Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental Employees, 92639-92654 [2016-30069]
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Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Rules and Regulations
its program or activity or in an undue
financial burden; or
(c) The structure of the housing to be
substantially rehabilitated makes
installation of broadband infrastructure
infeasible.
PART 905—THE PUBLIC HOUSING
CAPITAL FUND PROGRAM
31. The authority citation for part 905
continues to read as follows:
■
Authority: 42 U.S.C. 1437g, 42 U.S.C.
1437z–2, 42 U.S.C. 1437z–7, and 3535(d).
32. In § 905.312, add paragraph (e) to
read as follows:
■
§ 905.312
Design and construction.
*
*
*
*
*
(e) Broadband infrastructure. Any
new construction or substantial
rehabilitation, as substantial
rehabilitation is defined in 24 CFR
5.100, of a building with more than 4
rental units and funded by a grant
awarded or Capital Funds allocated after
January 19, 2017 must include
installation of broadband infrastructure,
as this term is also defined in 24 CFR
5.100, except where the PHA
determines and, in accordance with
§ 905.326, documents the determination
that:
(1) The location of the new
construction or substantial
rehabilitation makes installation of
broadband infrastructure infeasible;
(2) The cost of installing broadband
infrastructure would result in a
fundamental alteration in the nature of
its program or activity or in an undue
financial burden; or
(3) The structure of the housing to be
rehabilitated makes installation of
broadband infrastructure infeasible.
PART 983—PROJECT-BASED
VOUCHER (PBV) PROGRAM
33. The authority citation for part 983
continues to read as follows:
■
Authority: 42 U.S.C. 1437f and 3535(d).
34. Add § 983.157 to subpart D to read
as follows:
■
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§ 983.157
Broadband infrastructure.
Any new construction or substantial
rehabilitation, as substantial
rehabilitation is defined by 24 CFR
5.100, of a building with more than 4
rental units and where the date of the
notice of owner proposal selection or
the start of the rehabilitation while
under a HAP contract is after January
19, 2017 must include installation of
broadband infrastructure, as this term is
also defined in 24 CFR 5.100, except
where the owner determines and
documents the determination that:
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(a) The location of the new
construction or substantial
rehabilitation makes installation of
broadband infrastructure infeasible;
(b) The cost of installing broadband
infrastructure would result in a
fundamental alteration in the nature of
its program or activity or in an undue
financial burden; or
(c) The structure of the housing to be
substantially rehabilitated makes
installation of broadband infrastructure
infeasible.
Dated: December 15, 2016.
Nani A. Coloretti,
Deputy Secretary.
[FR Doc. 2016–30708 Filed 12–19–16; 8:45 am]
BILLING CODE 4210–67–P
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2510
RIN 1210–AB76
Savings Arrangements Established by
Qualified State Political Subdivisions
for Non-Governmental Employees
Employee Benefits Security
Administration, Department of Labor.
AGENCY:
ACTION:
Final rule.
This document contains an
amendment to a final regulation that
describes how states may design and
operate payroll deduction savings
programs for private-sector employees,
including programs that use automatic
enrollment, without causing the states
or private-sector employers to have
established employee pension benefit
plans under the Employee Retirement
Income Security Act of 1974 (ERISA).
The amendment expands the final
regulation beyond states to cover
qualified state political subdivisions
and their programs that otherwise
comply with the regulation. This final
rule affects individuals and employers
subject to such programs.
SUMMARY:
This rule is effective 30 days
after the date of publication in the
Federal Register.
DATES:
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:
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92639
I. Background
A. The 2016 Final Safe Harbor
Regulation
On August 30, 2016, the Department
issued a final regulation establishing a
safe harbor pursuant to which state
governments can establish payroll
deduction savings programs for privatesector employees, including programs
with automatic enrollment, without
causing either the state or the employers
of those employees to have established
employee pension benefit plans subject
to ERISA. The Department published
the safe harbor regulation in response to
legislation in some states, and stronglyexpressed interest in others, to
encourage private-sector employees to
save for retirement by giving those
employees broader access to retirement
savings arrangements through their
employers. The safe harbor regulation
became effective on October 31, 2016.
As the Department noted in the final
regulation’s preamble, concerns that
tens of millions of America’s workers do
not have access to workplace retirement
savings arrangements led some states to
establish state-administered programs
that allow private-sector employees to
contribute salary withholdings to taxfavored individual retirement accounts
described in 26 U.S.C. 408(a),
individual retirement annuities
described in 26 U.S.C. 408(b), and Roth
IRAs described in 26 U.S.C. 408A
(collectively, IRAs). California,
Connecticut, Illinois, Maryland, and
Oregon, for example, have adopted laws
along these lines.1 Those programs
generally require certain employers that
do not offer workplace savings
arrangements to automatically deduct a
specified amount of wages from their
employees’ paychecks, unless an
employee affirmatively chooses not to
participate in the program, and to remit
those payroll deductions to stateadministered programs consisting of
IRAs established for each participating
employee. All of these state initiatives
allow employees to stop payroll
deductions at any time once they have
begun, and they typically require that
employers provide employees with
program-generated information,
including information on employees’
rights and various program features.
None of the programs, however,
1 California Secure Choice Retirement Savings
Trust Act, Cal. Gov’t Code §§ 100000–10044 (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. 24 (H.B. 1378) (2016); Oregon
Retirement Savings Board Act, Ch. 557 (H.B. 2960)
(2015).
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currently require employers to make
matching or other employer
contributions to employee accounts,
while some programs expressly prohibit
employer contributions and other
programs do not address that issue.
The Department also noted in the
2016 final safe harbor regulation’s
preamble that some stakeholders had
expressed concern that their payroll
deduction savings programs might cause
either the state or the covered employers
to inadvertently establish ERISAcovered plans, despite the states’
express intent to avoid such a result.
