Savings Arrangements Established by State Political Subdivisions for Non-Governmental Employees, 59581-59592 [2016-20638]

Download as PDF Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules convicted of a criminal violation, in connection with the information that you submitted to the CFTC and upon which your application for an award is based. Question 5: State whether you acquired the information that you provided to the CFTC from any individual described in Questions 1 through 4 of this section. Question 6: If you answered yes to any of Questions 1 through 5 of this section, please provide details. Section E: Claims Pertaining to Related Actions Question 1: Provide the name of the agency or organization to which you provided your information. Question 2: Provide the name and contact information for your point of contact at the agency or organization, if known. Question 3a: Provide the date on which you provided your information to the agency or organization referenced in Question 1 of this section. 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Address these factors in your response as well. Section F: Eligibility Requirements and Other Information Question 1: State whether you are currently, or were at the time that you acquired the original information that you submitted to the CFTC, a member, officer or employee of: the CFTC; the Board of Governors of the Federal Reserve System; the Office of the Comptroller of the Currency; the Board of Directors of the Federal Deposit Insurance Corporation; the Director of the Office of Thrift Supervision; the National Credit Union Administration Board; the Securities and Exchange Commission; the Department of Justice; a registered entity; a registered futures association; a self-regulatory organization; a law enforcement organization; or a foreign regulatory authority or law enforcement organization. Question 2: State whether you provided the information that you submitted to the CFTC pursuant to a cooperation agreement with the CFTC, or with any other agency or organization. Question 3: State whether you provided this information before you (or anyone representing you) received any request, inquiry or demand that relates to the subject matter of your submission (i) from the CFTC, (ii) in connection with an investigation, inspection or examination by any registered entity, registered futures association or selfregulatory organization, or (iii) in connection with an investigation by the Congress, or any other federal or state authority. Question 4: State whether you are currently a subject or target of a criminal investigation, or whether you have been VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 Section H: Claimant’s Declaration You must sign this Declaration if you are submitting this claim pursuant to the CFTC whistleblower program and wish to be considered for an award. If you are submitting your claim anonymously, you must do so through an attorney, and you must provide your attorney with your original signed Form WB–APP. Section I: Counsel Certification If you are submitting this claim pursuant to the CFTC whistleblower program anonymously, you must do so through an attorney, and your attorney must sign the Counsel Certification Section. Issued in Washington, DC, on August 24, 2016, by the Commission. Christopher J. Kirkpatrick, Secretary of the Commission. Note: The following appendix will not appear in the Code of Federal Regulations. PO 00000 Frm 00064 Fmt 4702 Sfmt 4702 59581 Appendix to Whistleblower Awards Process—Commission Voting Summary On this matter, Chairman Massad and Commissioners Bowen and Giancarlo voted in the affirmative. No Commissioner voted in the negative. [FR Doc. 2016–20745 Filed 8–29–16; 8:45 am] BILLING CODE 6351–01–P DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2510 RIN 1210–AB76 Savings Arrangements Established by State Political Subdivisions for NonGovernmental Employees Employee Benefits Security Administration, Department of Labor. ACTION: Proposed rule. AGENCY: In this document, the Department proposes to amend a regulation that describes how states may design and operate payroll deduction savings programs, using automatic enrollment, for private-sector employees without causing the states or privatesector employers to establish employee pension benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA). The proposed amendments would expand the current regulation beyond states to cover programs of qualified state political subdivisions that otherwise comply with the current regulation. This rule would affect individuals and employers subject to such programs. DATES: Written comments should be received on or before September 29, 2016. SUMMARY: You may submit comments, identified by RIN 1210–AB76, by one of the following methods: • Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. • Email: e-ORI@dol.gov. Include RIN in the subject line of the message. • Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N–5655, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210, Attention: Savings Arrangements Established by State Political Subdivisions for NonGovernmental Employees. Instructions: All submissions must include the agency name and Regulatory Identification Number (RIN) for this ADDRESSES: E:\FR\FM\30AUP1.SGM 30AUP1 59582 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS rulemaking. Persons submitting comments electronically are encouraged to submit only by one electronic method and not to submit paper copies. Comments will be available to the public, without charge, online at www.regulations.gov and www.dol.gov/ ebsa and at the Public Disclosure Room, Employee Benefits Security Administration, U.S. Department of Labor, Suite N–1513, 200 Constitution Avenue NW., Washington, DC 20210. WARNING: Do not include any personally identifiable or confidential business information that you do not want publicly disclosed. Comments are public records and are posted on the Internet as received, and can be retrieved by most internet search engines. 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 Elsewhere in today’s Federal Register, the Department issued a final regulation describing conditions that would allow state governments to establish payroll deduction savings programs, with automatic enrollment, for private-sector employees without the state or the employers of those employees being treated as establishing employee pension benefit plans under ERISA. The final regulation is published in response to legislation in some states, and strong interest by others, to encourage retirement savings by giving privatesector employees broader access to savings arrangements through their employers. The final regulation is effective as of October 31, 2016. As noted in the preamble to the final regulation, concerns that tens of millions of American workers do not have access to workplace retirement savings arrangements have led some states to establish programs that allow private-sector employees to contribute payroll deductions to tax-favored individual retirement accounts described in 26 U.S.C. 408(a) or individual retirement annuities described in 26 U.S.C. 408(b), including Roth IRAs described in 26 U.S.C. 408A (IRAs), offered and administered by the states. California, Connecticut, Illinois, Maryland, and Oregon, for example, have adopted laws along these lines.1 1 California Secure Choice Retirement Savings Trust Act, Cal. Gov’t Code §§ 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 VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 These initiatives generally require certain employers that do not offer workplace savings arrangements to automatically deduct a specified amount of wages from their employees’ paychecks unless the employee affirmatively chooses not to participate in the program. 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. None of the initiatives require employers to make matching or other contributions of their own to employee accounts. Some expressly bar such contributions and others do not address this matter. 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. As indicated in the preamble to the final rule, some states expressed concern that these payroll deduction savings programs could cause either the state or covered employers to inadvertently establish ERISA-covered plans, despite the express intent of the states to avoid such a result. This concern is based on ERISA’s broad definition of ‘‘employee pension benefit plan’’ and ‘‘pension plan,’’ which are defined in relevant part as ‘‘any 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.’’ 2 The Department and the courts have broadly interpreted ‘‘established or maintained’’ to require only minimal involvement by an employer or employee organization.3 An employer could, for example, establish an employee benefit plan simply by purchasing insurance (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). 2 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 exemptions 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). 3 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). PO 00000 Frm 00065 Fmt 4702 Sfmt 4702 products for individual employees. These expansive definitions are essential to ERISA’s purpose of protecting plan participants by ensuring the security of promised benefits. Although ERISA does not govern plans established by states for their own employees, it governs nearly all plans established by private-sector employers for their employees. With certain exceptions, ERISA preempts state laws that relate to ERISA-covered employee benefit plans.4 Thus, if a state program were to require employers to take actions that effectively caused them to establish ERISA-covered plans, the state law underlying the program would likely be preempted. Similarly, ERISA would likely preempt a state law mandating private-sector employers to enroll their employees in an ERISA plan established by the state. A. The Department’s Rulemaking Regarding State Payroll Deduction Savings Initiatives The Department responded to the states’ concerns by publishing in today’s Federal Register a final safe harbor regulation describing specific circumstances in which state payroll deduction savings programs with automatic enrollment would not give rise to the establishment of employee pension benefit plans under ERISA. As a result, the final regulation helps states (but not political subdivisions) establish and operate payroll deduction savings programs so as to reduce the risk of ERISA preemption by avoiding the establishment of ERISA-covered plans. B. Public Comments on Political Subdivisions In both the 2015 proposed rule, and the current final rule, the Department defines the term ‘‘State’’ to have the same meaning as given to that term in section 3(10) of ERISA.5 That section, in 4 ERISA section 514(a), 29 U.S.C. 1144(a). 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. 80 FR 72006. On the same day that proposal was published, the Department also published an interpretive bulletin explaining the Department’s views concerning the application of ERISA section 3(2)(A), 29 U.S.C. 1002(2)(A), section 3(5), 29 U.S.C. 1002(5), and section 514, 29 U.S.C. 1144 to certain state laws designed to expand retirement savings options for private-sector workers through state-sponsored ERISA-covered retirement plans. 80 FR 71936 (codified at 29 CFR 2509.2015–02). Although discussed in the context of a state as the responsible governmental body, in the Department’s view the principles articulated in 5 On E:\FR\FM\30AUP1.SGM 30AUP1 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS relevant part, provides that the term State ‘‘includes any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, [and] Wake Island.’’ The effect of the definition is to limit the scope of the safe harbor to the fifty states and these other jurisdictions. The Department received multiple comments on the 2015 proposed rule concerning this definition. Several commenters believed this definition is too narrow and supported a broader definition in the final rule. They expressed their support, in general, for a definition that would cover not only state payroll deduction savings programs, but also payroll deduction savings programs of political subdivisions, such as counties and cities. Set forth below are the commenters’ main arguments in favor of expanding the safe harbor to include political subdivisions: 1. Expansion of the safe harbor to political subdivisions will increase retirement savings. Many U.S. workers will continue to be deprived of a workplace savings opportunity unless the safe harbor is expanded to cover payroll deduction savings programs of political subdivisions.6 Where states do not establish state-wide programs, political subdivisions within those states may be willing to do so, but are hesitant to act unless the safe harbor is expanded to clearly cover them.7 Expanding the safe harbor, therefore, would expand retirement savings coverage, especially in states that do not themselves establish state-level payroll deduction savings programs but do have political subdivisions that would be willing to do so.8 2. Expansion of the safe harbor to political subdivisions is supported by section 3(2) of ERISA. The legal basis for the current safe harbor for state programs would not suggest a different result for payroll deduction savings programs established by state political subdivisions that otherwise meet the safe harbor’s conditions. Employers that the Interpretive Bulletin regarding marketplace arrangements and sponsorship of ERISA-covered plans also apply with respect to laws of a political subdivision, provided applicable conditions in the bulletin can be and are satisfied by the political subdivision. 6 See, e.g., Comment Letter #57 (Public Advocate for the City of New York). 7 See, e.g., Comment Letter #38 (City of New York Office of Comptroller) and Comment Letter #42 (City of New York Office of the Mayor). See also Letter from Alan L. Butkovitz, City Controller, Philadelphia to Hon. Thomas E. Perez and Phyllis C. Borzi (April 7, 2016). 8 See, e.g., Comment Letter #41 (Georgetown University Center for Retirement Initiatives). VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 facilitate payroll deduction contributions to an IRA as required by the law of a political subdivision cannot logically be viewed as engaging in more or less involvement than employers that perform the same functions as required by the law of a state. In both cases, employers participate under a legal requirement and are limited to ministerial activity, such as withholding and remitting wages to an IRA custodian. Consequently, the standard for determining whether, under section 3(2) of ERISA, an ‘‘employee pension benefit plan’’ has been ‘‘established or maintained’’ should be the same in both cases. There simply is no legal basis for not expanding the safe harbor to political subdivisions.9 3. Expansion of the safe harbor to political subdivisions will not unduly burden employers. The safe harbor requires the state to administer the payroll deduction savings program. The safe harbor also forbids employers from involvement other than enrolling employees (or processing their opt-out requests), transmitting payroll deductions, and communicating statedeveloped explanatory materials. There is no variability in these conditions across political jurisdictions or state lines. Thus, extending the safe harbor to political subdivisions would create only a minimal burden on employers because they are limited to these few ministerial functions, even if the employer operates in multiple jurisdictions and is subject to multiple payroll deduction savings programs.10 Commenters further argue that most employers in multiple jurisdictions will be unaffected because they already offer retirement plans, the offering of which would exempt the employers from payroll deduction savings programs of state and political subdivisions.11 4. Expansion of the safe harbor could be limited to certain political subdivisions. To the extent there are concerns regarding the ability of smaller governmental authorities to appropriately oversee and safeguard payroll deduction savings programs, commenters have suggested that an expanded safe harbor could be restricted to political subdivisions that meet 9 See, e.g., Comment Letter #65 (Pension Rights Center). 10 See, e.g., Comment Letter #38 (City of New York Office of the Comptroller), Comment Letter #42 (City of New York Office of the Mayor), and Comment Letter #58 (Service Employee International Union and others). 11 See, e.g., Comment Letter #38 (City of New York Office of the Comptroller) and Comment Letter #58 (Service Employee International Union and others). PO 00000 Frm 00066 Fmt 4702 Sfmt 4702 59583 certain criteria.12 For example, the safe harbor could be extended to political subdivisions that meet a minimum population requirement, such as a population equal to or greater than the least populous state.13 Another criterion could be sponsorship of a governmental employee pension plan with a certain amount of assets.14 These criteria could indicate that the political subdivision has appropriate experience and infrastructure to operate a payroll deduction savings program.15 Another criterion could be that the political subdivision is not in a state that has established its own payroll deduction savings program.16 Any combination of these criteria could be used to limit the safe harbor. Several commenters also suggested that political subdivisions could be required to petition the Department for approval to establish a payroll deduction savings program.17 5. Expansion of the safe harbor will not conflict with state initiatives. Permitting political subdivisions to establish payroll deduction savings programs will not necessarily result in interference with state initiatives in this area. States generally have the authority to determine whether their political subdivisions may and should establish payroll deduction savings programs; determinations such as these are matters to be resolved between the states and their political subdivisions. If a state legislature chooses to create a program for the entire state, that program could simply preempt or incorporate any existing city-level payroll deduction savings program.18 The Department agrees with commenters that there may be good reasons for expanding the safe harbor to cover political subdivisions. It is not clear to the Department, however, how many such political subdivisions would have an interest in establishing programs of the kind described in the 12 Id. See also Letter from Seattle City Councilmember Tim Burgess to Hon. Thomas E. Perez and Phyllis C. Borzi (April 11, 2016). 13 Id. 14 See, e.g., Comment Letter #42 (City of New York Office of the Mayor). 15 See, e.g., Comment Letter #36 (AFL–CIO) and Comment Letter #38 (City of New York Office of the Comptroller). 16 See, e.g., Comment Letter #38 (The City of New York Office of the Comptroller), Comment Letter #56 (Aspen Institute Financial Security Program), and Comment Letter #63 (Tax Alliance for Economic Mobility). 17 See, e.g., Comment Letter #20 (New America), Comment Letter #56 (Aspen Institute Financial Security Program), and Comment Letter #63 (Tax Alliance for Economic Mobility). 