many ERISA-covered plans, 
although, if they do, some workers might lose ERISA-protected benefits 
that could have been more generous and more secure than state-based 
(IRA) benefits if states do not adopt consumer protections similar to 
those Congress provided under ERISA.
    There is also the possibility that some workers who would otherwise 
have saved more might reduce their savings to the low, default levels 
associated with some state programs. States can address this concern by 
incorporating into their programs participant education or ``auto-
escalation'' features that increase default contribution rates over 
time and/or as pay increases.
    Some commenters were concerned that state payroll deduction savings 
arrangements would in general provide participants with less consumer 
protection than ERISA-covered plans. Another commenter pointed out that 
one particular state's payroll deduction savings program would require 
employees to pay higher fees than those charged to private plans.\52\ 
However, a careful review of the report cited in this comment suggests 
that fees set by this particular state's arrangement are not 
inconsistent with the average fees in the mutual fund industry.\53\ 
Moreover, the Department reiterates that states enacting savings 
arrangements can take actions to augment consumer protections.
---------------------------------------------------------------------------

    \52\ According to a comment letter, Illinois' Secure Choice 
Savings Program stated that the costs of fees paid by employees will 
be charged up to 0.75 percent of the overall balances, which is 
higher than those charged to 401(k) plan participants who invested 
in equity mutual funds (0.58 percent).
    \53\ According to the ICI Research Perspective, ``The Economics 
of Providing 401(k) Plans: Services, Fees, and Expenses, 2014,'' the 
mutual fund industry average expense ratio was 0.74 percent in 2013 
and in 0.70 percent in 2014, which are in the comparable range to 
the Illinois Secure Choice Savings Program's ceiling in fees, 0.75 
percent.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the Department solicited comments 
regarding its determination that the proposed rule is not subject to 
the requirements of the PRA, because it does not contain a ``collection 
of information'' as defined in 44 U.S.C. 3502(3). The Department's 
conclusion was based on the premise that the proposed rule did not 
require any action by or impose any requirements on employers or 
states. It merely clarified that certain state payroll deduction 
savings programs that encourage retirement savings would not result in 
the creation of ERISA-covered employee benefit plans if the conditions 
of the safe harbor were met.
    The Department did not receive any comments regarding this 
assessment. Therefore, the Department has determined that the final 
rule is not subject to the PRA, because it does not contain a 
collection of information. The PRA definition of ``burden'' excludes 
time, effort, and financial resources necessary to comply with a 
collection of information that would be incurred by respondents in the 
normal course of their activities. See 5 CFR 1320.3(b)(2). The 
definition of ``burden'' also excludes burdens imposed by a state, 
local, or tribal government independent of a Federal requirement. See 5 
CFR 1320.3(b)(3). The final rule imposes no burden on employers because 
states customarily include notice and recordkeeping requirements when 
enacting their payroll deduction savings programs. Thus, employers 
participating in such programs are responding to state, not Federal, 
requirements.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency certifies that a rule will not have a 
significant economic impact on a substantial number of small entities, 
section 603 of the RFA requires the agency to present an initial 
regulatory flexibility analysis at the time of the publication of the 
notice of proposed rulemaking describing the impact of the rule on 
small entities. Small entities include small businesses, organizations 
and governmental jurisdictions.
    Although several commenters maintained that the proposed rule would 
impose significant costs on small employers, similar to the proposal, 
the final rule merely establishes a new safe harbor describing 
circumstances in which state payroll deduction savings programs would 
not give rise to ERISA-covered employee pension benefit plans. 
Therefore, the final rule imposes no requirements or costs on small 
employers, and the Department believes that it will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, pursuant to section 605(b) of the RFA, the Assistant 
Secretary of the Employee Benefits Security Administration hereby 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities.

D. Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1501 et seq.), as well as Executive Order 12875, this final rule does 
not include any federal mandate that may result in expenditures by 
state, local, or tribal governments, or the private-sector, which may 
impose an annual burden of $100 million.