The states’ concern is based in part on
ERISA’s broad definition of ‘‘employee
pension benefit plan’’ and ‘‘pension
plan,’’ which ERISA defines, 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 That definition’s
broad scope is further evident in the fact
that the Department and the courts have
broadly interpreted the phrase
‘‘established or maintained’’ as
requiring only minimal involvement by
an employer or employee organization.3
Thus, for example, it is possible for an
employer to establish an ERISA plan
simply by purchasing insurance
products for an individual employee or
employees. Given these expansive
definitions, which Congress deemed
essential to ERISA’s purpose of
protecting plan participants by ensuring
the security of promised benefits, ERISA
applies to nearly all benefit
arrangements that private-sector
employers establish for their employees.
The states’ desire to avoid
inadvertently creating ERISA plans
through their payroll deduction savings
programs stems from the fact that, with
certain exceptions, ERISA preempts
state laws that relate to ERISA-covered
employee benefit plans.4 Thus, if a state
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).
4 ERISA section 514(a), 29 U.S.C. 1144(a).
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program requires private employers to
take actions that effectively cause those
employers to establish ERISA-covered
plans, the state law underlying the
program would likely be preempted.
Similarly, if the state-sponsored
program itself were deemed to be an
ERISA plan, ERISA would likely
preempt any state law that mandates
private-sector employers to enroll their
employees in that program. It is
important to note in this regard that
although ERISA does exempt from its
scope benefit plans that states establish
for their own employees, the state
payroll deduction savings programs at
issue here would not fit that definition.5
The Department responded to these
concerns by publishing the 2016 final
safe harbor regulation, which described
specific conditions pursuant to which
state payroll deduction savings
programs, including those with
automatic enrollment, would not result
in the state or private-sector employers
having established ERISA-covered
employee pension benefit plans. The
2016 final safe harbor regulation thus
helps states to establish and operate
payroll deduction savings programs in a
manner that reduces the risk that ERISA
would preempt their laws and
programs. That final regulation did not,
however, include within its scope
payroll deduction savings programs
established by state political
subdivisions.
B. Proposed Amendment to the 2016
Safe Harbor Regulation
1. Expanding the Safe Harbor To
Include Political Subdivisions
On August 30, 2016, the Department
published in the Federal Register a
proposed rule amending the 2016 final
safe harbor regulation to include within
its scope laws and programs established
by certain state political subdivisions.6
The proposed amendment addressed
certain public comments the
Department received after it first
published the safe harbor regulation in
2015 as a proposed rule.7 In particular,
5 ERISA
section (3)(32), 29 U.S.C. 1002(32).
81 FR 59581 (August 30, 2016).
7 Id. See also 80 FR 72006 (November 18, 2015).
On the same day that the 2015 proposed rule 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 statesponsored 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
6 See
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several commenters had expressed the
view that the Department’s definition of
‘‘State’’ in the 2015 proposed safe
harbor regulation was too narrow
because it did not include political
subdivisions. Some of these commenters
identified New York City as being
interested in offering a program. The
2015 proposal defined the term ‘‘State’’
by referencing section 3(10) of ERISA,
which provides, in relevant part, 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.’’ That definition excludes from
the safe harbor any payroll deduction
savings program established by state
political subdivisions, such as a cities or
counties.
Although the Department retained the
section 3(10) definition in the 2016 final
safe harbor regulation, the Department
nevertheless agreed with commenters
that there may be good reasons for
expanding the safe harbor, subject to
certain conditions, to cover political
subdivisions and their programs. While
it is not clear to the Department how
many such political subdivisions
eventually will have an interest in
establishing programs of the kind
described in the final safe harbor
regulation, thus far the Department has
only received written letters of interest
from representatives of Seattle,
Philadelphia and New York City.8
Accordingly, the Department proposed
amending the 2016 final safe harbor
regulation to add to § 2510.3–2
paragraph (h) the term ‘‘or qualified
political subdivision’’ wherever the
term ‘‘State’’ appears. That change
would cause the regulation’s safe harbor
to apply to ‘‘qualified’’ political
subdivision payroll deduction savings
programs in the same manner as it
applies to state programs.
The proposed amendment also added
a new subparagraph (h)(4) to define the
term ‘‘qualified political subdivision’’ as
any governmental unit of a state,
including any city, county, or similar
governmental body that met three
criteria. First, the political subdivision
must have the authority, under state
law, whether implicit or explicit, to
require employers’ participation in the
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. A
number of commenters asked the Department to
amend the Interpretive Bulletin to reflect this view.
Such an amendment is beyond the scope of this
rulemaking.
8 See, e.g., Comment Letter #4 (Seattle City
Councilmember Tim Burgess); Comment letter #5
(City of Philadelphia Controller); Comment Letter
#20 (New York City Mayor).
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payroll deduction savings program.
Second, the political subdivision must
have a population equal to or greater
than the population of the least
populous state.9 Third, the political
subdivision cannot be within a state that
has a statewide retirement savings
program for private-sector employees.10
The Department’s goal in defining
‘‘qualified political subdivision’’ in this
way was to reduce the number of
political subdivisions that can fit within
the safe harbor and focus the authority
on those subdivisions most likely to
have the capacity to implement
successful programs. As the Department
noted in the proposed rule’s preamble,
the U.S. Census Bureau reports that
there are approximately 90,000 local
governmental units in the United States,
many of which could be considered
‘‘political subdivisions’’ for purposes of
the proposed regulation.11 Given this
large number, the Department was
concerned that expanding the safe
harbor to all political subdivisions
would result in overlapping programs
within a given state.12 The Department
also had some concerns about
expanding the safe harbor to very small
political subdivisions, as the U.S.
Census Bureau has reported that
approximately 83% of state
subdivisions have populations of less
than 10,000 people.13 These statistics
led the Department to propose to further
limit the types of political subdivisions
that can fall within the safe harbor to
those that are sufficiently large and
sophisticated to have the ability to
oversee and safeguard payroll deduction
savings programs.
9 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.
10 The proposal’s paragraph (h)(4) definition
would not, however, 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).