18 See, e.g., Comment Letter #57 (Public Advocate for the City of New York). E:\FR\FM\30AUP1.SGM 30AUP1 59584 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules final safe harbor regulation.19 It also is not clear how many political subdivisions would have authority to establish such programs and to require employer participation in such programs. Assuming that at least some political subdivisions could comply with the conditions of the current safe harbor for states, the Department believes that it is important to consider whether these political subdivisions’ programs should be included in the safe harbor and that the Department’s analysis of the issue would benefit from additional public comments. Accordingly, the Department is publishing this notice of proposed rulemaking soliciting further comments on whether and how the safe harbor should be expanded to state political subdivisions. mstockstill on DSK3G9T082PROD with PROPOSALS II. Overview of Proposed Rule The proposal would amend paragraph (h) of § 2510.3–2 to add the term ‘‘or qualified political subdivision’’ wherever the term ‘‘State’’ appears in the current regulation. Thus, the regulation’s safe harbor provisions would apply in the same manner to payroll deduction savings programs of qualified political subdivisions as they currently apply to state programs. The proposal would add a new paragraph (h)(4) to define the term ‘‘qualified political subdivision.’’ Proposed paragraph (h)(4) would define qualified political subdivision as any governmental unit of a state, including any city, county, or similar governmental body that meets three criteria. First, the political subdivision must have the authority, implicit or explicit, under state law to require employers’ participation in the payroll deduction savings program. Second, the political subdivision must have a population equal to or greater than the population of the least populous state.20 Third, the political subdivision cannot be within a state that has a state-wide retirement savings program for privatesector employees. The definition in paragraph (h)(4) of the proposal would not apply for other purposes under ERISA, such as for determining whether an entity is a political subdivision for purposes of the definition of a ‘‘governmental plan’’ in section 3(32) of ERISA, 29 U.S.C. 1002(32). 19 Thus far, the Department has received written letters of interest from representatives of Philadelphia, New York City, and Seattle. 20 For this purpose, the term ‘‘state’’ does not include the non-state authorities listed in section 3(10) of ERISA. Thus, it does not include the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, and Wake Island. VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 According to the U.S. Census Bureau, there are approximately 90,000 local governmental units that could be considered ‘‘political subdivisions’’ for purposes of the proposed regulation.21 Of this number, there are approximately 40,000 ‘‘general-purpose’’ political subdivisions in the United States, which include county governments, municipal governments, and township governments.22 The remaining approximately 50,000 political subdivisions are so-called ‘‘specialpurpose’’ political subdivisions that perform only one function or a very limited number of functions, such as school districts, utility districts, water and sewer districts, and transit authorities.23 The number of political subdivisions within each state varies widely across the nation, with Illinois, Minnesota, Pennsylvania, and Ohio having over 2,000 general-purpose subdivisions, while Hawaii has only four.24 In addition, the populations of political subdivisions range greatly in size, for example, from 10,170,292 (Los Angeles County) to 1 (Monowi Village, Nebraska).25 Given these statistics, the proposed definition is intended to reduce the number of political subdivisions that would be able to fit within the safe harbor to a small subset of the total number of political subdivisions in the U.S. The Department is sensitive to the issue regarding the potential for overlapping programs to apply, for example, to an employer that might be 21 The U.S. Census Bureau’s count for 2012 (the most recent data available). The U.S. Census Bureau produces data every 5 years as a part of the Census of Governments in years ending in ‘‘2’’ and ‘‘7.’’ See U.S. Census Bureau, Government Organization Summary Report: 2012 Census of Governments (http://www.census.gov/govs/cog/index.html). 22 The U.S. Census Bureau’s count of generalpurpose political subdivisions for 2012 was 38,910 (3,031 counties, 19,519 municipalities, and 16,360 townships). Id. 23 The Census Bureau’s count of special-purpose political subdivisions for 2012 was 51,146. Specialpurpose political subdivisions include school districts and all other single or limited purpose political subdivisions, known by a variety of titles, including districts, authorities, boards, and commissions. Id. 24 Illinois has 2,831, Minnesota has 2,724, Pennsylvania has 2,627 and Ohio has 2,333 generalpurpose political subdivisions. Note also that the District of Columbia has only one general-purpose political subdivision. See U.S. Census Bureau, Local Governments by Type and State: 2012 Census of Governments (http://www.census.gov/govs/cog/ index.html). 25 U.S. Census Bureau, Annual Estimates of the Resident Population for Counties: 2015 Population Estimate (http://www.census.gov/popest/data/ counties/totals/2015/index.html); U.S. Census Bureau, Annual Estimates of the Resident Population for Cities and Towns (Incorporated Places and Minor Civil Divisions): 2015 Population Estimate (https://www.census.gov/popest/data/ cities/totals/2015/index.html). PO 00000 Frm 00067 Fmt 4702 Sfmt 4702 operating in a state (or states) with multiple political subdivisions. In addition, given that the vast majority of political subdivisions are relatively small in terms of population (approximately 83% have populations of less than 10,000 people), the Department also is sensitive to the issue of whether smaller political subdivisions have the ability to oversee and safeguard payroll deduction savings programs.26 A narrow expansion of the safe harbor would address these concerns. The proposal’s first limit on the number of political subdivisions is the criterion that, to be within the safe harbor, the political subdivision must have the authority under state law to require employers within its jurisdiction to participate in the payroll deduction savings program, including in particular, the power to require wage withholding in the case of programs with automatic enrollment.27 See paragraph (h)(4)(i) of this proposal. As proposed, this requirement does not mean that a state law must explicitly authorize the political subdivision to establish the program at issue, but the political subdivision would need to have authority, implicit or explicit, under state law to establish and operate the program and compel employer participation. The Department understands that this criterion (i.e., that the political subdivisions have the ability to compel employer participation) will have the effect of limiting the proposed definition, and therefore the scope of the safe harbor, to so-called ‘‘general-purpose’’ subdivisions, meaning political subdivisions with authority to exercise traditional sovereign powers, such as the power of taxation, the power of eminent domain, and the police power. The Department does not expect that ‘‘special-purpose’’ subdivisions, such as utility districts or transit authorities, ordinarily will have this kind of authority under state law. This limitation is expected to reduce the universe of potential political subdivisions to approximately 40,000 from the approximately 90,000 total. Commenters suggested three specific additional criteria that could be used to 26 U.S. Census Bureau, County Governments by Population-Size Group and State: 2012 Census of Governments; U.S. Census Bureau; Subcounty Governments by Population-Size Group and State: 2012 Census of Governments (http:// www.census.gov/govs/cog/index.html). 27 This criterion not only limits the number of political subdivisions that would be eligible for the safe harbor, it also is central to the Department’s analysis under section 3(2) of ERISA and the conclusion that employers are not establishing or maintaining ERISA-covered plans. E:\FR\FM\30AUP1.SGM 30AUP1 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules narrow this universe of approximately 40,000 political subdivisions even further. The first suggested criterion is that a political subdivision would have a population equal to or greater than the population of the least populous state.28 The second suggested criterion is that the state in which the political subdivision exists does not have a statewide retirement savings program for private-sector employees. The third suggested criterion is that a political subdivision would have demonstrated capacity to design and operate a payroll deduction savings program, such as by maintaining a pension plan with substantial assets for employees of the political subdivision.29 The proposal adopts only the first two criteria suggested by the commenters. To be within the safe harbor, the proposal would require that the political subdivision have a population equal to or greater than the population of the least populous State (excluding the District of Columbia and territories listed in section 3(10) of the ERISA). See paragraph (h)(4)(ii) of this proposal. Based on the most recently available U.S. Census Bureau statistics, Wyoming is the least populous state, with approximately 600,000 residents. The Department has two primary policy reasons for adopting this criterion. First, it is important to the Department that the proposal not expand the safe harbor to political subdivisions that may not have the experience, capacity, and resources to safely establish and oversee payroll deduction savings programs in a manner that is sufficiently protective of employees. The existing public record does not convince the Department that small political subdivisions in general have comparable experience, resources, and capacity to those of the least populous state.30 Second, it is important to the Department that the proposal reduce the possibility that employers would be subject to a multiplicity of overlapping political subdivision programs. This criterion would significantly reduce the possibility of overlap by limiting the universe of mstockstill on DSK3G9T082PROD with PROPOSALS 28 Wyoming is the least populated state in the U.S., with a population of 586,107. See U.S. Census Bureau, Annual Estimates of the Resident Population for States: 2015 Population Estimate (https://www.census.gov/popest/data/state/totals/ 2015/index.html). 29 New York City, for instance, has five different pension funds with their combined $160 billion in assets and a deferred compensation plan with over $15 billion in assets. See Comment Letter # 42 (City of New York Office of Mayor) and Comment Letter #38 (City of New York Office of Comptroller). 30 The regulation does not preclude these smaller political subdivisions from establishing their own programs, but for policy reasons the Department chooses not to extend safe harbor status to such programs. VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 potentially eligible political subdivisions from approximately 40,000 to a subset of approximately 136 political subdivisions.31 In addition, the proposal would further condition the safe harbor on the political subdivision not being in a state that has a state-wide retirement savings program for private-sector employees. See paragraph (h)(4)(iii) of this proposal. For instance, eight states presently have adopted laws to implement some form of state-wide savings program for private-sector employees.32 This criterion would exclude from the safe harbor approximately 48 additional political subdivisions with populations equal to or greater than the population of Wyoming, thereby limiting the universe of potentially eligible political subdivisions to approximately 88.33 The criterion is intended to mitigate overlap and duplication in circumstances where it is most likely to exist, and contemplates, but is not necessarily limited to, those state retirement savings programs described in the safe harbor rule at 29 CFR 2510.3–2(h) and the Department’s Interpretive Bulletin at 29 CFR 2509.2015–02. The Department also is considering the possibility of further limiting the universe of potentially eligible political subdivisions. The Department is considering whether to add the third criterion suggested by the commenters that would require that political subdivisions have a demonstrated capacity to design and operate a payroll deduction savings program, such as by maintaining a pension plan with substantial assets for employees of the political subdivision. Whereas the ‘‘smallest state’’ criterion in paragraph (h)(4)(ii) of the proposal would assume that political subdivisions have sufficient experience, capacity, and resources to safely establish and oversee a payroll deduction savings program by using population as a proxy for evidence of these characteristics, this criterion would require direct and objectively verifiable evidence of this 31 As of 2015, there were approximately 136 general-purpose political subdivisions with populations equal to or greater than the population of Wyoming. 32 California Secure Choice Retirement Savings Trust Act, Cal. Gov’t Code §§ 100000–100044 (2012); Connecticut Retirement Security Program Act, Pub. Act. 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); Mass. Gen. Laws ch. 29, § 64E (2012); New Jersey Small Business Retirement Marketplace Act, Pub. L. 2015, ch. 298; Oregon Retirement Savings Board Act, ch. 557 (H.B. 2960) (2015); Washington State Small Business Retirement Savings Marketplace Act, Wash. Rev. Code §§ 43.330.730–750 (2015). 33 Supra at footnote 25. PO 00000 Frm 00068 Fmt 4702 Sfmt 4702 59585 ability. For example, a political subdivision that establishes and maintains a large defined benefit plan for its governmental employees would be more likely to have sufficient experience, capacity, and resources to design and operate a payroll deduction savings program. III. Solicitation of Comments The Department seeks comments on all aspects of this proposal. Although general comments and views on whether or not the safe harbor should be expanded to cover political subdivisions are solicited, the Department is especially interested in comments on the proposed definition of ‘‘qualified political subdivision’’ in paragraph (h)(4). Specifically, commenters are encouraged to focus on the three specific limiting criteria in paragraphs (i), (ii), and (iii) of (h)(4) of the proposal, and to address the following operational questions. With respect to paragraph (h)(4)(ii) of the proposal (requiring the political subdivision to have a population equal to or greater than the population of the least populous state), comments are solicited on whether the final regulation should contain a provision to address the possibility of fluctuating populations of states and political subdivisions and the consequences of a qualified political subdivision falling below the required population threshold after it has already established and is administering a payroll deduction savings program. For instance, determinations under paragraph (h)(4)(ii) could be made at a fixed point in time and preserved, such that future changes in populations of the state, political subdivision, or both would not affect the program’s status under the safe harbor. The phrase ‘‘at the time it establishes its payroll deduction savings program,’’ for example, could be added to the end of paragraph (h)(4)(ii) of the proposal to accomplish this result. With respect to paragraph (h)(4)(iii) of the proposal (relating to situations in which a state has a preexisting statewide retirement savings program), comments are solicited on whether the final regulation should address the effect on the status of a payroll deduction savings program of a qualified political subdivision if the state in which the subdivision is located establishes a state-wide retirement savings program after the subdivision has established and operates a payroll deduction savings program. If a state were to establish a state-wide program after one of its subdivisions previously had done so, presumably the state would take into account the nature and E:\FR\FM\30AUP1.SGM 30AUP1 mstockstill on DSK3G9T082PROD with PROPOSALS 59586 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules existence of the subdivision’s program and act in a measured and calculated way so as to avoid or mitigate any undesirable overlap, in which case the final regulation need not address the issue. For example, the state could act by displacing the subdivision’s program after a transition period or coordinating the state and subdivision programs. Either approach would mitigate overlap. In addition, for an employer that had employees in two adjoining states, overlap could be avoided or mitigated by coordination among the states (including their political subdivisions) to, for example, exempt any employer that complied with any state (or political subdivision) program or sponsored a workplace savings arrangement. The intent of such approaches could be to ensure that employers would never be subject to more than one state (or political subdivision) program. Also with respect to paragraph (h)(4)(iii) of the proposal, comments are solicited on whether the final regulation should expand this provision to cover, for example, those situations in which a political subdivision, encompassed within the jurisdictional boundaries of a larger political subdivision that already maintains a retirement savings program, seeks to establish a payroll deduction savings program. For instance, if a county in a state without a state-wide retirement savings program were to establish a county-wide retirement savings program, the question is whether paragraph (h)(4)(iii) of the proposal should be expanded to preclude a city in (or in part of) that county from thereafter being considered a qualified political subdivision. Thus, in much the same way that paragraph (h)(4)(iii) of the proposal would mitigate overlap across the entire state, the expansion discussed in this paragraph could mitigate overlap across political subdivisions, in circumstances in which there is no state-wide retirement savings program. In addition, commenters are encouraged to focus on the criterion relating to a demonstrated capacity to design and operate a payroll deduction savings program. As mentioned above, this criterion is being considered by the Department, but is not included in paragraph (h)(4) of the proposal. Comments on what objective evidence could be used by political subdivisions to establish that they have sufficient experience, capacity, and resources to design and operate a payroll deduction savings program would be particularly useful. Some commenters, by contrast, suggested fewer limitations than what is VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 included in paragraph (h)(4) of the proposal. These commenters believe that the only limitation needed is the one in paragraph (h)(4)(i) of the proposal (i.e., the political subdivision must have the requisite authority, implicit or explicit, under state law to require the employer’s participation in the program). The Department requests that commenters also address this approach and whether, and to what extent, overlap would be a problem under this approach and if not, why. Further, if the safe harbor is expanded to qualified political subdivisions, commenters are encouraged to address whether the conditions of the existing safe harbor should differ in any way as applied to the qualified political subdivisions. In addition, the Department is interested in additional comments on other criteria, not discussed in this proposal, which might be used to refine the definition of qualified political subdivision in the proposed regulation or other facets of the safe harbor more generally. IV. 