E. Congressional Review Act

    The final rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the 
Comptroller General for review. The final rule is not a ``major rule'' 
as that term is defined in 5 U.S.C. 804, because it is not likely to 
result in (1) an annual

[[Page 59476]]

effect on the economy of $100 million or more; (2) a major increase in 
costs or prices for consumers, individual industries, or Federal, 
State, or local government agencies, or geographic regions; or (3) 
significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign- based enterprises in domestic and 
export markets.

F. Federalism Statement

    Executive Order 13132 outlines fundamental principles of 
federalism. It also requires adherence to specific criteria and 
requirements, such as consultation with state and local officials, in 
the case of policies that have federalism implications, defined as 
``regulations, legislative comments or proposed legislation, and other 
policy statements or actions that have substantial direct effects on 
the states, on the relationship between the national government and 
states, or on the distribution of power and responsibilities among the 
various levels of government.''
    The final rule describes circumstances under which a state payroll 
deduction savings program would not constitute the establishment or 
maintenance of an ERISA-covered plan by specified actors. Such guidance 
may therefore be helpful to states that have taken or might take 
action, but the safe harbor does not limit the actions that states 
could take. The safe harbor does not require states to do anything or 
preempt state law. Nor does it act directly on a state, or cause any 
state to do anything the state had not already decided or is inclined 
to do on its own. For example, as described elsewhere in this final 
rule, a state program that fell outside the terms of the safe harbor 
would not necessarily result in the creation of ERISA plans. The 
regulation itself is devoid of consequences to the state or states that 
decide not to follow its terms. In other words, the regulation may 
indirectly influence how states design their payroll deduction savings 
programs, but its existence is unlikely to be dispositive on whether 
states adopt programs in the first instance, as evidenced by some 
states that already enacted legislation. Therefore, the final rule does 
not contain polices with federalism implications within the meaning of 
the Order.
    Nonetheless, in respect for the fundamental federalism principles 
set forth in the Order, the Department affirmatively engaged in 
outreach with officials of states, and with employers and other 
stakeholders, regarding the proposed rule and sought their input on any 
federalism implications that they believe may be presented by the safe 
harbor. Departmental staff engaged in numerous meetings, conference 
calls, and outreach events with interested stakeholders on the proposed 
rule and on various state legislative proposals. The Department also 
received numerous comment letters from states and local governments and 
their representatives. Many of the changes in the final rule stem from 
suggestions contained in these comment letters. Indeed, the notice of 
proposed rulemaking on political subdivisions discussed earlier in this 
preamble also stems from comments and concerns raised by state or local 
governments.

List of Subjects in 29 CFR Part 2510

    Accounting, Employee benefit plans, Employee Retirement Income 
Security Act, Pensions, Reporting, Coverage.

    For the reasons stated in the preamble, the Department of Labor 
amends 29 CFR part 2510 as set forth below:

PART 2510--DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, G, 
AND L OF THIS CHAPTER

0
1. The authority citation for part 2510 is revised to read as follows:

    Authority: 29 U.S.C. 1002(2), 1002(21), 1002(37), 1002(38), 
1002(40), 1031, and 1135; Secretary of Labor's Order No. 1-2011, 77 
FR 1088 (Jan. 9, 2012); Sec. 2510.3-101 also issued under sec. 102 
of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. at 237 (2012), 
E.O. 12108, 44 FR 1065 (Jan. 3, 1979) and 29 U.S.C. 1135 note. Sec. 
2510.3-38 is also issued under sec. 1, Pub. L. 105-72, 111 Stat. 
1457 (1997).

0
2. In Sec.  2510.3-2, revise paragraph (a) and add paragraph (h) to 
read as follows:


Sec.  2510.3-2   Employee pension benefit plans.