11 This figure represents 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 (https://www.census.gov/
govs/cog/).
12 This could occur in situations where, for
example, an employer operates in a state (or states)
with multiple political subdivisions.
13 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 (https://
www.census.gov/govs/cog/).
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2. Criteria Limiting Political
Subdivision Eligibility for the Safe
Harbor
The first proposed criterion limiting
the potential number of political
subdivisions eligible for the safe harbor
requires that the political subdivision
have either explicit or implicit authority
under state law to establish and operate
a payroll deduction savings program
and to require employers within its
jurisdiction to participate. In the case of
programs with automatic enrollment,
that authority must encompass the
power to require employers to execute
payroll deduction wage withholdings.14
This criterion will effectively limit the
safe harbor’s scope to so-called
‘‘general-purpose’’ subdivisions, which
are political subdivisions that have the
authority to exercise traditional
sovereign powers, such as the power of
taxation, the power of eminent domain,
and the police power. It includes county
governments, municipal governments,
and township governments.15
According to the U.S. Census Bureau,
there are approximately 40,000
‘‘general-purpose’’ political
subdivisions in the United States.16 By
contrast, ‘‘special-purpose’’
subdivisions, such as utility districts or
transit authorities, ordinarily would not
have this kind of authority under state
law. Thus, the Department expects that
this criterion alone will reduce the
universe of political subdivisions
potentially eligible for the safe harbor
from the approximate total of 90,000
U.S. political subdivisions to
approximately 40,000.
The second proposed criterion
limiting the number of potentiallyeligible political subdivisions requires
that the political subdivision have a
population equal to or greater than the
population of the least populous U.S.
state (excluding the District of Columbia
and the territories listed in section 3(10)
of the ERISA). Based on the most recent
U.S. Census Bureau statistics available,
the least populous U.S. state had
14 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. Other criteria in
(h)(4) also serve this purpose by reducing the
likelihood that an employer might become involved
with the arrangement beyond the limits of the safe
harbor.
15 See U.S. Census Bureau, Government
Organization Summary Report: 2012 Census of
Governments (https://www.census.gov/govs/cog/
index.html).
16 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.
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approximately 600,000 residents.17 This
criterion will significantly reduce the
possibility of overlap by further limiting
the universe of potentially-eligible
political subdivisions from
approximately 40,000 to a subset of
approximately 136.18
The proposal’s third criterion further
limited the safe harbor to political
subdivisions in states that do not offer
their own statewide retirement savings
program for private-sector employees.19
As presented in the proposal, this
criterion would have applied to state
retirement savings programs described
in the safe harbor rule itself, 29 CFR
2510.3–2(h), and also to programs
described or referenced in the
Department’s Interpretive Bulletin
found at 29 CFR 2509.2015–02. This
criterion excluded from the safe harbor
approximately 48 additional political
subdivisions that otherwise meet the
proposal’s population threshold,
thereby further limiting the universe of
potentially eligible political
subdivisions to approximately 88 as of
the date of the proposed rule.
3. Solicitation of Comments on the
Proposed Amendment
The Department solicited public
comments on all aspects of the proposed
amendment, including comments on
criteria the Department did not
specifically address in the proposal, but
which might be useful in refining the
qualified political subdivision
definition. In addition, the Department
also requested comments on other facets
of the safe harbor more generally. In
response to these solicitations, the
Department received approximately 27
written comments, many of which are
discussed under the topical headings
below.
17 Wyoming was 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/).
18 As of 2015, there were approximately 136
general-purpose political subdivisions with
populations equal to or greater than the population
of Wyoming.
19 Eight states have already adopted laws to
implement some form of statewide retirement
savings program for private-sector employees.
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, Public Law
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).
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II. Final Rule
of the date the political subdivision’s
program is enacted.
A. General Overview
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The final rule largely adopts the
proposal’s general structure.
Specifically, it amends paragraph (h) of
§ 2510.3–2 by adding the term ‘‘or
qualified political subdivision’’
wherever the term ‘‘State’’ appears in
the regulation. Thus, with these
amendments, the final regulation’s safe
harbor provisions generally apply in the
same manner to qualified political
subdivision payroll deduction savings
programs as they apply to state
programs.
The final rule also adopts proposed
new subparagraph (h)(4), but with
modifications. In the final rule,
paragraph (h)(4) defines the term
‘‘qualified political subdivision’’ as any
governmental unit of a state, including
any city, county, or similar
governmental body that meets four
criteria.20 First, the political subdivision
must have implicit or explicit authority
under state law to require employers’
participation in the payroll deduction
savings program. 29 CFR 2510.3–
2(h)(4)(i).21 Second, the political
subdivision must have a population
equal to or greater than the population
of the least populous state.22 29 CFR
2510.3–2(h)(4)(ii)(A). Third, the
political subdivision cannot be within a
state that has enacted a mandatory
statewide payroll deduction savings
program for private-sector employees;
nor can the political subdivision have
geographic overlap with another
political subdivision that has enacted
such a program. 29 CFR 2510.3–
2(h)(4)(ii)(B).23 Fourth, the political
subdivision must implement and
administer a retirement plan for its
employees. 29 CFR 2510.3–
2(h)(4)(ii)(C).24 Compliance with the
latter three conditions is determined as
20 This new definition does not apply for other
purposes under ERISA, such as for determining
whether an entity is a political subdivision for
purposes of the definition of a ‘‘governmental plan’’
in section 3(32) of ERISA, 29 U.S.C. 1002(32).
21 This provision reduces the approximate
number of potentially eligible political subdivisions
from 90,000 to 40,000.
22 This provision reduces the approximate
number of potentially eligible political subdivisions
from 40,000 to 128. For purposes of this provision,
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.
23 This provision reduces the approximate
number of potentially eligible political subdivisions
from 128 to 80.
24 This provision reduces the approximate
number of potentially eligible political subdivisions
from 80 to 51.