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 review by 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 mandates, the President’s priorities, or the principles set forth in the Executive Order. OMB has tentatively 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 proposed rule and the PO 00000 Frm 00069 Fmt 4702 Sfmt 4702 Department provides the following assessment of its benefits and costs. B. Background and Need for Regulatory Action As discussed in detail above in Section I of this preamble, several commenters on the 2015 proposal urged the Department to expand the safe harbor to include payroll deduction savings programs established by political subdivisions of states. In particular, the 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. Certain commenters asked the Department to consider extending the safe harbor to large political subdivisions (in terms of population) with authority and capacity to maintain such programs. The Department stated in the final rule that it agrees with these commenters but believes that its analysis of the issue would benefit from additional public comments. Accordingly, the Department is publishing this notice of proposed rulemaking, which would amend paragraph (h) of § 2510.3–2 to cover payroll deduction savings programs of qualified political subdivisions, as defined in paragraph (h)(4) of this proposal. C. Benefits and Costs In analyzing benefits and costs associated with this proposed 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 proposed rule would merely establish a safe harbor describing the circumstances under which a qualified political subdivision with authority under state law could establish payroll deduction savings programs that would not give rise to ERISA-covered employee pension benefit plans. It does not require qualified political subdivisions to take any actions nor employers to provide any retirement savings programs to their employees. The Department also addresses indirect effects associated with the proposed rule, which include (1) potential benefits and costs directly associated with the requirements of qualified political subdivision payroll deduction savings programs, and (2) the potential increase in retirement savings and potential cost burden imposed on E:\FR\FM\30AUP1.SGM 30AUP1 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS covered employers to comply with the requirements of such programs. Indirect effects vary by qualified political subdivisions depending on their program requirements and the degree to which the proposed rule might influence political subdivisions to design their payroll deduction savings programs. 1. Direct Benefits The Department believes that political subdivisions and other stakeholders would directly benefit from the proposal to expand the scope of the safe harbor to include payroll deduction savings programs established by qualified political subdivisions eligible for the safe harbor rule. Similar to the states, this will provide political subdivisions with clear guidelines to determine the circumstances under which programs they create for private-sector workers would not give rise to the establishment of ERISA-covered plans. The Department expects that the proposed rule would reduce legal costs, including litigation costs political subdivisions would incur, by (1) removing uncertainty about whether such political subdivision payroll deduction savings programs give rise to the establishment of plans that are covered by Title I of ERISA, and (2) creating efficiencies by eliminating the need for multiple political subdivisions to incur the same costs to determine that their programs would not give rise to the establishment of ERISA-covered plans. However, these benefits would be limited to qualified political subdivisions meeting all criteria set forth in this proposed rule. Those governmental units of a state, including any city, county, or similar governmental body that are not eligible to use the safe harbor may incur legal costs if they elect to establish their own payroll deduction savings programs. Furthermore, the population size criterion inherently induces uncertainty about eligibility status because population sizes of both states and political subdivisions change over time due to births, deaths, and migrations. Some political subdivisions currently meeting the safe harbor criteria may face uncertainty and incur legal costs later if they fail the population test after they establish their own payroll deduction savings programs.34 This uncertainty 34 According to 1980 Census, Alaska was the least populated state but in 2010, it followed Wyoming and Vermont as the third smallest state. Wyoming was the least populated state in 2000 and 2010. A number of counties and cities that were more populated than Wyoming in 2000 became less populated than Wyoming in 2010. For example, to name a few, Delaware County in Pennsylvania, New VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 about the eligibility status may deter some political subdivisions that barely meet the population size requirement from establishing their own payroll deduction savings programs, especially if their populations are projected to decline or to remain steady compared to the population growth of the least populous state in near future. For example, a currently qualified political subdivision interested in establishing its own payroll deduction savings program may not do so if it is unsure whether it can continuously meet the population criterion set forth in this proposed rule. Similarly, some qualified political subdivisions may face uncertainty if their states establish a state-wide retirement savings programs later. Thus, although the Department estimates approximately 88 political subdivisions could become qualified under this proposed rule, some qualified political subdivisions may not consider themselves as qualified in a practical sense based on the uncertainty regarding their population growth and their states’ decisions in near future. Even beyond that, some political subdivisions may have no interest in establishing payroll deduction savings programs without regard to the safe harbor in the proposal. The Department notes that the proposed rule would not prevent political subdivisions 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 proposed rule would reduce uncertainty about political subdivision activity within the safe harbor, it would not impair political subdivision activity outside of it. This proposed regulation is a safe harbor and as such, does not require employers to participate in qualified political subdivision payroll deduction savings programs; nor does it purport to define every possible program that does not give rise to the establishment of ERISA-covered plans. 2. Direct Costs The proposed rule does not require any new action by employers or the political subdivisions. It merely establishes a safe harbor describing certain circumstances under which qualified political subdivision-required payroll deduction savings programs Castle County in Delaware, Summit County in Ohio, Union County in New Jersey were larger than Wyoming by population in 2000 yet became smaller by 2010. Another example would be Las Vegas city in Nevada. Las Vegas city was smaller than Wyoming in 2000 but it surpassed Wyoming in population size by 2010. PO 00000 Frm 00070 Fmt 4702 Sfmt 4702 59587 would not give rise to an ERISA-covered employee pension benefit plan and, therefore, should not be preempted by ERISA. Political subdivisions may incur legal costs to analyze the rule and determine whether their programs fall within the safe harbor. However, the Department expects that these costs will be less than the costs that would be incurred in the absence of the proposed rule. Some political subdivisions currently developing payroll deduction savings programs would need to monitor their current population to assess their eligibility for the safe harbor, projected population sizes as well as the least populous state’s size. However, the Department expects these monitoring costs to be small, because such monitoring activity generally would be confined to political subdivisions with a population size similar to the least populous state. Similarly, some political subdivisions interested in developing their own payroll deduction savings programs would also need to monitor states’ activities regarding state-wide retirement savings programs and communicate with states to mitigate any undesirable overlap. Qualified political subdivisions may incur administrative and operating costs including mailing and form production costs. These potential costs are not directly attributable to the proposed rule; however, they are attributable to the political subdivision’s creation of the payroll deduction savings program pursuant to its authority under state law. Some commenters on the 2015 proposed rule expressed the concern that smaller political subdivisions without the experience or capabilities to administer a payroll deduction savings program may contemplate creating and operating their own programs if the safe harbor rule is extended to all political subdivisions without any restrictions. This proposed rule addresses this concern by limiting eligibility for the safe harbor rule based on a political subdivision’s population size, assuming larger political subdivisions are more likely than smaller ones to have sufficient existing resources, experience, and infrastructure to create and implement payroll deduction savings programs. 3. Uncertainty The Department is confident that the proposed safe harbor rule, by clarifying that qualified political subdivision programs do not require employers to establish ERISA-covered plans, will benefit political subdivisions and many other stakeholders otherwise beset by greater uncertainty. However, the E:\FR\FM\30AUP1.SGM 30AUP1 59588 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS Department is unsure as to the magnitude of the benefits, costs and transfer impacts of these programs, because they will depend on the qualified political subdivisions’ independent decisions on whether and how best to take advantage of the safe harbor and on the cost that otherwise would have been attached to uncertainty about the legal status of the qualified political subdivisions’ actions. The Department is also unsure of (1) the proposed rule’s effects on political subdivisions that do not meet the safe harbor criteria, (2) whether any of these ineligible political subdivisions are currently developing their own payroll deduction savings programs, and (3) the extent to which ineligible political subdivisions would be discouraged from designing and implementing payroll deduction savings programs. The Department cannot predict what actions political subdivisions will take, stakeholders’ propensity to challenge such actions’ legal status, either absent or pursuant to the proposed rule, or courts’ resultant decisions. 4. Indirect Effects: Impact of Qualified Political Subdivision Payroll Deduction Savings Programs As discussed above, the impact of qualified political subdivision payroll deduction savings programs is directly attributable to the qualified political subdivision legislation that creates such programs. As discussed below, however, under certain circumstances, these effects could be indirectly attributable to the proposed rule. For example, it is conceivable that more qualified political subdivisions could create payroll deduction savings programs due to the clear guidelines provided in the proposed rule and the reduced risk of an ERISA preemption challenge, and therefore, the increased prevalence of such programs would be indirectly attributable to the proposed rule. However, such an increase would be bounded by the eligibility restrictions for political subdivisions. 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 political subdivisions’ uncertainty-related costs could induce more political subdivisions to pursue these workplace savings initiatives. An additional possibility is that the rule would not change the prevalence of political subdivision payroll deduction savings programs, but would accelerate the implementation of programs that VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 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 political subdivision-level payroll deduction savings programs. The possibility exists that the proposed rule could result in an acceleration or deceleration of payroll deduction programs at the state level depending on the circumstances. For example, if multiple cities in a state set up robust, successful payroll deduction savings programs, a state that might otherwise create its own program could conclude a state-wide program no longer is necessary. On the other hand, states could feel pressure to create a state-wide program if a city in the state does so in order to provide retirement income security for all of its citizens. However, problems could arise if the state and city programs overlap. Therefore, in Section III above, the Department solicits comments regarding whether the final regulation should clarify the status of a payroll deduction savings program of a qualified political subdivision when the state in which the subdivision is located establishes a state-wide retirement savings program after the qualified political subdivision establishes and operates its program. As discussed in the comment solicitation, the Department expects that in this circumstance, states would take into account the nature and existence of the qualified political subdivision’s program and act in a measured and calculated way to ensure undesirable overlaps are eliminated. Qualified political subdivisions that elect to establish payroll deduction savings programs pursuant to the safe harbor would incur administrative and operating costs, which can be substantial especially in the beginning years until the payroll deduction savings programs become selfsustaining. In addition, in order to avoid conflicts and confusion, qualified political subdivisions may incur costs to coordinate with other subdivisions, particularly those with overlapping boundaries.35 However, these costs should offset compliance costs affected employers in the political subdivision would otherwise incur in the absence of communication and coordination. 35 For example, Harris County and City of Houston in Texas both would be eligible for the safe harbor and could create and operate their own savings programs. In this scenario, it would be ideal for the political subdivisions to coordinate and communicate with each other in developing and implementing savings programs to avoid conflicting rules and confusion for employers. PO 00000 Frm 00071 Fmt 4702 Sfmt 4702 The Department acknowledges the possibility that conflicting programs could be created in overlapping qualified political subdivisions when their programs are not coordinated in states without state-wide retirement savings program. Therefore, in order to obtain information that may help evaluate approaches to mitigate overlap across political subdivision, the Department solicits comments in Section III above regarding whether paragraph (h)(4)(iii) of the proposed rule should be expanded to, for example, preclude a city that is located within a county from being considered a qualified political subdivision if the county has established a county-wide payroll deduction savings program. Employers may incur costs to update their payroll systems to transmit payroll deductions to the political subdivision or its agent, develop recordkeeping systems to document their collection and remittance of payments under the payroll deduction savings program, and provide information to employees regarding the political subdivision programs. As with political subdivisions’ operational and administrative costs, some portion of these employer costs would be indirectly attributable to the rule if more political subdivision payroll deduction savings programs are implemented in the rule’s presence than would be in its absence. Because the proposed rule narrows the number of political subdivisions that are eligible for the safe harbor rule, the aggregate costs imposed on employers would be limited. Moreover, in order to satisfy the safe harbor, most associated costs for employers would be nominal because the roles of employers are limited to ministerial functions such as withholding the required contribution from employees’ wages, remitting contributions to the political subdivision program and providing information about the program to employees. However, 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, about 60% of small employers do not use a payroll service.36 These small 36 National Small Business Association, April 11, 2013, ‘‘2013 Small Business Taxation Survey.’’ This survey says 23% of small employers who handle payroll taxes internally have no employees. Therefore, only about 46%, not 60%, of small employers would be in fact affected by political subdivisions’ payroll deduction savings programs, 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. E:\FR\FM\30AUP1.SGM 30AUP1 mstockstill on DSK3G9T082PROD with PROPOSALS Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules employers may incur additional costs to use external payroll companies to comply with their political subdivisions’ programs. However, some small employers may decide to use a payroll service to withhold and remit payroll taxes independent of their political subdivisions’ program requirement. Therefore, the extent to which these costs can be attributable to political subdivisions’ programs could be smaller than what some might estimate. Moreover such costs could be mitigated if political subdivisions exempt the smallest companies from their payroll deduction savings programs as some states do. The Department welcomes comments regarding this assessment. Employers, particularly those operating in multiple political subdivisions, may face potentially increased costs to comply with several political subdivision payroll deduction savings programs. This can be more challenging for employers if they operate in political subdivisions where not all subdivisions have their own payroll deduction savings programs and/or where some subdivisions’ programs conflict with others. The Department acknowledges the heightened complexity caused by political subdivisions’ payroll deduction savings programs and challenges faced by employers. However, the employers operating across several political subdivision borders may have ERISA-covered plans in place for their employees. Thus, there may be no cost burden associated with complying with multiple political subdivision payroll deduction savings programs because employers that sponsor plans might be exempt from those programs. Furthermore, in order to satisfy the proposed safe harbor rule, the role of employers would be limited to ministerial functions such as timely transmitting payroll deductions, which implies that the increase in cost burden is further likely to be restricted. By limiting the eligibility to political subdivisions in states without statewide retirement savings programs, this proposed rule addresses the concerns raised by several commenters about the possibility that a political subdivision’s program may conflict with its state’s retirement savings program. The Department believes that welldesigned political subdivision-level payroll deduction savings programs have the potential to effectively reduce gaps in retirement security. Relevant variables such as pension coverage, VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 labor market conditions,37 population demographics, and elderly poverty, vary widely across the political subdivisions, suggesting a potential opportunity for progress at the political subdivision level. Many workers throughout these political subdivisions currently may save less than would be optimal due to (1) behavioral biases (such as myopia or inertia), (2) labor market conditions that prevent them from accessing plans at work, or (3) their employers failure to offer retirement plans.38 Some research suggests that automatic contribution policies are effective in increasing retirement savings and wealth in general by overcoming behavioral biases or inertia.39 Well-designed political subdivisions’ payroll deduction savings programs 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 lowincome Americans, including older Americans. The Department believes that welldesigned political subdivision payroll deduction savings programs can achieve their intended, positive effects of fostering retirement security. However, the potential benefits—primarily increases in retirement savings—might be somewhat limited, because the proposed safe harbor does not allow employer contributions to political subdivisions’ payroll deduction savings programs. Additionally, the initiatives might have some unintended consequences. Those workers least equipped to make good retirement savings decisions arguably stand to 37 See, e.g., U.S. Bureau of Labor Statistics, ‘‘Metropolitan Area Employment and Unemployment—May 2016,’’ USDL–16–1291 (June 29, 2016). 