DOL Amends State-Run Retirement Plan Regulation

By Nevin Adams • December 19, 2016 • 0 Comments
The Department of Labor (DOL) has made some changes to the final regulations regarding state-run retirement programs for private sector workers — specifically regarding those established by “state political subdivisions.”

In a document slated to be published in the Federal Register on Dec. 20, the DOL agreed with commenters that there may be good reasons for expanding the safe harbor, subject to certain conditions, to cover political subdivisions and their programs.

“While it is not clear to the Department how many such political subdivisions eventually will have an interest in establishing programs of the kind described in the final safe harbor regulation, thus far the Department has only received written letters of interest from representatives of Seattle, Philadelphia and New York City,” the DOL wrote, by way of noting that it proposed amending the 2016 final safe harbor regulation to add to §2510.3-2 paragraph (h) the term “or qualified political subdivision” wherever the term “State” appears. The DOL had published its final rule on state-run retirement programs in August, with an effective date of Oct. 31, 2016. The amendments were in response to industry comments received on the final regulation, including the American Retirement Association.

Three Criteria

More precisely, that term is meant to apply to any governmental unit of a state, including city, county, or similar governmental body that meets three criteria;

1. It must have the authority, under state law, whether implicit or explicit, to require employers’ participation in the payroll deduction savings program (which the DOL says could be as many as 40,000 entities);
2. It must have a population equal to or greater than the population of the least populous state (that does NOT include the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam or Wake Island, btw. That would be Wyoming, whose approximately 600,000 residents, when applied to the criteria in the first point, would reduce the potentially-eligible subdivisions to about 136); and
3. It cannot be within a state that has a statewide retirement savings program for private-sector employees (which, according to the DOL, in conjunction with the other criteria, further reduces the potential pool of sponsoring bodies to 88 as of today).

Sophisticated Population Tests

Oh, and citing Census data that approximately 83% of state subdivisions have populations of less than 10,000 people, the DOL also limited the types of political subdivisions that can fall within the safe harbor to those that are “sufficiently large and sophisticated to have the ability to oversee and safeguard payroll deduction savings programs.”

In addition to the population test, the final regulation adopts a “demonstrated capacity” test that focuses on a political subdivision’s ability to operate a payroll deduction savings program by requiring direct and objectively verifiable evidence of a political subdivision’s experience, capacity, and resources to operate or administer such programs. Specifically, the test is that a political subdivision must implement and administer its own retirement plan criteria that applies even if it passes the population test.

The final rule modifies the proposed rule to clarify that in order to be eligible for the safe harbor a political subdivision must not be located in a state that has enacted a mandatory statewide payroll deduction savings program for private sector employees (which, as of now includes California, Connecticut, Illinois, Maryland and Oregon), but does not exclude from the safe harbor political subdivisions located in states that have enacted only voluntary programs such as those today in Massachusetts , New Jersey and Washington.

Pre-Existing ‘Conditions’

The final rule also excludes from the safe harbor political subdivisions that are located in a state that already has enacted a mandatory statewide payroll deduction savings program before the political subdivision enacts its own program. In in such instances the DOL says it is “incumbent upon the state and the political subdivision to determine how to coordinate the potentially overlapping programs in a way that does not require employer involvement beyond the limits of the safe harbor regulation, whether that means carving out the political subdivision from the state program, incorporating the political subdivision’s program into the state program, or employing some other alternative.”

Further, the final regulation imposes a first-in-time rule to the extent that a political subdivision meets the other conditions to be qualified but has a geographic overlap with another political subdivision that has already enacted a mandatory payroll deduction saving program for private-sector employees, the former political subdivision would be precluded from enacting a mandatory payroll deduction saving program that would satisfy the safe harbor.

In response to comments that fluctuating populations could cause a qualified political subdivision to fall below the required population threshold — and therefore drop outside the safe harbor—after it had already enacted a payroll deduction savings program, the final rule contains new language to clarify that such cities and counties would not lose their qualified status merely because of population fluctuations (by inserting the phrase “[a]t the time of the enactment of the political subdivision’s payroll deduction savings program”).

The DOL also took pains to note that the final regulation does not — and, it reminds that the DOL could not — bar smaller localities from establishing and maintaining payroll deduction savings programs for private-sector employees that fall outside the Department’s safe harbor regulation.