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B. The Authority Test
The final rule adopts the proposal’s
requirement that in order to be
‘‘qualified’’ a political subdivision must
have the ‘‘authority, implicit or explicit,
under State law to require employers’
participation in the program . . . .’’
§ 2510.3–2(h)(4)(i). This provision
serves two purposes. The main purpose
is to ensure that the political
subdivision has the authority under
state law to require employers within its
jurisdiction to participate in the payroll
deduction savings program and, in the
case of programs with automatic
enrollment, to require wage
withholding. This is not to say,
however, that a state law must explicitly
authorize the political subdivision to
establish a payroll deduction savings
program; rather, it means that the
political subdivision must have some
measure of legal authority, even if
implicit, to establish and operate the
program and to compel employers to
participate.25 The provision’s second
purpose is to limit the qualified political
subdivision definition—and by
extension to limit the safe harbor’s
scope—to general-purpose subdivisions,
a limitation that greatly reduces the
approximate number of potentiallyeligible subdivisions from 90,000 to
40,000. For these reasons, and noting
that the Department did not receive
significant or notable comments on this
particular provision, the Department
incorporates this provision in the final
rule without change.
C. The Population Test
The final rule adopts the proposal’s
population test for safe harbor
qualification, with one modification. As
noted above, the final rule states, in
relevant part, that a political
subdivision must have ‘‘a population
equal to or greater than the population
of the least populated State,’’ and
defines the term ‘‘State’’ to have the
same meaning as in section 3(10) of
ERISA (excluding the District of
Columbia and territories listed in that
section). 29 CFR 2510.3–2(h)(4)(ii)(A).26
The final rule modifies the proposal by
adding to (h)(4)(ii) the phrase ‘‘[a]t the
time of the enactment of the political
subdivision’s payroll deduction savings
25 This particular purpose is central to the
Department’s analysis under section 3(2) of ERISA
and to its conclusion that employers are not
establishing or maintaining ERISA-covered plans.
81 FR 59464, 70–71 (Aug. 30, 2016).
26 The U.S. Census Bureau currently identifies
Wyoming as the least populous state, with
approximately 600,000 residents.
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program,’’ and applying this
requirement to the population test, as
well as the two other conditions that a
political subdivision must satisfy to be
a qualified political subdivision.
The Department has two primary
policy reasons for adopting the
population test. First, it is important
that the safe harbor not include political
subdivisions that may not have the
experience, capacity, and resources to
establish and oversee payroll deduction
savings programs. Second, the
Department is interested in reducing the
possibility that employers would be
subject to a multiplicity of overlapping
political subdivision programs. It is the
Department’s view that the population
test is an important measure in
achieving both of those purposes. In the
preamble to the proposed rule, the
Department articulated these policy
considerations for public notice and
comment.
The Department received a number of
comments on this issue that reflected
apparently conflicting viewpoints. Some
commenters supported the population
test because they agree with the
Department that population size
correlates with a political subdivision
having the experience, capacity, and
resources to implement the necessary
structures to establish and oversee
payroll deduction savings programs and
meet the safe harbor regulation’s various
requirements.27 These commenters state
that political subdivisions with larger
populations are more likely to share
states’ concerns about the effect of
inadequate retirement savings on social
welfare programs. Other commenters
disagreed with the population test’s
underlying premise, as they believe that
a population test is arbitrary and does
not prove either that the least populated
state has sufficient capacity to establish
and oversee a payroll deduction savings
program or that political subdivisions
with lesser populations are per se
incapable of competently overseeing
such a program.
The Department agrees with those
commenters who recognize a
relationship between population, on the
one hand, and resources, experience,
and capacity on the other. This is
because larger cities and counties (in
terms of population) likely have, among
other things, a larger tax base and
governmental infrastructure, which
provides access to greater resources,
experience, and capacity than smaller
27 See Comment Letter #11 (Corporation for
Enterprise Development); Comment Letter #14
(AARP); Comment Letter #17 (AFSCME).
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cities and counties.28 In this regard,
population can serve as one indicator of
whether a city or county is likely to
have sufficient resources, experience,
and capacity to safely and competently
establish and oversee a payroll
deduction savings program. By keying
off the least populated state, the final
regulation’s population test effectively
establishes a federal floor, such that no
political subdivision could qualify for
the safe harbor unless the subdivision
has a level of capacity and resources
equal to or greater than the capacity and
resources of the least populated state,
using population as a proxy for capacity
and resources.
The provisions of the Department’s
safe harbor pertaining to state payroll
deduction savings programs assume that
even the least populated states have the
capacity and resources to manage a
payroll deduction savings program. In
the Department’s view, political
subdivisions that are the population size
of small states could, in the right
circumstances, have similar capacity
and resources as their state counterparts
of the same size. For that reason, the
Department has decided not to flatly
exclude such entities from coverage
under the safe harbor. At the same time,
however, the Department notes that
states necessarily have a breadth of
responsibilities, administrative systems,
and experience that may not be matched
by political subdivisions of equal size.
Accordingly, the final regulation also
adopts the demonstrated capacity test
for these subdivisions, as discussed
below. Together these tests ensure a
high likelihood that qualified political
subdivisions will have sufficient
resources, experience, and capacity to
safely and competently establish and
oversee a payroll deduction savings
programs. The application of both the
size restriction and the demonstrated
capacity test reduce the possibility that
employers would be subject to a
multiplicity of overlapping political
subdivision programs. The population
test directly advances this important
policy interest by limiting the universe
of political subdivisions potentially
eligible for the safe harbor from
approximately 40,000 general purpose
political subdivisions to a far smaller
number. As of 2015, there were
28 For similar reasons, the population test also
would reduce the likelihood of employer
involvement beyond the limits of the safe harbor
regulation. For instance, larger cities and counties
with greater resources, experience and capacity
likely will be better able to assert and maintain
complete control over their programs such that
there will be few or no occasions for participating
employers to exercise their own discretion or
control with respect to the program.