38 According to the National Compensation Survey, March 2016, only 66% of private-sector workers have access to retirement benefits— including Defined Benefit and Defined Contribution plans—at work. According to the comment letter submitted by the Public Advocate for the City of New York, only 41 percent of individuals working in the private sector within the five boroughs of New York City have access to retirement savings plans at work. 39 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). PO 00000 Frm 00072 Fmt 4702 Sfmt 4702 59589 benefit most from these programs, 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, political subdivisions’ payroll deduction savings programs 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. In general, workers without retirement plan coverage tend to be younger, lower-income or less attached to the workforce, thus these workers may be financially stressed or have other savings goals. Because only large political subdivisions can create and implement programs under the proposed rule, these demographic characteristics can be more pronounced assuming large political subdivisions tend to have more diverse workforces.40 If so, then the benefits of political subdivisions’ payroll deduction savings programs could be further limited and in some cases potentially harmful for certain workers. Although these might be valid concerns, political subdivisions are responsible for designing effective programs that minimize these types of harm and maximize benefits to participants. There is another concern that political subdivision initiatives may ‘‘crowd-out’’ ERISA-covered plans. The proposed rule may inadvertently encourage employers operating in multiple political subdivisions to switch from ERISA-covered plans to political subdivision payroll deduction savings programs in order to reduce costs especially if they are required to cover employees currently ineligible to participate in ERISA-covered plans under political subdivision programs. This proposed rule makes clear that political subdivision programs directed toward employers that do not offer other retirement plans fall within this proposed safe harbor rule. However, 40 See e.g., Comment Letter #57 (Public Advocate for the City of New York). E:\FR\FM\30AUP1.SGM 30AUP1 59590 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules mstockstill on DSK3G9T082PROD with PROPOSALS 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 political subdivision programs. Potential advantages include significantly higher limits on taxfavored contributions, 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 political subdivision 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 political subdivision-based (IRA) benefits if political subdivisions 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 political subdivision programs. Political subdivisions 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. There also is a concern that political subdivisions’ programs would in general provide participants with less consumer protection than ERISAcovered plans. However, this concern can be addressed by political subdivisions designing their programs with sufficient participant protections. D. Regulatory Alternatives As discussed in Section II of this preamble, the Department was presented with and considered two divergent alternatives in determining which political subdivisions would be qualified to use the safe harbor. Under the first and broadest alternative, the safe harbor could be made available to any political subdivision in the U.S. with the authority to require employers to participate in payroll deduction programs. According to U.S. Census Bureau data, tens of thousands of political subdivisions would qualify under this approach.41 While this alternative potentially could result in 41 The U.S. Census Bureau’s count for 2012 (the most recent data available). The U.S. Census Bureau produces data every 5 years as a part of the Census of Governments in years ending in ‘‘2’’ and ‘‘7.’’ See U.S. Census Bureau, Government Organization Summary Report: 2012 Census of Governments (http://www.census.gov/govs/cog/index.html). VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 providing access to payroll deduction savings programs to the most workers in a state, the Department did not adopt this alternative because it could cause administrative complexity for employers operating in a state (or states) with multiple political subdivisions due to overlapping programs of political subdivisions. Moreover, the vast majority of political subdivisions are relatively small in terms of population (83% have populations of less than 10,000 people), and the Department is sensitive to the issue of whether smaller political subdivisions have the ability, experience, and resources to oversee payroll deduction savings programs and safeguard employee contributions to such programs.42 By contrast, the narrower approach the Department considered and adopted in the proposal would reduce the number of potentially qualified political subdivisions by applying the criteria set forth in paragraphs (h)(4)(i) through(iii) of the proposal. This approach should reduce administrative burden and complexity on employers and protect workers by ensuring that payroll deduction savings programs would be established and operated by larger political subdivisions. The consequence of this approach may be that fewer employees will be automatically enrolled in payroll deduction savings programs of political subdivisions, but the Department found this to be the preferred alternative, because it balances two very important policy goals of advancing secure coverage and savings opportunities for workers whose employers do not offer workplace savings programs while reducing burdens on employers. Comments are solicited on this analysis. E. Paperwork Reduction Act As part of its continuing effort to reduce paperwork and respondent burden, the Department of Labor conducts a preclearance consultation program to provide the general public and Federal agencies with an opportunity to comment on proposed and continuing collections of information in accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public understands the Department’s collection instructions, respondents can provide the requested data in the desired format, reporting burden (time and financial resources) is 42 U.S. Census Bureau, County Governments by Population-Size Group and State: 2012 Census of Governments; U.S. Census Bureau; Subcounty Governments by Population-Size Group and State: 2012 Census of Governments (http:// www.census.gov/govs/cog/index.html). PO 00000 Frm 00073 Fmt 4702 Sfmt 4702 minimized, collection instruments are clearly understood, and the Department can properly assess the impact of collection requirements on respondents. The Department has determined this 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 rule does not require any action by or impose any requirements on employers or the states. It merely clarifies that certain political subdivision payroll deduction savings programs that encourage retirement savings would not result in the creation of employee benefit plans covered by Title I of ERISA. Moreover, 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 proposed rule imposes no burden on employers, because political subdivisions customarily include notice and recordkeeping requirements when enacting their payroll deduction savings programs. Thus, employers participating in such programs are responding to political subdivision, not Federal, requirements. Although the Department has determined that the proposed rule does not contain a collection of information, when rules contain information collections the Department invites comments that: • Evaluate whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; • Evaluate the burden of the collection of information, including the validity of the methodology and assumptions used; • Enhance the quality, utility, and clarity of the information to be collected; and • Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission of responses. In addition to having an opportunity to file comments with the Department, comments may also be sent to the Office of Information and Regulatory Affairs, E:\FR\FM\30AUP1.SGM 30AUP1 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503; Attention: Desk Officer for the Employee Benefits Security Administration. OMB requests that comments be received within 30 days of publication of the proposed rule to ensure their consideration. mstockstill on DSK3G9T082PROD with PROPOSALS F. 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. The proposed rule merely establishes a new safe harbor describing circumstances in which payroll deduction savings programs established and maintained by political subdivisions would not give rise to ERISA-covered employee pension benefit plans. Therefore, the proposed 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 proposed rule will not have a significant economic impact on a substantial number of small entities. G. 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 proposed 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 as adjusted for inflation. H. Congressional Review Act The proposed rule is subject to the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 U.S.C. 801 et seq.) and will be transmitted to Congress and the Comptroller General for review. The proposed 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 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. 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 proposes to amend 29 CFR part 2510 as set forth below: Frm 00074 Fmt 4702 Sfmt 4702 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). 2. Revise § 2510.3–2(h) to read as follows: ■ Employee pension benefit plan. * Executive Order 13132 outlines fundamental principles of federalism. It also requires adherence to specific criteria by federal agencies in formulating and implementing policies that have ‘‘substantial direct effects’’ on the states, the relationship between the national government and states, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have these federalism implications must consult with state and local officials, and describe the extent of their consultation and the nature of the concerns of state and local officials in the preamble to the final regulation. In the Department’s view, the proposed regulations, by clarifying that certain workplace savings arrangements under consideration or adopted by certain political subdivisions will not result in creation of employee benefit plans under ERISA, would provide more latitude and certainty to political subdivisions and employers regarding the treatment of such arrangements under ERISA. The Department will affirmatively engage in outreach with officials of states, political subdivisions, and with employers and other stakeholders, regarding the proposed rule and seek their input on the proposed rule and any federalism implications that they believe may be presented by it. PO 00000 PART 2510—DEFINITION OF TERMS USED IN SUBCHAPTERS C, D, E, F, G, AND L OF THIS CHAPTER § 2510.3–2 I. Federalism Statement 59591 * * * * (h) Certain governmental payroll deduction 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 payroll deduction savings program of a State or qualified political subdivision of a State, provided that: (i) The program is specifically established pursuant to State or qualified political subdivision law; (ii) The program is implemented and administered by the State or qualified political subdivision establishing the program (or by a governmental agency or instrumentality of either), which is responsible for investing the employee savings or for selecting investment alternatives for employees to choose; (iii) The State or qualified political subdivision (or governmental agency or instrumentality of either) assumes responsibility for the security of payroll deductions and employee savings; (iv) The State or qualified political subdivision (or governmental agency or instrumentality of either) 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 qualified political subdivision (or governmental agency or instrumentality of either); (vii) The involvement of the employer is limited to the following: E:\FR\FM\30AUP1.SGM 30AUP1 mstockstill on DSK3G9T082PROD with PROPOSALS 59592 Federal Register / Vol. 81, No. 168 / Tuesday, August 30, 2016 / Proposed Rules (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 qualified political subdivision (or governmental agency or instrumentality of either) necessary to facilitate the operation of the program; and (D) Distributing program information to employees from the State or qualified political subdivision (or governmental agency or instrumentality of either) and permitting the State or qualified political subdivision (or governmental agency or instrumentality of either) 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; (ix) The employer’s participation in the program is required by State or qualified political subdivision 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 qualified political subdivision (or governmental agency or instrumentality of either) that does not exceed an amount that reasonably approximates the employer’s (or a typical employer’s) costs under the program. (2) A payroll deduction 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 qualified political subdivision (or the governmental agency or instrumentality of either) 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 VerDate Sep<11>2014 17:56 Aug 29, 2016 Jkt 238001 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. (4) For purposes of this section, the term ‘‘qualified political subdivision’’ means any governmental unit of a State, including a city, county, or similar governmental body, that– (i) Has the authority, implicit or explicit, under State law to require employers’ participation in the program as described in paragraph (h)(1)(ix) of this section; (ii) Has a population equal to or greater than the population of the least populated State (excluding the District of Columbia and territories listed in section 3(10) of the Act); and (iii) Is not located in a State that pursuant to State law establishes a statewide retirement savings program for private-sector employees. 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. 2016–20638 Filed 8–25–16; 4:15 pm] BILLING CODE 4510–29–P POSTAL REGULATORY COMMISSION 39 CFR Part 3050 [Docket No. RM2016–12; Order No. 3482] Periodic Reporting Postal Regulatory Commission. Notice of proposed rulemaking. AGENCY: ACTION: The Commission is noticing a recent filing requesting that the Commission initiate an informal rulemaking proceeding to consider changes to an analytical method for use in periodic reporting (Proposal Four). This notice informs the public of the filing, invites public comment, and takes other administrative steps. DATES: Comments are due: October 7, 2016. Reply Comments are due: October 21, 2016. ADDRESSES: Submit comments electronically via the Commission’s Filing Online system at http:// www.prc.gov. Those who cannot submit comments electronically should contact the person identified in the FOR FURTHER SUMMARY: PO 00000 Frm 00075 Fmt 4702 Sfmt 4702 section by telephone for advice on filing alternatives. INFORMATION CONTACT FOR FURTHER INFORMATION CONTACT: David A. Trissell, General Counsel, at 202–789–6820. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction II. Proposal Four III. Notice and Comment IV. Ordering Paragraphs I. Introduction On August 22, 2016, the Postal Service filed a petition pursuant to 39 CFR 3050.11 requesting that the Commission initiate an informal rulemaking proceeding to consider changes to an analytical method for use in periodic reporting.1 The Petition identifies the proposed analytical method changes filed in this docket as Proposal Four. II. Proposal Four Proposal Four concerns the treatment of purchased highway transportation costs within the Cost and Revenue Analysis report. The objective of the proposal is to improve the methodology for calculating attributable purchased highway costs by incorporating the variability of purchased highway transportation capacity with respect to volume into the calculation of attributable costs for purchased highway transportation. Petition at 2. In support of its Petition, the Postal Service has attached a report: ‘‘Research on Estimating the Variability of Purchased Highway Transportation Capacity with Respect to Volume’’ by Michael D. Bradley, Department of Economics, George Washington University. III. Notice and Comment The Commission establishes Docket No. RM2016–12 for consideration of matters raised by the Petition. More information on the Petition may be accessed via the Commission’s Web site at http://www.prc.gov. Interested persons may submit comments on the Petition and Proposal Four no later than October 7, 2016. Reply comments are due no later than October 21, 2016. Pursuant to 39 U.S.C. 505, Lawrence Fenster is designated as officer of the Commission (Public Representative) to represent the interests of the general public in this proceeding. 1 Petition of the United States Postal Service for the Initiation of a Proceeding to Consider Proposed Changes in Analytical Principles (Proposal Four), August 22, 2016 (Petition). E:\FR\FM\30AUP1.SGM 30AUP1