    (a) General. This section clarifies the terms ``employee pension 
benefit plan'' and ``pension plan'' for purposes of title I of the Act 
and this chapter by setting forth safe harbors under which certain 
specific plans, funds and programs would not constitute employee 
pension benefit plans when the conditions of this section are 
satisfied. The safe harbors in this section should not be read as 
implicitly indicating the Department's views on the possible scope of 
section 3(2). To the extent that these plans, funds and programs 
constitute employee welfare benefit plans within the meaning of section 
3(1) of the Act and Sec.  2510.3-1 of this part, they will be covered 
under title I; however, they will not be subject to parts 2 and 3 of 
title I of the Act.
* * * * *
    (h) Certain State savings programs. (1) For purposes of title I of 
the Act and this chapter, the terms ``employee pension benefit plan'' 
and ``pension plan'' shall not include an individual retirement plan 
(as defined in 26 U.S.C. 7701(a)(37)) established and maintained 
pursuant to a State payroll deduction savings program, provided that:
    (i) The program is specifically established pursuant to State law;
    (ii) The program is implemented and administered by the State 
establishing the program (or by a governmental agency or 
instrumentality of the State), which is responsible for investing the 
employee savings or for selecting investment alternatives for employees 
to choose;
    (iii) The State (or governmental agency or instrumentality of the 
State) assumes responsibility for the security of payroll deductions 
and employee savings;
    (iv) The State (or governmental agency or instrumentality of the 
State) adopts measures to ensure that employees are notified of their 
rights under the program, and creates a mechanism for enforcement of 
those rights;
    (v) Participation in the program is voluntary for employees;
    (vi) All rights of the employee, former employee, or beneficiary 
under the program are enforceable only by the employee, former 
employee, or beneficiary, an authorized representative of such a 
person, or by the State (or governmental agency or instrumentality of 
the State);
    (vii) The involvement of the employer is limited to the following:
    (A) Collecting employee contributions through payroll deductions 
and remitting them to the program;
    (B) Providing notice to the employees and maintaining records 
regarding the employer's collection and remittance of payments under 
the program;
    (C) Providing information to the State (or governmental agency or 
instrumentality of the State) necessary to facilitate the operation of 
the program; and
    (D) Distributing program information to employees from the State 
(or governmental agency or instrumentality of the State) and permitting 
the State (or governmental agency or instrumentality of the State) to 
publicize the program to employees;
    (viii) The employer contributes no funds to the program and 
provides no bonus or other monetary incentive to employees to 
participate in the program;

[[Page 59477]]

    (ix) The employer's participation in the program is required by 
State law;
    (x) The employer has no discretionary authority, control, or 
responsibility under the program; and
    (xi) The employer receives no direct or indirect consideration in 
the form of cash or otherwise, other than consideration (including tax 
incentives and credits) received directly from the State (or 
governmental agency or instrumentality of the State) that does not 
exceed an amount that reasonably approximates the employer's (or a 
typical employer's) costs under the program.
    (2) A State savings program will not fail to satisfy the provisions 
of paragraph (h)(1) of this section merely because the program--
    (i) Is directed toward those employers that do not offer some other 
workplace savings arrangement;
    (ii) Utilizes one or more service or investment providers to 
operate and administer the program, provided that the State (or 
governmental agency or instrumentality of the State) retains full 
responsibility for the operation and administration of the program; or
    (iii) Treats employees as having automatically elected payroll 
deductions in an amount or percentage of compensation, including any 
automatic increases in such amount or percentage, unless the employee 
specifically elects not to have such deductions made (or specifically 
elects to have the deductions made in a different amount or percentage 
of compensation allowed by the program), provided that the employee is 
given adequate advance notice of the right to make such elections and 
provided, further, that a program may also satisfy this paragraph (h) 
without requiring or otherwise providing for automatic elections such 
as those described in this paragraph (h)(2)(iii).
    (3) For purposes of this section, the term State shall have the 
same meaning as defined in section 3(10) of the Act.

    Signed at Washington, DC, this 24th day of August, 2016.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, U.S. 
Department of Labor.
[FR Doc. 2016-20639 Filed 8-25-16; 4:15 pm]
 BILLING CODE 4510-29-P