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approximately 136 general-purpose
political subdivisions with populations
equal to or greater than the population
of Wyoming.
Even though the final regulation
excludes smaller political subdivisions
from the safe harbor, the Department
acknowledges that cities and counties
are not per se incapable of competently
overseeing a payroll deduction savings
program solely because they fail the
final rule’s population test. Indeed,
many localities that fall below the
population threshold may have
sufficient experience, capacity, and
resources to safely establish and oversee
payroll deduction savings programs in a
manner that sufficiently protects
employees. Nevertheless, based on the
public record, the Department’s view
continues to be that smaller political
subdivisions do not, in general, have
experience, resources, and capacity
comparable to that of the least populous
state, and therefore the Department
chooses not to extend safe harbor status
to such localities and their programs. It
is also important to note that the final
regulation does not—and the
Department could not—bar smaller
localities from establishing and
maintaining payroll deduction savings
programs for private-sector employees
that fall outside the Department’s safe
harbor regulation.
As noted above, the Department did
make one technical improvement to the
proposed population test. Public
comments raised concerns about the
possibility that fluctuating populations
could cause a qualified political
subdivision to fall below the required
population threshold—and therefore
drop outside the safe harbor—after it
had already enacted a payroll deduction
savings program. To eliminate this
possibility and its attendant uncertainty,
the final rule contains new language to
clarify that such cities and counties
would not lose their qualified status
merely because of population
fluctuations. In that regard, the final
regulation adds to paragraph (h)(4)(ii)
the phrase ‘‘[a]t the time of the
enactment of the political subdivision’s
payroll deduction savings program.’’
Finally, some commenters suggested
that, because population size is only a
rough indicator of a political
subdivision’s capacity and ability to
safely operate a payroll deduction
savings program, the Department should
consider pairing the population test
with some other more refined test or
indicator. As mentioned above, the
Department agrees that the population
test could be improved by being paired
with an additional criterion to gauge
whether a sufficiently-large political
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subdivision should nonetheless fail to
qualify under the safe harbor for lack of
experience. The section below discusses
the changes made to accomplish this
result.
D. Demonstrated Capacity Test
The final regulation adopts a
‘‘demonstrated capacity’’ test in
addition to the population test. As noted
in the preceding sections, the
population test removed from the safe
harbor a significant number of smaller
political subdivisions based solely on
their size. The demonstrated capacity
test, on the other hand, focuses on a
political subdivision’s ability to operate
a payroll deduction savings program by
requiring direct and objectively
verifiable evidence of a political
subdivision’s experience, capacity, and
resources to operate or administer such
programs. The two tests (population test
and demonstrated capacity test)
combine to ensure a strong likelihood
that political subdivisions that meet the
safe harbor have sufficient experience,
capacity, and resources to safely
establish and oversee payroll deduction
savings programs in a manner that
sufficiently protects private-sector
employees and that would not require
employer involvement beyond the
limits of the safe harbor regulation.
The Department adopted this new test
in response to a significant number of
commenters that strongly support this
idea. These commenters encouraged the
Department to consider two different
approaches for developing a
demonstrated capacity test. The first
suggested approach focuses on whether
the political subdivision has
implemented and administers a
retirement plan for its own employees.29
The second suggested approach focuses
on whether the political subdivision has
an existing infrastructure for assessing
and collecting income, sales, use or
other similar taxes.30 The apparent
rationale behind these suggested
approaches is that political subdivisions
that are sophisticated enough to operate
a retirement plan or levy and collect
their own taxes should possess
sufficient experience, capacity, and
resources to safely establish and oversee
a payroll deduction savings program. In
addition, retirement plan administration
and tax administration entail
administrative activities that are highly
comparable to the type of administrative
activity that would be necessary to
establish and oversee a successful
29 See, e.g., Comment Letter #16 (Investment
Company Institute).
30 See, e.g., Comment Letter #19 (Georgetown
University Center for Retirement Initiatives).
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payroll deduction savings program for
private-sector employees.
The final regulation adopts the
suggested plan sponsorship approach as
the sole basis for a demonstrated
capacity test. Thus, in order to be
qualified for the safe harbor under the
final regulation, a political subdivision
must implement and administer its own
retirement plan. The Department agrees
with the commenters that administering
a public retirement plan for the political
subdivision’s own employees is
sufficiently similar to establishing and
overseeing a payroll deduction savings
program for employees of other entities
that successfully performing the former
is strong evidence of an ability to
successfully perform the latter. Both
endeavors require, for example,
receiving contributions, custodianship,
investing assets or selecting investment
options, deciding claims, furnishing
account statements, meeting reporting
requirements, distributing benefit
payments, or selecting and overseeing
others to perform some or all of these
tasks. A political subdivision that does
not implement and administer a
retirement plan for its own employees,
on the other hand, will fail to qualify
under the safe harbor even if it passes
the population test and all the other safe
harbor conditions set forth in the
qualified political subdivision
definition.
The Department declined to adopt as
part of the demonstrated capacity test
the second of the commenters’
suggested approaches, i.e., the existence
of a tax infrastructure. In support of that
approach, the commenters suggested
that a political subdivision’s levying
and collecting its own income, wage, or
similar taxes may provide evidence that
the political subdivision has the
capacity to establish and oversee payroll
deduction savings programs. The
commenters noted that effective tax and
program administration require political
subdivisions to safely and efficiently
exchange data and money with
employers in a timely and ongoing
fashion, usually by way of electronic
payroll and other systems. In the
Department’s view, however, plan
sponsorship is a better and more
directly relevant indicator of a
subdivision’s ability to sponsor and
administer a retirement savings
program. Additionally, the Department
is unable to verify the precise number
of political subdivisions that both levy
and collect their own income, wage, or
similar taxes. Without such information,
the Department is unable to assess the
effect of this suggested approach on the
safe harbor’s scope. For these reasons,
the Department declined to include this
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approach in the final rule’s
demonstrated capacity test.