Agencies

[Federal Register Volume 81, Number 168 (Tuesday, August 30, 2016)]
[Proposed Rules]
[Pages 59581-59592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20638]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2510

RIN 1210-AB76


Savings Arrangements Established by State Political Subdivisions 
for Non-Governmental Employees

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Proposed rule.

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SUMMARY: In this document, the Department proposes to amend a 
regulation that describes how states may design and operate payroll 
deduction savings programs, using automatic enrollment, for private-
sector employees without causing the states or private-sector employers 
to establish employee pension benefit plans under the Employee 
Retirement Income Security Act of 1974 (ERISA). The proposed amendments 
would expand the current regulation beyond states to cover programs of 
qualified state political subdivisions that otherwise comply with the 
current regulation. This rule would affect individuals and employers 
subject to such programs.

DATES: Written comments should be received on or before September 29, 
2016.

ADDRESSES: You may submit comments, identified by RIN 1210-AB76, by one 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: e-ORI@dol.gov. Include RIN in the subject line of 
the message.
     Mail: Office of Regulations and Interpretations, Employee 
Benefits Security Administration, Room N-5655, U.S. Department of 
Labor, 200 Constitution Avenue NW., Washington, DC 20210, Attention: 
Savings Arrangements Established by State Political Subdivisions for 
Non-Governmental Employees.
    Instructions: All submissions must include the agency name and 
Regulatory Identification Number (RIN) for this

[[Page 59582]]

rulemaking. Persons submitting comments electronically are encouraged 
to submit only by one electronic method and not to submit paper copies. 
Comments will be available to the public, without charge, online at 
www.regulations.gov and www.dol.gov/ebsa and at the Public Disclosure 
Room, Employee Benefits Security Administration, U.S. Department of 
Labor, Suite N-1513, 200 Constitution Avenue NW., Washington, DC 20210. 
WARNING: Do not include any personally identifiable or confidential 
business information that you do not want publicly disclosed. Comments 
are public records and are posted on the Internet as received, and can 
be retrieved by most internet search engines.

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

    Elsewhere in today's Federal Register, the Department issued a 
final regulation describing conditions that would allow state 
governments to establish payroll deduction savings programs, with 
automatic enrollment, for private-sector employees without the state or 
the employers of those employees being treated as establishing employee 
pension benefit plans under ERISA. The final regulation is published in 
response to legislation in some states, and strong interest by others, 
to encourage retirement savings by giving private-sector employees 
broader access to savings arrangements through their employers. The 
final regulation is effective as of October 31, 2016.
    As noted in the preamble to the final regulation, concerns that 
tens of millions of American workers do not have access to workplace 
retirement savings arrangements have led some states to establish 
programs that allow private-sector employees to contribute payroll 
deductions to tax-favored individual retirement accounts described in 
26 U.S.C. 408(a) or individual retirement annuities described in 26 
U.S.C. 408(b), including Roth IRAs described in 26 U.S.C. 408A (IRAs), 
offered and administered by the states. California, Connecticut, 
Illinois, Maryland, and Oregon, for example, have adopted laws along 
these lines.\1\ These initiatives generally require certain employers 
that do not offer workplace savings arrangements to automatically 
deduct a specified amount of wages from their employees' paychecks 
unless the employee affirmatively chooses not to participate in the 
program. 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. None of the initiatives require employers to make matching or 
other contributions of their own to employee accounts. Some expressly 
bar such contributions and others do not address this matter. 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.
---------------------------------------------------------------------------

    \1\ 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).
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    As indicated in the preamble to the final rule, some states 
expressed concern that these payroll deduction savings programs could 
cause either the state or covered employers to inadvertently establish 
ERISA-covered plans, despite the express intent of the states to avoid 
such a result. This concern is based on ERISA's broad definition of 
``employee pension benefit plan'' and ``pension plan,'' which are 
defined in relevant part as ``any 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.'' \2\ The 
Department and the courts have broadly interpreted ``established or 
maintained'' to require only minimal involvement by an employer or 
employee organization.\3\ 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. Although ERISA does not govern plans 
established by states for their own employees, it governs nearly all 
plans established by private-sector employers for their employees.
---------------------------------------------------------------------------

    \2\ 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 exemptions 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).
    \3\ 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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    With certain exceptions, ERISA preempts state laws that relate to 
ERISA-covered employee benefit plans.\4\ Thus, if a state program were 
to require employers to take actions that effectively caused them to 
establish ERISA-covered plans, the state law underlying the program 
would likely be preempted. Similarly, ERISA would likely preempt a 
state law mandating private-sector employers to enroll their employees 
in an ERISA plan established by the state.
---------------------------------------------------------------------------

    \4\ ERISA section 514(a), 29 U.S.C. 1144(a).
---------------------------------------------------------------------------

A. The Department's Rulemaking Regarding State Payroll Deduction 
Savings Initiatives

    The Department responded to the states' concerns by publishing in 
today's Federal Register a final safe harbor regulation describing 
specific circumstances in which state payroll deduction savings 
programs with automatic enrollment would not give rise to the 
establishment of employee pension benefit plans under ERISA. As a 
result, the final regulation helps states (but not political 
subdivisions) establish and operate payroll deduction savings programs 
so as to reduce the risk of ERISA preemption by avoiding the 
establishment of ERISA-covered plans.

B. Public Comments on Political Subdivisions

    In both the 2015 proposed rule, and the current final rule, the 
Department defines the term ``State'' to have the same meaning as given 
to that term in section 3(10) of ERISA.\5\ That section, in

[[Page 59583]]

relevant part, provides that the term State ``includes any State of the 
United States, the District of Columbia, Puerto Rico, the Virgin 
Islands, American Samoa, Guam, [and] Wake Island.'' The effect of the 
definition is to limit the scope of the safe harbor to the fifty states 
and these other jurisdictions.
---------------------------------------------------------------------------

    \5\ 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. 80 FR 72006. On the same day that proposal was published, the 
Department also published an interpretive bulletin explaining the 
Department's views concerning the application of ERISA section 
3(2)(A), 29 U.S.C. 1002(2)(A), section 3(5), 29 U.S.C. 1002(5), and 
section 514, 29 U.S.C. 1144 to certain state laws designed to expand 
retirement savings options for private-sector workers through state-
sponsored ERISA-covered retirement plans. 80 FR 71936 (codified at 
29 CFR 2509.2015-02). Although discussed in the context of a state 
as the responsible governmental body, in the Department's view the 
principles articulated in the Interpretive Bulletin regarding 
marketplace arrangements and sponsorship of ERISA-covered plans also 
apply with respect to laws of a political subdivision, provided 
applicable conditions in the bulletin can be and are satisfied by 
the political subdivision.
---------------------------------------------------------------------------

    The Department received multiple comments on the 2015 proposed rule 
concerning this definition. Several commenters believed this definition 
is too narrow and supported a broader definition in the final rule. 
They expressed their support, in general, for a definition that would 
cover not only state payroll deduction savings programs, but also 
payroll deduction savings programs of political subdivisions, such as 
counties and cities.
    Set forth below are the commenters' main arguments in favor of 
expanding the safe harbor to include political subdivisions:
    1. Expansion of the safe harbor to political subdivisions will 
increase retirement savings. Many U.S. workers will continue to be 
deprived of a workplace savings opportunity unless the safe harbor is 
expanded to cover payroll deduction savings programs of political 
subdivisions.\6\ Where states do not establish state-wide programs, 
political subdivisions within those states may be willing to do so, but 
are hesitant to act unless the safe harbor is expanded to clearly cover 
them.\7\ Expanding the safe harbor, therefore, would expand retirement 
savings coverage, especially in states that do not themselves establish 
state-level payroll deduction savings programs but do have political 
subdivisions that would be willing to do so.\8\
---------------------------------------------------------------------------

    \6\ See, e.g., Comment Letter #57 (Public Advocate for the City 
of New York).
    \7\ See, e.g., Comment Letter #38 (City of New York Office of 
Comptroller) and Comment Letter #42 (City of New York Office of the 
Mayor). See also Letter from Alan L. Butkovitz, City Controller, 
Philadelphia to Hon. Thomas E. Perez and Phyllis C. Borzi (April 7, 
2016).
    \8\ See, e.g., Comment Letter #41 (Georgetown University Center 
for Retirement Initiatives).
---------------------------------------------------------------------------

    2. Expansion of the safe harbor to political subdivisions is 
supported by section 3(2) of ERISA. The legal basis for the current 
safe harbor for state programs would not suggest a different result for 
payroll deduction savings programs established by state political 
subdivisions that otherwise meet the safe harbor's conditions. 
Employers that facilitate payroll deduction contributions to an IRA as 
required by the law of a political subdivision cannot logically be 
viewed as engaging in more or less involvement than employers that 
perform the same functions as required by the law of a state. In both 
cases, employers participate under a legal requirement and are limited 
to ministerial activity, such as withholding and remitting wages to an 
IRA custodian. Consequently, the standard for determining whether, 
under section 3(2) of ERISA, an ``employee pension benefit plan'' has 
been ``established or maintained'' should be the same in both cases. 
There simply is no legal basis for not expanding the safe harbor to 
political subdivisions.\9\
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    \9\ See, e.g., Comment Letter #65 (Pension Rights Center).
---------------------------------------------------------------------------

    3. Expansion of the safe harbor to political subdivisions will not 
unduly burden employers. The safe harbor requires the state to 
administer the payroll deduction savings program. The safe harbor also 
forbids employers from involvement other than enrolling employees (or 
processing their opt-out requests), transmitting payroll deductions, 
and communicating state-developed explanatory materials. There is no 
variability in these conditions across political jurisdictions or state 
lines. Thus, extending the safe harbor to political subdivisions would 
create only a minimal burden on employers because they are limited to 
these few ministerial functions, even if the employer operates in 
multiple jurisdictions and is subject to multiple payroll deduction 
savings programs.\10\ Commenters further argue that most employers in 
multiple jurisdictions will be unaffected because they already offer 
retirement plans, the offering of which would exempt the employers from 
payroll deduction savings programs of state and political 
subdivisions.\11\
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    \10\ See, e.g., Comment Letter #38 (City of New York Office of 
the Comptroller), Comment Letter #42 (City of New York Office of the 
Mayor), and Comment Letter #58 (Service Employee International Union 
and others).
    \11\ See, e.g., Comment Letter #38 (City of New York Office of 
the Comptroller) and Comment Letter #58 (Service Employee 
International Union and others).
---------------------------------------------------------------------------

    4. Expansion of the safe harbor could be limited to certain 
political subdivisions. To the extent there are concerns regarding the 
ability of smaller governmental authorities to appropriately oversee 
and safeguard payroll deduction savings programs, commenters have 
suggested that an expanded safe harbor could be restricted to political 
subdivisions that meet certain criteria.\12\ For example, the safe 
harbor could be extended to political subdivisions that meet a minimum 
population requirement, such as a population equal to or greater than 
the least populous state.\13\ Another criterion could be sponsorship of 
a governmental employee pension plan with a certain amount of 
assets.\14\ These criteria could indicate that the political 
subdivision has appropriate experience and infrastructure to operate a 
payroll deduction savings program.\15\ Another criterion could be that 
the political subdivision is not in a state that has established its 
own payroll deduction savings program.\16\ Any combination of these 
criteria could be used to limit the safe harbor. Several commenters 
also suggested that political subdivisions could be required to 
petition the Department for approval to establish a payroll deduction 
savings program.\17\
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    \12\ Id. See also Letter from Seattle City Councilmember Tim 
Burgess to Hon. Thomas E. Perez and Phyllis C. Borzi (April 11, 
2016).
    \13\ Id.
    \14\ See, e.g., Comment Letter #42 (City of New York Office of 
the Mayor).
    \15\ See, e.g., Comment Letter #36 (AFL-CIO) and Comment Letter 
#38 (City of New York Office of the Comptroller).
    \16\ See, e.g., Comment Letter #38 (The City of New York Office 
of the Comptroller), Comment Letter #56 (Aspen Institute Financial 
Security Program), and Comment Letter #63 (Tax Alliance for Economic 
Mobility).
    \17\ See, e.g., Comment Letter #20 (New America), Comment Letter 
#56 (Aspen Institute Financial Security Program), and Comment Letter 
#63 (Tax Alliance for Economic Mobility).
---------------------------------------------------------------------------

    5. Expansion of the safe harbor will not conflict with state 
initiatives. Permitting political subdivisions to establish payroll 
deduction savings programs will not necessarily result in interference 
with state initiatives in this area. States generally have the 
authority to determine whether their political subdivisions may and 
should establish payroll deduction savings programs; determinations 
such as these are matters to be resolved between the states and their 
political subdivisions. If a state legislature chooses to create a 
program for the entire state, that program could simply preempt or 
incorporate any existing city-level payroll deduction savings 
program.\18\
---------------------------------------------------------------------------

    \18\ See, e.g., Comment Letter #57 (Public Advocate for the City 
of New York).
---------------------------------------------------------------------------

    The Department agrees with commenters that there may be good 
reasons for expanding the safe harbor to cover political subdivisions. 
It is not clear to the Department, however, how many such political 
subdivisions would have an interest in establishing programs of the 
kind described in the