Finally, the new test does not
prescribe the type or size of plan a
political subdivision must implement
and administer in order to meet the safe
harbor’s new ‘‘plan administration’’
criterion. Thus, a political subdivision
can satisfy this criterion by
administering a defined benefit plan, an
individual account plan, or both.
Although a number of commenters
suggested that the Department consider
a plan size requirement, such as a
minimum level of assets under
management or number of participants
covered, the Department declines to
adopt these suggestions in the final
rule.31 As long as the plan provides
retirement benefits for some or all of the
political subdivision’s employees, and
provided that the political subdivision
administers the plan directly or is
responsible for selecting and overseeing
others performing plan administration,
the retirement plan is a ‘‘plan, fund, or
program’’ within the meaning of
paragraph (h)(4)(ii)(C) of the final
regulation.
E. Consumer Protections
The final rule eliminates lingering
ambiguity regarding the requirement in
proposed paragraph (h)(1)(iii) that the
state or political subdivision must
assume responsibility for the security of
payroll deductions. The Department
previously attempted to clarify this
requirement in the preamble to the final
regulation dealing with state payroll
deduction savings programs.32 Despite
those earlier efforts, commenters on the
proposal continued to ask the
Department to further clarify the
meaning of this requirement. A number
of commenters specifically focused on
the need to clarify and strengthen
proposed paragraph (h)(1)(iii), with
some specifically stressing the
importance of clear and strong
standards protecting payroll
deductions.33 Many commenters also
raised a generic concern that the
proposal does not contain sufficient
consumer protections as compared to
31 See, e.g., Comment Letter #9 (New York City
Comptroller).
32 81 FR 59470 (August 30, 2016).
33 See, e.g., Comment Letter #12 (AFL–CIO);
Comment Letter #16 (ICI) (incorporating comments
from January 19, 2016 letter pertaining to state
payroll deduction savings programs); Comment
Letter #22 (American Council of Life Insurers)
(‘‘The inclusion of a payroll deduction transmission
timing requirement in a safe harbor—especially one
that provides for auto-enrollment—will provide a
powerful incentive for those seeking to use the safe
harbor protection to ensure that employee payroll
deductions are transmitted safely, appropriately,
and in a timely manner as non-compliance will
subject the plan to ERISA’s Title I requirements.’’).
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the protections ERISA would offer.34
The Department received similar
comments on the 2015 proposed rule for
state payroll deduction savings
programs. Many of those commenters
specifically referenced and supported a
rule similar to the Department’s
regulation at 29 CFR 2510.3–102
(defining when participant
contributions become ‘‘plan assets’’ for
the purpose of triggering ERISA’s
protections).
In response to these concerns, the
final rule clarifies and strengthens the
requirement that states and political
subdivisions must assume responsibility
for the security of payroll deductions.
Specifically, paragraph (h)(1)(iii)
contains a new sub-clause clarifying
that this requirement—to assume
responsibility for the security of payroll
deductions—includes two subsidiary
requirements. The first subsidiary
requirement is that states and political
subdivisions must require that
employers promptly transmit wage
withholdings to the payroll deduction
savings program. The second subsidiary
requirement is that states and political
subdivisions must provide an
enforcement mechanism to ensure
employer compliance with the first
subsidiary requirement. These new
requirements protect employees by
ensuring that their payroll deductions
are transmitted to their IRAs as quickly
as possible, where they become subject
to applicable Internal Revenue Code
provisions, including the protective
prohibited transaction provisions found
in section 4975 of the Code.35 States and
political subdivisions may meet the new
requirements in a variety of ways,
including, for example, through
legislation, ordinance, or administrative
rulemaking.
The final regulation does not
prescribe what is meant for wage
withholdings to be transmitted
‘‘promptly.’’ Instead, each state and
qualified political subdivision is best
positioned to calibrate the appropriate
timeframe for its own program.
Nevertheless, in the interest of
providing certainty to states and
political subdivisions, the final
regulation contains a special safe harbor
for promptness. Paragraph (h)(5)
provides that, for purposes of paragraph
(h)(1)(iii), employer wage withholdings
are ‘‘deemed to be transmitted
promptly’’ if such amounts are
34 See, e.g., Comment Letter #12 (AFL–CIO);
Comment Letter #16 (ICI); Comment Letter #17
(AFSCME); Comment Letter #18 (U.S. Chamber of
Commerce); Comment Letter #22 (American
Council of Life Insurers); Comment Letter #26
(Economic Studies at Brookings).
35 See 81 FR 59469 (August 30, 2016).
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transmitted to the program as of the
earliest date on which such
contributions can reasonably be
segregated from the employer’s general
assets, but in no event later than the last
day of the month following the month
in which such amounts would
otherwise have been payable to the
employee in cash. This standard is
closely aligned with the rules in 29 CFR
2510.3–102 for plans involving SIMPLE
IRAs, as described in section 408(p) of
the Internal Revenue Code.36 Paragraph
(h)(5) is not, however, the only method
of complying with the promptness
requirement in paragraph (h)(1)(iii) of
the final regulation.
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F. Overlap
The proposed rule limited the safe
harbor to political subdivisions that are
not located in a state that establishes a
statewide retirement savings program
for private-sector employees.37 The
purpose behind this criterion was to
reduce the number of political
subdivisions that could potentially meet
the safe harbor, thereby mitigating the
potential for overlap or duplication
between political subdivision programs
and state programs. In the proposal’s
preamble, the Department interpreted
the term ‘‘state-wide retirement savings
program’’ to include retirement savings
programs described in the Department’s
Interpretive Bulletin found at 29 CFR
2509.2015–02, such as the voluntary
marketplace and exchange models
adopted by Washington State and New
Jersey.38
A number of commenters expressed
concern that including non-mandatory
state programs within this limiting
criterion is overly broad.39 The
commenters noted that where a state
establishes the types of voluntary
programs described in the Interpretive
Bulletin, such as voluntary
marketplaces and exchanges, there is
little risk that employers would be
subject to overlapping requirements or
duplication because statewide
information marketplaces and
exchanges are merely vehicles for
providing employees access to
36 29 CFR 2510.3–102(b)(2). See, e.g., DOL
Advisory Opinion 83–25A (May 24, 1983).