[[Page 59584]]

final safe harbor regulation.\19\ It also is not clear how many 
political subdivisions would have authority to establish such programs 
and to require employer participation in such programs. Assuming that 
at least some political subdivisions could comply with the conditions 
of the current safe harbor for states, the Department believes that it 
is important to consider whether these political subdivisions' programs 
should be included in the safe harbor and that the Department's 
analysis of the issue would benefit from additional public comments. 
Accordingly, the Department is publishing this notice of proposed 
rulemaking soliciting further comments on whether and how the safe 
harbor should be expanded to state political subdivisions.
---------------------------------------------------------------------------

    \19\ Thus far, the Department has received written letters of 
interest from representatives of Philadelphia, New York City, and 
Seattle.
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II. Overview of Proposed Rule

    The proposal would amend paragraph (h) of Sec.  2510.3-2 to add the 
term ``or qualified political subdivision'' wherever the term ``State'' 
appears in the current regulation. Thus, the regulation's safe harbor 
provisions would apply in the same manner to payroll deduction savings 
programs of qualified political subdivisions as they currently apply to 
state programs. The proposal would add a new paragraph (h)(4) to define 
the term ``qualified political subdivision.'' Proposed paragraph (h)(4) 
would define qualified political subdivision as any governmental unit 
of a state, including any city, county, or similar governmental body 
that meets three criteria. First, the political subdivision must have 
the authority, implicit or explicit, under state law to require 
employers' participation in the payroll deduction savings program. 
Second, the political subdivision must have a population equal to or 
greater than the population of the least populous state.\20\ Third, the 
political subdivision cannot be within a state that has a state-wide 
retirement savings program for private-sector employees. The definition 
in paragraph (h)(4) of the proposal would not apply for other purposes 
under ERISA, such as for determining whether an entity is a political 
subdivision for purposes of the definition of a ``governmental plan'' 
in section 3(32) of ERISA, 29 U.S.C. 1002(32).
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    \20\ For this purpose, the term ``state'' does not include the 
non-state authorities listed in section 3(10) of ERISA. Thus, it 
does not include the District of Columbia, Puerto Rico, the Virgin 
Islands, American Samoa, Guam, and Wake Island.
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    According to the U.S. Census Bureau, there are approximately 90,000 
local governmental units that could be considered ``political 
subdivisions'' for purposes of the proposed regulation.\21\ Of this 
number, there are approximately 40,000 ``general-purpose'' political 
subdivisions in the United States, which include county governments, 
municipal governments, and township governments.\22\ The remaining 
approximately 50,000 political subdivisions are so-called ``special-
purpose'' political subdivisions that perform only one function or a 
very limited number of functions, such as school districts, utility 
districts, water and sewer districts, and transit authorities.\23\ The 
number of political subdivisions within each state varies widely across 
the nation, with Illinois, Minnesota, Pennsylvania, and Ohio having 
over 2,000 general-purpose subdivisions, while Hawaii has only 
four.\24\ In addition, the populations of political subdivisions range 
greatly in size, for example, from 10,170,292 (Los Angeles County) to 1 
(Monowi Village, Nebraska).\25\
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    \21\ The U.S. Census Bureau's count for 2012 (the most recent 
data available). The U.S. Census Bureau produces data every 5 years 
as a part of the Census of Governments in years ending in ``2'' and 
``7.'' See U.S. Census Bureau, Government Organization Summary 
Report: 2012 Census of Governments (http://www.census.gov/govs/cog/index.html).
    \22\ The U.S. Census Bureau's count of general-purpose political 
subdivisions for 2012 was 38,910 (3,031 counties, 19,519 
municipalities, and 16,360 townships). Id.
    \23\ The Census Bureau's count of special-purpose political 
subdivisions for 2012 was 51,146. Special-purpose political 
subdivisions include school districts and all other single or 
limited purpose political subdivisions, known by a variety of 
titles, including districts, authorities, boards, and commissions. 
Id.
    \24\ Illinois has 2,831, Minnesota has 2,724, Pennsylvania has 
2,627 and Ohio has 2,333 general-purpose political subdivisions. 
Note also that the District of Columbia has only one general-purpose 
political subdivision. See U.S. Census Bureau, Local Governments by 
Type and State: 2012 Census of Governments (http://www.census.gov/govs/cog/index.html).
    \25\ U.S. Census Bureau, Annual Estimates of the Resident 
Population for Counties: 2015 Population Estimate (http://www.census.gov/popest/data/counties/totals/2015/index.html); U.S. 
Census Bureau, Annual Estimates of the Resident Population for 
Cities and Towns (Incorporated Places and Minor Civil Divisions): 
2015 Population Estimate (https://www.census.gov/popest/data/cities/totals/2015/index.html).
---------------------------------------------------------------------------

    Given these statistics, the proposed definition is intended to 
reduce the number of political subdivisions that would be able to fit 
within the safe harbor to a small subset of the total number of 
political subdivisions in the U.S. The Department is sensitive to the 
issue regarding the potential for overlapping programs to apply, for 
example, to an employer that might be operating in a state (or states) 
with multiple political subdivisions. In addition, given that the vast 
majority of political subdivisions are relatively small in terms of 
population (approximately 83% have populations of less than 10,000 
people), the Department also is sensitive to the issue of whether 
smaller political subdivisions have the ability to oversee and 
safeguard payroll deduction savings programs.\26\ A narrow expansion of 
the safe harbor would address these concerns.
---------------------------------------------------------------------------

    \26\ U.S. Census Bureau, County Governments by Population-Size 
Group and State: 2012 Census of Governments; U.S. Census Bureau; 
Subcounty Governments by Population-Size Group and State: 2012 
Census of Governments (http://www.census.gov/govs/cog/index.html).
---------------------------------------------------------------------------

    The proposal's first limit on the number of political subdivisions 
is the criterion that, to be within the safe harbor, the political 
subdivision must have the authority under state law to require 
employers within its jurisdiction to participate in the payroll 
deduction savings program, including in particular, the power to 
require wage withholding in the case of programs with automatic 
enrollment.\27\ See paragraph (h)(4)(i) of this proposal. As proposed, 
this requirement does not mean that a state law must explicitly 
authorize the political subdivision to establish the program at issue, 
but the political subdivision would need to have authority, implicit or 
explicit, under state law to establish and operate the program and 
compel employer participation. The Department understands that this 
criterion (i.e., that the political subdivisions have the ability to 
compel employer participation) will have the effect of limiting the 
proposed definition, and therefore the scope of the safe harbor, to so-
called ``general-purpose'' subdivisions, meaning political subdivisions 
with authority to exercise traditional sovereign powers, such as the 
power of taxation, the power of eminent domain, and the police power. 
The Department does not expect that ``special-purpose'' subdivisions, 
such as utility districts or transit authorities, ordinarily will have 
this kind of authority under state law. This limitation is expected to 
reduce the universe of potential political subdivisions to 
approximately 40,000 from the approximately 90,000 total.
---------------------------------------------------------------------------

    \27\ This criterion not only limits the number of political 
subdivisions that would be eligible for the safe harbor, it also is 
central to the Department's analysis under section 3(2) of ERISA and 
the conclusion that employers are not establishing or maintaining 
ERISA-covered plans.
---------------------------------------------------------------------------

    Commenters suggested three specific additional criteria that could 
be used to

[[Page 59585]]

narrow this universe of approximately 40,000 political subdivisions 
even further. The first suggested criterion is that a political 
subdivision would have a population equal to or greater than the 
population of the least populous state.\28\ The second suggested 
criterion is that the state in which the political subdivision exists 
does not have a state-wide retirement savings program for private-
sector employees. The third suggested criterion is that a political 
subdivision would have demonstrated capacity to design and operate a 
payroll deduction savings program, such as by maintaining a pension 
plan with substantial assets for employees of the political 
subdivision.\29\
---------------------------------------------------------------------------

    \28\ Wyoming is the least populated state in the U.S., with a 
population of 586,107. See U.S. Census Bureau, Annual Estimates of 
the Resident Population for States: 2015 Population Estimate 
(https://www.census.gov/popest/data/state/totals/2015/index.html).
    \29\ New York City, for instance, has five different pension 
funds with their combined $160 billion in assets and a deferred 
compensation plan with over $15 billion in assets. See Comment 
Letter # 42 (City of New York Office of Mayor) and Comment Letter 
#38 (City of New York Office of Comptroller).
---------------------------------------------------------------------------

    The proposal adopts only the first two criteria suggested by the 
commenters. To be within the safe harbor, the proposal would require 
that the political subdivision have a population equal to or greater 
than the population of the least populous State (excluding the District 
of Columbia and territories listed in section 3(10) of the ERISA). See 
paragraph (h)(4)(ii) of this proposal. Based on the most recently 
available U.S. Census Bureau statistics, Wyoming is the least populous 
state, with approximately 600,000 residents. The Department has two 
primary policy reasons for adopting this criterion. First, it is 
important to the Department that the proposal not expand the safe 
harbor to political subdivisions that may not have the experience, 
capacity, and resources to safely establish and oversee payroll 
deduction savings programs in a manner that is sufficiently protective 
of employees. The existing public record does not convince the 
Department that small political subdivisions in general have comparable 
experience, resources, and capacity to those of the least populous 
state.\30\ Second, it is important to the Department that the proposal 
reduce the possibility that employers would be subject to a 
multiplicity of overlapping political subdivision programs. This 
criterion would significantly reduce the possibility of overlap by 
limiting the universe of potentially eligible political subdivisions 
from approximately 40,000 to a subset of approximately 136 political 
subdivisions.\31\
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    \30\ The regulation does not preclude these smaller political 
subdivisions from establishing their own programs, but for policy 
reasons the Department chooses not to extend safe harbor status to 
such programs.
    \31\ As of 2015, there were approximately 136 general-purpose 
political subdivisions with populations equal to or greater than the 
population of Wyoming.
---------------------------------------------------------------------------

    In addition, the proposal would further condition the safe harbor 
on the political subdivision not being in a state that has a state-wide 
retirement savings program for private-sector employees. See paragraph 
(h)(4)(iii) of this proposal. For instance, eight states presently have 
adopted laws to implement some form of state-wide savings program for 
private-sector employees.\32\ This criterion would exclude from the 
safe harbor approximately 48 additional political subdivisions with 
populations equal to or greater than the population of Wyoming, thereby 
limiting the universe of potentially eligible political subdivisions to 
approximately 88.\33\ The criterion is intended to mitigate overlap and 
duplication in circumstances where it is most likely to exist, and 
contemplates, but is not necessarily limited to, those state retirement 
savings programs described in the safe harbor rule at 29 CFR 2510.3-
2(h) and the Department's Interpretive Bulletin at 29 CFR 2509.2015-02.
---------------------------------------------------------------------------

    \32\ California Secure Choice Retirement Savings Trust Act, Cal. 
Gov't Code Sec. Sec.  100000-100044 (2012); Connecticut Retirement 
Security Program Act, Pub. Act. 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); Mass. Gen. Laws ch. 29, Sec.  64E (2012); New Jersey Small 
Business Retirement Marketplace Act, Pub. L. 2015, ch. 298; Oregon 
Retirement Savings Board Act, ch. 557 (H.B. 2960) (2015); Washington 
State Small Business Retirement Savings Marketplace Act, Wash. Rev. 
Code Sec. Sec.  43.330.730-750 (2015).
    \33\ Supra at footnote 25.
---------------------------------------------------------------------------

    The Department also is considering the possibility of further 
limiting the universe of potentially eligible political subdivisions. 
The Department is considering whether to add the third criterion 
suggested by the commenters that would require that political 
subdivisions have a demonstrated capacity to design and operate a 
payroll deduction savings program, such as by maintaining a pension 
plan with substantial assets for employees of the political 
subdivision. Whereas the ``smallest state'' criterion in paragraph 
(h)(4)(ii) of the proposal would assume that political subdivisions 
have sufficient experience, capacity, and resources to safely establish 
and oversee a payroll deduction savings program by using population as 
a proxy for evidence of these characteristics, this criterion would 
require direct and objectively verifiable evidence of this ability. For 
example, a political subdivision that establishes and maintains a large 
defined benefit plan for its governmental employees would be more 
likely to have sufficient experience, capacity, and resources to design 
and operate a payroll deduction savings program.

III. Solicitation of Comments

    The Department seeks comments on all aspects of this proposal. 
Although general comments and views on whether or not the safe harbor 
should be expanded to cover political subdivisions are solicited, the 
Department is especially interested in comments on the proposed 
definition of ``qualified political subdivision'' in paragraph (h)(4). 
Specifically, commenters are encouraged to focus on the three specific 
limiting criteria in paragraphs (i), (ii), and (iii) of (h)(4) of the 
proposal, and to address the following operational questions.
    With respect to paragraph (h)(4)(ii) of the proposal (requiring the 
political subdivision to have a population equal to or greater than the 
population of the least populous state), comments are solicited on 
whether the final regulation should contain a provision to address the 
possibility of fluctuating populations of states and political 
subdivisions and the consequences of a qualified political subdivision 
falling below the required population threshold after it has already 
established and is administering a payroll deduction savings program. 
For instance, determinations under paragraph (h)(4)(ii) could be made 
at a fixed point in time and preserved, such that future changes in 
populations of the state, political subdivision, or both would not 
affect the program's status under the safe harbor. The phrase ``at the 
time it establishes its payroll deduction savings program,'' for 
example, could be added to the end of paragraph (h)(4)(ii) of the 
proposal to accomplish this result.
    With respect to paragraph (h)(4)(iii) of the proposal (relating to 
situations in which a state has a preexisting state-wide retirement 
savings program), comments are solicited on whether the final 
regulation should address the effect on the status of a payroll 
deduction savings program of a qualified political subdivision if the 
state in which the subdivision is located establishes a state-wide 
retirement savings program after the subdivision has established and 
operates a payroll deduction savings program. If a state were to 
establish a state-wide program after one of its subdivisions previously 
had done so, presumably the state would take into account the nature 
and

[[Page 59586]]

existence of the subdivision's program and act in a measured and 
calculated way so as to avoid or mitigate any undesirable overlap, in 
which case the final regulation need not address the issue. For 
example, the state could act by displacing the subdivision's program 
after a transition period or coordinating the state and subdivision 
programs. Either approach would mitigate overlap. In addition, for an 
employer that had employees in two adjoining states, overlap could be 
avoided or mitigated by coordination among the states (including their 
political subdivisions) to, for example, exempt any employer that 
complied with any state (or political subdivision) program or sponsored 
a workplace savings arrangement. The intent of such approaches could be 
to ensure that employers would never be subject to more than one state 
(or political subdivision) program.
    Also with respect to paragraph (h)(4)(iii) of the proposal, 
comments are solicited on whether the final regulation should expand 
this provision to cover, for example, those situations in which a 
political subdivision, encompassed within the jurisdictional boundaries 
of a larger political subdivision that already maintains a retirement 
savings program, seeks to establish a payroll deduction savings 
program. For instance, if a county in a state without a state-wide 
retirement savings program were to establish a county-wide retirement 
savings program, the question is whether paragraph (h)(4)(iii) of the 
proposal should be expanded to preclude a city in (or in part of) that 
county from thereafter being considered a qualified political 
subdivision. Thus, in much the same way that paragraph (h)(4)(iii) of 
the proposal would mitigate overlap across the entire state, the 
expansion discussed in this paragraph could mitigate overlap across 
political subdivisions, in circumstances in which there is no state-
wide retirement savings program.
    In addition, commenters are encouraged to focus on the criterion 
relating to a demonstrated capacity to design and operate a payroll 
deduction savings program. As mentioned above, this criterion is being 
considered by the Department, but is not included in paragraph (h)(4) 
of the proposal. Comments on what objective evidence could be used by 
political subdivisions to establish that they have sufficient 
experience, capacity, and resources to design and operate a payroll 
deduction savings program would be particularly useful.
    Some commenters, by contrast, suggested fewer limitations than what 
is included in paragraph (h)(4) of the proposal. These commenters 
believe that the only limitation needed is the one in paragraph 
(h)(4)(i) of the proposal (i.e., the political subdivision must have 
the requisite authority, implicit or explicit, under state law to 
require the employer's participation in the program). The Department 
requests that commenters also address this approach and whether, and to 
what extent, overlap would be a problem under this approach and if not, 
why. Further, if the safe harbor is expanded to qualified political 
subdivisions, commenters are encouraged to address whether the 
conditions of the existing safe harbor should differ in any way as 
applied to the qualified political subdivisions. In addition, the 
Department is interested in additional comments on other criteria, not 
discussed in this proposal, which might be used to refine the 
definition of qualified political subdivision in the proposed 
regulation or other facets of the safe harbor more generally.

IV. 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 review 
by 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 mandates, the President's 
priorities, or the principles set forth in the Executive Order.
    OMB has tentatively 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 proposed rule and the 
Department provides the following assessment of its benefits and costs.

B. Background and Need for Regulatory Action

    As discussed in detail above in Section I of this preamble, several 
commenters on the 2015 proposal urged the Department to expand the safe 
harbor to include payroll deduction savings programs established by 
political subdivisions of states. In particular, the 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. Certain commenters asked the Department to 
consider extending the safe harbor to large political subdivisions (in 
terms of population) with authority and capacity to maintain such 
programs.
    The Department stated in the final rule that it agrees with these 
commenters but believes that its analysis of the issue would benefit 
from additional public comments. Accordingly, the Department is 
publishing this notice of proposed rulemaking, which would amend 
paragraph (h) of Sec.  2510.3-2 to cover payroll deduction savings 
programs of qualified political subdivisions, as defined in paragraph 
(h)(4) of this proposal.

C. Benefits and Costs

    In analyzing benefits and costs associated with this proposed 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 proposed rule would 
merely establish a safe harbor describing the circumstances under which 
a qualified political subdivision with authority under state law could 
establish payroll deduction savings programs that would not give rise 
to ERISA-covered employee pension benefit plans. It does not require 
qualified political subdivisions to take any actions nor employers to 
provide any retirement savings programs to their employees.
    The Department also addresses indirect effects associated with the 
proposed rule, which include (1) potential benefits and costs directly 
associated with the requirements of qualified political subdivision 
payroll deduction savings programs, and (2) the potential increase in 
retirement savings and potential cost burden imposed on

[[Page 59587]]

covered employers to comply with the requirements of such programs. 
Indirect effects vary by qualified political subdivisions depending on 
their program requirements and the degree to which the proposed rule 
might influence political subdivisions to design their payroll 
deduction savings programs.
1. Direct Benefits
    The Department believes that political subdivisions and other 
stakeholders would directly benefit from the proposal to expand the 
scope of the safe harbor to include payroll deduction savings programs 
established by qualified political subdivisions eligible for the safe 
harbor rule. Similar to the states, this will provide political 
subdivisions with clear guidelines to determine the circumstances under 
which programs they create for private-sector workers would not give 
rise to the establishment of ERISA-covered plans. The Department 
expects that the proposed rule would reduce legal costs, including 
litigation costs political subdivisions would incur, by (1) removing 
uncertainty about whether such political subdivision payroll deduction 
savings programs give rise to the establishment of plans that are 
covered by Title I of ERISA, and (2) creating efficiencies by 
eliminating the need for multiple political subdivisions to incur the 
same costs to determine that their programs would not give rise to the 
establishment of ERISA-covered plans. However, these benefits would be 
limited to qualified political subdivisions meeting all criteria set 
forth in this proposed rule. Those governmental units of a state, 
including any city, county, or similar governmental body that are not 
eligible to use the safe harbor may incur legal costs if they elect to 
establish their own payroll deduction savings programs. Furthermore, 
the population size criterion inherently induces uncertainty about 
eligibility status because population sizes of both states and 
political subdivisions change over time due to births, deaths, and 
migrations. Some political subdivisions currently meeting the safe 
harbor criteria may face uncertainty and incur legal costs later if 
they fail the population test after they establish their own payroll 
deduction savings programs.\34\ This uncertainty about the eligibility 
status may deter some political subdivisions that barely meet the 
population size requirement from establishing their own payroll 
deduction savings programs, especially if their populations are 
projected to decline or to remain steady compared to the population 
growth of the least populous state in near future. For example, a 
currently qualified political subdivision interested in establishing 
its own payroll deduction savings program may not do so if it is unsure 
whether it can continuously meet the population criterion set forth in 
this proposed rule. Similarly, some qualified political subdivisions 
may face uncertainty if their states establish a state-wide retirement 
savings programs later. Thus, although the Department estimates 
approximately 88 political subdivisions could become qualified under 
this proposed rule, some qualified political subdivisions may not 
consider themselves as qualified in a practical sense based on the 
uncertainty regarding their population growth and their states' 
decisions in near future. Even beyond that, some political subdivisions 
may have no interest in establishing payroll deduction savings programs 
without regard to the safe harbor in the proposal.
---------------------------------------------------------------------------

    \34\ According to 1980 Census, Alaska was the least populated 
state but in 2010, it followed Wyoming and Vermont as the third 
smallest state. Wyoming was the least populated state in 2000 and 
2010. A number of counties and cities that were more populated than 
Wyoming in 2000 became less populated than Wyoming in 2010. For 
example, to name a few, Delaware County in Pennsylvania, New Castle 
County in Delaware, Summit County in Ohio, Union County in New 
Jersey were larger than Wyoming by population in 2000 yet became 
smaller by 2010. Another example would be Las Vegas city in Nevada. 
Las Vegas city was smaller than Wyoming in 2000 but it surpassed 
Wyoming in population size by 2010.
---------------------------------------------------------------------------

    The Department notes that the proposed rule would not prevent 
political subdivisions 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 
proposed rule would reduce uncertainty about political subdivision 
activity within the safe harbor, it would not impair political 
subdivision activity outside of it. This proposed regulation is a safe 
harbor and as such, does not require employers to participate in 
qualified political subdivision payroll deduction savings programs; nor 
does it purport to define every possible program that does not give 
rise to the establishment of ERISA-covered plans.
2. Direct Costs
    The proposed rule does not require any new action by employers or 
the political subdivisions. It merely establishes a safe harbor 
describing certain circumstances under which qualified political 
subdivision-required payroll deduction savings programs would not give 
rise to an ERISA-covered employee pension benefit plan and, therefore, 
should not be preempted by ERISA. Political subdivisions may incur 
legal costs to analyze the rule and determine whether their programs 
fall within the safe harbor. However, the Department expects that these 
costs will be less than the costs that would be incurred in the absence 
of the proposed rule. Some political subdivisions currently developing 
payroll deduction savings programs would need to monitor their current 
population to assess their eligibility for the safe harbor, projected 
population sizes as well as the least populous state's size. However, 
the Department expects these monitoring costs to be small, because such 
monitoring activity generally would be confined to political 
subdivisions with a population size similar to the least populous 
state. Similarly, some political subdivisions interested in developing 
their own payroll deduction savings programs would also need to monitor 
states' activities regarding state-wide retirement savings programs and 
communicate with states to mitigate any undesirable overlap.
    Qualified political subdivisions may incur administrative and 
operating costs including mailing and form production costs. These 
potential costs are not directly attributable to the proposed rule; 
however, they are attributable to the political subdivision's creation 
of the payroll deduction savings program pursuant to its authority 
under state law. Some commenters on the 2015 proposed rule expressed 
the concern that smaller political subdivisions without the experience 
or capabilities to administer a payroll deduction savings program may 
contemplate creating and operating their own programs if the safe 
harbor rule is extended to all political subdivisions without any 
restrictions. This proposed rule addresses this concern by limiting 
eligibility for the safe harbor rule based on a political subdivision's 
population size, assuming larger political subdivisions are more likely 
than smaller ones to have sufficient existing resources, experience, 
and infrastructure to create and implement payroll deduction savings 
programs.
3. Uncertainty
    The Department is confident that the proposed safe harbor rule, by 
clarifying that qualified political subdivision programs do not require 
employers to establish ERISA-covered plans, will benefit political 
subdivisions and many other stakeholders otherwise beset by greater 
uncertainty. However, the

[[Page 59588]]

Department is unsure as to the magnitude of the benefits, costs and 
transfer impacts of these programs, because they will depend on the 
qualified political subdivisions' independent decisions on whether and 
how best to take advantage of the safe harbor and on the cost that 
otherwise would have been attached to uncertainty about the legal 
status of the qualified political subdivisions' actions. The Department 
is also unsure of (1) the proposed rule's effects on political 
subdivisions that do not meet the safe harbor criteria, (2) whether any 
of these ineligible political subdivisions are currently developing 
their own payroll deduction savings programs, and (3) the extent to 
which ineligible political subdivisions would be discouraged from 
designing and implementing payroll deduction savings programs. The 
Department cannot predict what actions political subdivisions will 
take, stakeholders' propensity to challenge such actions' legal status, 
either absent or pursuant to the proposed rule, or courts' resultant 
decisions.
4. Indirect Effects: Impact of Qualified Political Subdivision Payroll 
Deduction Savings Programs
    As discussed above, the impact of qualified political subdivision 
payroll deduction savings programs is directly attributable to the 
qualified political subdivision legislation that creates such programs. 
As discussed below, however, under certain circumstances, these effects 
could be indirectly attributable to the proposed rule. For example, it 
is conceivable that more qualified political subdivisions could create 
payroll deduction savings programs due to the clear guidelines provided 
in the proposed rule and the reduced risk of an ERISA preemption 
challenge, and therefore, the increased prevalence of such programs 
would be indirectly attributable to the proposed rule. However, such an 
increase would be bounded by the eligibility restrictions for political 
subdivisions. 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 political subdivisions' uncertainty-related 
costs could induce more political subdivisions to pursue these 
workplace savings initiatives. An additional possibility is that the 
rule would not change the prevalence of political subdivision 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 
political subdivision-level payroll deduction savings programs.
    The possibility exists that the proposed rule could result in an 
acceleration or deceleration of payroll deduction programs at the state 
level depending on the circumstances. For example, if multiple cities 
in a state set up robust, successful payroll deduction savings 
programs, a state that might otherwise create its own program could 
conclude a state-wide program no longer is necessary. On the other 
hand, states could feel pressure to create a state-wide program if a 
city in the state does so in order to provide retirement income 
security for all of its citizens. However, problems could arise if the 
state and city programs overlap. Therefore, in Section III above, the 
Department solicits comments regarding whether the final regulation 
should clarify the status of a payroll deduction savings program of a 
qualified political subdivision when the state in which the subdivision 
is located establishes a state-wide retirement savings program after 
the qualified political subdivision establishes and operates its 
program. As discussed in the comment solicitation, the Department 
expects that in this circumstance, states would take into account the 
nature and existence of the qualified political subdivision's program 
and act in a measured and calculated way to ensure undesirable overlaps 
are eliminated.
    Qualified political subdivisions that elect to establish payroll 
deduction savings programs pursuant to the safe harbor would incur 
administrative and operating costs, which can be substantial especially 
in the beginning years until the payroll deduction savings programs 
become self-sustaining. In addition, in order to avoid conflicts and 
confusion, qualified political subdivisions may incur costs to 
coordinate with other subdivisions, particularly those with overlapping 
boundaries.\35\ However, these costs should offset compliance costs 
affected employers in the political subdivision would otherwise incur 
in the absence of communication and coordination.
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    \35\ For example, Harris County and City of Houston in Texas 
both would be eligible for the safe harbor and could create and 
operate their own savings programs. In this scenario, it would be 
ideal for the political subdivisions to coordinate and communicate 
with each other in developing and implementing savings programs to 
avoid conflicting rules and confusion for employers.
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    The Department acknowledges the possibility that conflicting 
programs could be created in overlapping qualified political 
subdivisions when their programs are not coordinated in states without 
state-wide retirement savings program. Therefore, in order to obtain 
information that may help evaluate approaches to mitigate overlap 
across political subdivision, the Department solicits comments in 
Section III above regarding whether paragraph (h)(4)(iii) of the 
proposed rule should be expanded to, for example, preclude a city that 
is located within a county from being considered a qualified political 
subdivision if the county has established a county-wide payroll 
deduction savings program.
    Employers may incur costs to update their payroll systems to 
transmit payroll deductions to the political subdivision or its agent, 
develop recordkeeping systems to document their collection and 
remittance of payments under the payroll deduction savings program, and 
provide information to employees regarding the political subdivision 
programs. As with political subdivisions' operational and 
administrative costs, some portion of these employer costs would be 
indirectly attributable to the rule if more political subdivision 
payroll deduction savings programs are implemented in the rule's 
presence than would be in its absence. Because the proposed rule 
narrows the number of political subdivisions that are eligible for the 
safe harbor rule, the aggregate costs imposed on employers would be 
limited. Moreover, in order to satisfy the safe harbor, most associated 
costs for employers would be nominal because the roles of employers are 
limited to ministerial functions such as withholding the required 
contribution from employees' wages, remitting contributions to the 
political subdivision program and providing information about the 
program to employees. However, 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, 
about 60% of small employers do not use a payroll service.\36\ These 
small