37 See paragraph (h)(4)(iii) of the proposed rule;
81 FR 59581, 92 (Aug. 30, 2016).
38 81 FR 59581, 85 (Aug. 30, 2016).
39 See, e.g., Comment Letter #3 (Washington State
Department of Commerce); Comment Letter #4
(Seattle City Councilmember Tim Burgess);
Comment Letter #7 (Economic Opportunity
Institute); Comment Letter #9 (New York City
Comptroller); Comment Letter #14 (AARP);
Comment Letter #17 (AFSCME); Comment Letter
#19 (Georgetown University Center for Retirement
Initiatives); Comment Letter #20 (New York City
Mayor); Comment Letter #26 (Economic Studies at
Brookings).
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information about retirement savings
options.40 Thus, such programs would
not impose upon employers any
obligations that might conflict or
overlap with a political subdivision’s
mandatory payroll deduction savings
program. These commenters urged the
Department to clarify in the final rule
that a political subdivision is precluded
from meeting this safe harbor condition
only when the political subdivision is in
a state that establishes a mandatory
statewide payroll deduction savings
program that requires employers to
participate.
Commenters also expressed concern
that the proposed rule’s provision
excluding a political subdivision from
the safe harbor if the state subsequently
enacts its own payroll deduction
savings program could, in certain
circumstances, result in legitimate
political subdivision programs
automatically dropping out of the safe
harbor.41 Specifically, the commenters
pointed out that under the proposed
rule, a political subdivision could be
‘‘qualified’’ at the time it enacts a
payroll deduction savings program, but
then suffer automatic disqualification if
its state subsequently enacts a statewide
program.42 This is because the proposed
rule excludes from the safe harbor any
political subdivision that is in a state
that ‘‘enacts’’ its own program, without
regard to whether the political
subdivision had enacted its own
program before the state acted.
1. Clarifying ‘‘Statewide Retirement
Savings Program’’
The Department agrees with the
commenters that this criterion was
overly broad. Accordingly, the final rule
modifies the proposed rule to clarify
that in order to be eligible for the safe
harbor a political subdivision must not
be located in a state that has enacted a
mandatory statewide payroll deduction
savings program for private sector
employees. See § 2510.3(h)(4)(ii)(B).
This modified language will continue to
exclude from the safe harbor political
subdivisions located in states (such as
California, Connecticut, Illinois,
Maryland, and Oregon) that have
enacted a mandatory state payroll
deduction savings program, as well as
other political subdivisions that seek to
enact a safe harbor program after the
state in which they are located has
40 See Comment Letter #9 (New York City
Comptroller).
41 See, e.g., Comment Letter #4 (Seattle City
Councilmember Tim Burgess); Comment Letter #8
(American Retirement Association).
42 See Comment Letter #8 (American Retirement
Association); Comment Letter #20 (New York City
Mayor).
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92645
already done so. Revised paragraph
(h)(4)(ii)(B) does not, however, exclude
from the safe harbor political
subdivisions located in states that have
enacted only voluntary programs such
as those Massachusetts, New Jersey, and
Washington State had enacted as of the
date this final rule was published.43
2. Timing—Political Subdivisions
Enacting Programs Before the State
The Department agrees with
commenters that an otherwise-qualified
political subdivision that has relied on
the safe harbor to enact a payroll
deduction savings program should not
automatically lose its qualified status
when its state subsequently enacts its
own program. To allow an otherwisequalified, pre-existing program to
precipitously drop outside the safe
harbor due to actions outside of its
control would impose upon affected
employers and participants undesirable
uncertainty and complexities.44 The
final rule therefore revises paragraph
(h)(4) to exclude from the safe harbor
political subdivisions that are located in
a state that already has enacted a
mandatory statewide payroll deduction
savings program before the political
subdivision enacts its own program.
Thus, if a state enacts such a program
after the political subdivision has done
so, the political subdivision does not
automatically fall outside the safe
harbor. Rather, in such instances it is
incumbent upon the state and the
political subdivision to determine how
to coordinate the potentially
overlapping programs in a way that does
not require employer involvement
beyond the limits of the safe harbor
regulation, whether that means carving
out the political subdivision from the
state program, incorporating the
political subdivision’s program into the
state program, or employing some other
alternative.
3. Elimination of Overlapping Political
Subdivision Programs
Some commenters asked the
Department to clarify how the safe
harbor would apply to political
subdivisions that each enact a
mandatory payroll deduction savings
program for employees within their
potentially overlapping jurisdictions.
Some of those commenters further
suggested that the Department should
43 Mass. Gen. Laws ch. 29, § 64E (2012); New
Jersey Small Business Retirement Marketplace Act,
Public Law 2015, ch. 298; Washington State Small
Business Retirement Savings Marketplace Act,
Wash. Rev. Code §§ 43.330.730–750 (2015).
44 See, e.g., Comment Letter #8 (American
Retirement Association); Comment Letter #20 (New
York City Mayor).