[[Page 59589]]

employers may incur additional costs to use external payroll companies 
to comply with their political subdivisions' programs. However, some 
small employers may decide to use a payroll service to withhold and 
remit payroll taxes independent of their political subdivisions' 
program requirement. Therefore, the extent to which these costs can be 
attributable to political subdivisions' programs could be smaller than 
what some might estimate. Moreover such costs could be mitigated if 
political subdivisions exempt the smallest companies from their payroll 
deduction savings programs as some states do. The Department welcomes 
comments regarding this assessment.
---------------------------------------------------------------------------

    \36\ National Small Business Association, April 11, 2013, ``2013 
Small Business Taxation Survey.'' This survey says 23% of small 
employers who handle payroll taxes internally have no employees. 
Therefore, only about 46%, not 60%, of small employers would be in 
fact affected by political subdivisions' payroll deduction savings 
programs, 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.
---------------------------------------------------------------------------

    Employers, particularly those operating in multiple political 
subdivisions, may face potentially increased costs to comply with 
several political subdivision payroll deduction savings programs. This 
can be more challenging for employers if they operate in political 
subdivisions where not all subdivisions have their own payroll 
deduction savings programs and/or where some subdivisions' programs 
conflict with others. The Department acknowledges the heightened 
complexity caused by political subdivisions' payroll deduction savings 
programs and challenges faced by employers. However, the employers 
operating across several political subdivision borders may have ERISA-
covered plans in place for their employees. Thus, there may be no cost 
burden associated with complying with multiple political subdivision 
payroll deduction savings programs because employers that sponsor plans 
might be exempt from those programs. Furthermore, in order to satisfy 
the proposed safe harbor rule, the role of employers would be limited 
to ministerial functions such as timely transmitting payroll 
deductions, which implies that the increase in cost burden is further 
likely to be restricted. By limiting the eligibility to political 
subdivisions in states without state-wide retirement savings programs, 
this proposed rule addresses the concerns raised by several commenters 
about the possibility that a political subdivision's program may 
conflict with its state's retirement savings program.
    The Department believes that well-designed political subdivision-
level payroll deduction savings programs have the potential to 
effectively reduce gaps in retirement security. Relevant variables such 
as pension coverage, labor market conditions,\37\ population 
demographics, and elderly poverty, vary widely across the political 
subdivisions, suggesting a potential opportunity for progress at the 
political subdivision level. Many workers throughout these political 
subdivisions currently may save less than would be optimal due to (1) 
behavioral biases (such as myopia or inertia), (2) labor market 
conditions that prevent them from accessing plans at work, or (3) their 
employers failure to offer retirement plans.\38\ Some research suggests 
that automatic contribution policies are effective in increasing 
retirement savings and wealth in general by overcoming behavioral 
biases or inertia.\39\ Well-designed political subdivisions' payroll 
deduction savings programs 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.
---------------------------------------------------------------------------

    \37\ See, e.g., U.S. Bureau of Labor Statistics, ``Metropolitan 
Area Employment and Unemployment--May 2016,'' USDL-16-1291 (June 29, 
2016).
    \38\ According to the National Compensation Survey, March 2016, 
only 66% of private-sector workers have access to retirement 
benefits--including Defined Benefit and Defined Contribution plans--
at work. According to the comment letter submitted by the Public 
Advocate for the City of New York, only 41 percent of individuals 
working in the private sector within the five boroughs of New York 
City have access to retirement savings plans at work.
    \39\ 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).
---------------------------------------------------------------------------

    The Department believes that well-designed political subdivision 
payroll deduction savings programs can achieve their intended, positive 
effects of fostering retirement security. However, the potential 
benefits--primarily increases in retirement savings--might be somewhat 
limited, because the proposed safe harbor does not allow employer 
contributions to political subdivisions' payroll deduction savings 
programs. Additionally, the initiatives might have some unintended 
consequences. Those workers least equipped to make good retirement 
savings decisions arguably stand to benefit most from these programs, 
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, political subdivisions' payroll deduction 
savings programs 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. In 
general, workers without retirement plan coverage tend to be younger, 
lower-income or less attached to the workforce, thus these workers may 
be financially stressed or have other savings goals. Because only large 
political subdivisions can create and implement programs under the 
proposed rule, these demographic characteristics can be more pronounced 
assuming large political subdivisions tend to have more diverse 
workforces.\40\ If so, then the benefits of political subdivisions' 
payroll deduction savings programs could be further limited and in some 
cases potentially harmful for certain workers. Although these might be 
valid concerns, political subdivisions are responsible for designing 
effective programs that minimize these types of harm and maximize 
benefits to participants.
---------------------------------------------------------------------------

    \40\ See e.g., Comment Letter #57 (Public Advocate for the City 
of New York).
---------------------------------------------------------------------------

    There is another concern that political subdivision initiatives may 
``crowd-out'' ERISA-covered plans. The proposed rule may inadvertently 
encourage employers operating in multiple political subdivisions to 
switch from ERISA-covered plans to political subdivision payroll 
deduction savings programs in order to reduce costs especially if they 
are required to cover employees currently ineligible to participate in 
ERISA-covered plans under political subdivision programs. This proposed 
rule makes clear that political subdivision programs directed toward 
employers that do not offer other retirement plans fall within this 
proposed safe harbor rule. However,

[[Page 59590]]

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 political subdivision 
programs. Potential advantages include significantly higher limits on 
tax-favored contributions, 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 political subdivision 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 political subdivision-based (IRA) benefits if political 
subdivisions 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 political subdivision programs. Political 
subdivisions 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. 
There also is a concern that political subdivisions' programs would in 
general provide participants with less consumer protection than ERISA-
covered plans. However, this concern can be addressed by political 
subdivisions designing their programs with sufficient participant 
protections.

D. Regulatory Alternatives

    As discussed in Section II of this preamble, the Department was 
presented with and considered two divergent alternatives in determining 
which political subdivisions would be qualified to use the safe harbor.
    Under the first and broadest alternative, the safe harbor could be 
made available to any political subdivision in the U.S. with the 
authority to require employers to participate in payroll deduction 
programs. According to U.S. Census Bureau data, tens of thousands of 
political subdivisions would qualify under this approach.\41\ While 
this alternative potentially could result in providing access to 
payroll deduction savings programs to the most workers in a state, the 
Department did not adopt this alternative because it could cause 
administrative complexity for employers operating in a state (or 
states) with multiple political subdivisions due to overlapping 
programs of political subdivisions. Moreover, the vast majority of 
political subdivisions are relatively small in terms of population (83% 
have populations of less than 10,000 people), and the Department is 
sensitive to the issue of whether smaller political subdivisions have 
the ability, experience, and resources to oversee payroll deduction 
savings programs and safeguard employee contributions to such 
programs.\42\
---------------------------------------------------------------------------

    \41\ The U.S. Census Bureau's count for 2012 (the most recent 
data available). The U.S. Census Bureau produces data every 5 years 
as a part of the Census of Governments in years ending in ``2'' and 
``7.'' See U.S. Census Bureau, Government Organization Summary 
Report: 2012 Census of Governments (http://www.census.gov/govs/cog/index.html).
    \42\ U.S. Census Bureau, County Governments by Population-Size 
Group and State: 2012 Census of Governments; U.S. Census Bureau; 
Subcounty Governments by Population-Size Group and State: 2012 
Census of Governments (http://www.census.gov/govs/cog/index.html).
---------------------------------------------------------------------------

    By contrast, the narrower approach the Department considered and 
adopted in the proposal would reduce the number of potentially 
qualified political subdivisions by applying the criteria set forth in 
paragraphs (h)(4)(i) through(iii) of the proposal. This approach should 
reduce administrative burden and complexity on employers and protect 
workers by ensuring that payroll deduction savings programs would be 
established and operated by larger political subdivisions. The 
consequence of this approach may be that fewer employees will be 
automatically enrolled in payroll deduction savings programs of 
political subdivisions, but the Department found this to be the 
preferred alternative, because it balances two very important policy 
goals of advancing secure coverage and savings opportunities for 
workers whose employers do not offer workplace savings programs while 
reducing burdens on employers. Comments are solicited on this analysis.

E. Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public 
understands the Department's collection instructions, respondents can 
provide the requested data in the desired format, reporting burden 
(time and financial resources) is minimized, collection instruments are 
clearly understood, and the Department can properly assess the impact 
of collection requirements on respondents.
    The Department has determined this 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 rule does not 
require any action by or impose any requirements on employers or the 
states. It merely clarifies that certain political subdivision payroll 
deduction savings programs that encourage retirement savings would not 
result in the creation of employee benefit plans covered by Title I of 
ERISA.
    Moreover, 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 proposed rule imposes no burden on employers, because 
political subdivisions customarily include notice and recordkeeping 
requirements when enacting their payroll deduction savings programs. 
Thus, employers participating in such programs are responding to 
political subdivision, not Federal, requirements.
    Although the Department has determined that the proposed rule does 
not contain a collection of information, when rules contain information 
collections the Department invites comments that:
     Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the burden of the collection of information, 
including the validity of the methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    In addition to having an opportunity to file comments with the 
Department, comments may also be sent to the Office of Information and 
Regulatory Affairs,

[[Page 59591]]

Office of Management and Budget, Room 10235, New Executive Office 
Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. OMB requests that comments 
be received within 30 days of publication of the proposed rule to 
ensure their consideration.

F. 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.
    The proposed rule merely establishes a new safe harbor describing 
circumstances in which payroll deduction savings programs established 
and maintained by political subdivisions would not give rise to ERISA-
covered employee pension benefit plans. Therefore, the proposed 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 proposed rule will 
not have a significant economic impact on a substantial number of small 
entities.

G. 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 proposed 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 as adjusted for inflation.

H. Congressional Review Act

    The proposed 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 proposed 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 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.

I. Federalism Statement

    Executive Order 13132 outlines fundamental principles of 
federalism. It also requires adherence to specific criteria by federal 
agencies in formulating and implementing policies that have 
``substantial direct effects'' on the states, the relationship between 
the national government and states, or on the distribution of power and 
responsibilities among the various levels of government. Federal 
agencies promulgating regulations that have these federalism 
implications must consult with state and local officials, and describe 
the extent of their consultation and the nature of the concerns of 
state and local officials in the preamble to the final regulation.
    In the Department's view, the proposed regulations, by clarifying 
that certain workplace savings arrangements under consideration or 
adopted by certain political subdivisions will not result in creation 
of employee benefit plans under ERISA, would provide more latitude and 
certainty to political subdivisions and employers regarding the 
treatment of such arrangements under ERISA. The Department will 
affirmatively engage in outreach with officials of states, political 
subdivisions, and with employers and other stakeholders, regarding the 
proposed rule and seek their input on the proposed rule and any 
federalism implications that they believe may be presented by it.

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 
proposes to amend 29 CFR part 2510 as set forth below:

PART 2510--DEFINITION 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. Revise Sec.  2510.3-2(h) to read as follows:


Sec.  2510.3-2  Employee pension benefit plan.

* * * * *
    (h) Certain governmental payroll deduction 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 payroll deduction 
savings program of a State or qualified political subdivision of a 
State, provided that:
    (i) The program is specifically established pursuant to State or 
qualified political subdivision law;
    (ii) The program is implemented and administered by the State or 
qualified political subdivision establishing the program (or by a 
governmental agency or instrumentality of either), which is responsible 
for investing the employee savings or for selecting investment 
alternatives for employees to choose;
    (iii) The State or qualified political subdivision (or governmental 
agency or instrumentality of either) assumes responsibility for the 
security of payroll deductions and employee savings;
    (iv) The State or qualified political subdivision (or governmental 
agency or instrumentality of either) 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 qualified political subdivision (or 
governmental agency or instrumentality of either);
    (vii) The involvement of the employer is limited to the following:

[[Page 59592]]

    (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 qualified political 
subdivision (or governmental agency or instrumentality of either) 
necessary to facilitate the operation of the program; and
    (D) Distributing program information to employees from the State or 
qualified political subdivision (or governmental agency or 
instrumentality of either) and permitting the State or qualified 
political subdivision (or governmental agency or instrumentality of 
either) 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;
    (ix) The employer's participation in the program is required by 
State or qualified political subdivision 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 qualified 
political subdivision (or governmental agency or instrumentality of 
either) that does not exceed an amount that reasonably approximates the 
employer's (or a typical employer's) costs under the program.
    (2) A payroll deduction 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 
qualified political subdivision (or the governmental agency or 
instrumentality of either) 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.
    (4) For purposes of this section, the term ``qualified political 
subdivision'' means any governmental unit of a State, including a city, 
county, or similar governmental body, that-
    (i) Has the authority, implicit or explicit, under State law to 
require employers' participation in the program as described in 
paragraph (h)(1)(ix) of this section;
    (ii) Has a population equal to or greater than the population of 
the least populated State (excluding the District of Columbia and 
territories listed in section 3(10) of the Act); and
    (iii) Is not located in a State that pursuant to State law 
establishes a state-wide retirement savings program for private-sector 
employees.

    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. 2016-20638 Filed 8-25-16; 4:15 pm]
 BILLING CODE 4510-29-P