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establish a rule that the larger political
subdivision’s program (e.g., a county
program) should take priority over any
political subdivision program within its
jurisdiction (e.g., a city program),
regardless of which program was first
enacted.45
As a practical matter, and in view of
the fact that only three political
subdivisions have expressed a potential
interest in establishing payroll
deduction savings programs, the
Department does not anticipate that
there will be overlapping programs
among political subdivisions. After
careful deliberation, however, the
Department decided to address concerns
regarding the potential for conflicting
requirements by modifying the
proposed rule to preclude potentially
overlapping political subdivision
programs. As explained in the proposed
rule’s preamble, the Department has
taken substantial measures to mitigate
the potential that overlapping programs
could simultaneously meet the safe
harbor,46 but there remains some
potential for overlap. To eliminate any
remaining potential for overlap, the
Department has decided to extend the
first-in-time coordination rule (the
provisions of paragraph (h)(4)(ii)(B) of
the rule that exclude from the safe
harbor an otherwise qualified political
subdivision when the state in which it
is located has already enacted a
mandatory payroll deduction savings
program) to apply in situations where a
mandatory payroll deduction savings
program has already been enacted in
another political subdivision. Thus, to
the extent that a political subdivision
meets the other conditions to be
qualified but has a geographic overlap
with another political subdivision that
has already enacted a mandatory payroll
deduction saving program for privatesector employees, the former political
subdivision would be precluded from
enacting a mandatory payroll deduction
saving program that would satisfy the
safe harbor. The Department has
determined that this first-in-time rule
will eliminate the few remaining
situations in which the possibility of
overlap among political subdivisions
might otherwise exist.
G. Petition Process
Some commenters suggested that
political subdivisions could petition or
apply to the Department for an
individual opinion or decision
45 See,
e.g., Comment Letter #6 (American Payroll
Association); Comment Letter #15 (American
Benefits Council); Comment Letter #20 (New York
City Mayor); Comment Letter #23 (Financial
Services Institute).
46 See 81 FR 59581, 59585–86.
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regarding whether or not the political
subdivisions qualify for the safe harbor.
These commenters propose that such a
process could be available for political
subdivisions that meet at least some of
the four conditions in paragraph (h)(4)
of the final regulation, but fail to meet
all of the conditions. For example, the
process could be available for a city or
county that satisfies the demonstrated
capacity test but not the population test,
or vice-versa. These commenters
envision a process in which the
petitioner or applicant would present to
the Department its best case for safe
harbor status using a list of factors or
criteria to be developed by the
Department. This approach would give
‘‘close-call’’ cities and counties an
avenue to obtain qualified status, while
reserving to the Department the ability
to deny potentially unsafe or improper
applicants.
The Department declines to adopt this
suggestion. The qualified political
subdivision definition in paragraph
(h)(4) of the final rule consists of four
criteria, each of which is a bright-line
measure that is either met or not. These
objective criteria enable interested
parties to readily determine whether or
not they meet the definition. The
commenters’ suggested petition or
application process, by contrast, is
inherently subjective, and thus runs
entirely counter to the Department’s
objective approach. Moreover, under the
commenters’ proposed model, the
outcome in any particular case would
depend on, among other things, the
Department’s view of the relevant facts
and its weighing and balancing of a
given list of factors or criteria. The
present public record provides little, if
any, direction on the type of criteria or
factors the Department could or should
adopt under such an approach, or
whether each individual criterion or
factor should be given equal weight.
Apart from these significant
shortcomings, the commenters’
suggested proposal also raises
Departmental budgetary and resource
issues that are beyond the scope of this
rulemaking.
H. Responsibility and Liability for
Program Operations
The proposal required that states and
political subdivisions assume and retain
full responsibility for the payroll
deduction savings programs they
implement and administer. More
specifically, the proposal provided that
states and political subdivisions must
assume responsibility (i) for investing
employee savings or for selecting
investment alternatives; (ii) for the
security of payroll deductions and
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employee savings; and (iii) for operating
and administering their programs, even
if they delegate those functions to
service or investment providers.47 The
proposal thus made it clear that in order
for a program to qualify for the safe
harbor, states and political subdivisions
must assume and retain responsibility
for operating and administering their
programs.
At least one commenter requested that
the Department clarify what it means for
a state or political subdivision to
assume and retain full responsibility for
program operations, especially where
the state or political subdivision
chooses to delegate some of its
responsibilities to third-party experts.48
In the commenter’s view, this
requirement effectively prevents states
and political subdivisions from
delegating responsibilities and liabilities
to third-party experts who are willing to
assume such duties and liabilities. This
commenter argues that this provision
exposes states and political subdivisions
to broader responsibility—and greater
liability for third-party management—
than they would have under ERISA’s
fiduciary standards, or possibly even
under state statutes or common law. The
commenter therefore asked the
Department to modify the proposal to
clarify that states and political
subdivisions can delegate some of their
management responsibility and
attendant liability to third-party service
or investment providers, on the
condition that the state or political
subdivision prudently selects and
appropriately monitors those service
providers.
The final regulation contains no such
modification. The essence of the
regulation’s requirement that states and
political subdivisions assume and retain
full responsibility for operating and
administering their payroll deduction
savings programs is simply that states
and political subdivisions must retain
ultimate authority over those programs.
Such authority includes, for example,
determining whether or not to hire and
fire qualified third-party service
providers, and determining the scope of
those service providers’ duties. In
drafting this rule, the Department fully
anticipated that states and political
subdivisions might choose to delegate
program administration to qualified
service providers that the states or
political subdivisions oversee.49 In that
47 See §§ 2510.3–2(h)(1)(ii), (h)(1)(iii), and
(h)(2)(ii), respectively.
48 See Comment Letter #20 (New York City
Mayor).
49 See § 2510.3–2(h)(2)(ii) (states and political
subdivisions may, without falling outside the safe
harbor, utilize service or investment providers to
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regard, the Department recognizes that
prudently-selected third parties with
relevant program administration and
investment experience and expertise
may, in many circumstances, be better
equipped than a state or political
subdivision to discharge the specialized
duties associated with operating and
managing payroll deduction savings
programs. Thus, given that this
requirement does not preclude
sponsoring states and political
subdivisions from delegating or
assigning some or all of their
administrative responsibilities to thirdparty service providers, states and
political subdivisions would not lose
their safe harbor status by doing so. It
is important to note, however, that this
requirement does not in any way govern
the assignment of liability between
states and political subdivisions and
those to whom they delegate such
responsibilities. Rather, issues of
liability, such as whether and how
states or political subdivisions and their
service providers allocate liabilities
among themselves, are matters for state
and local law, and for applicable
provisions of the Internal Revenue
Code.
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I. Timing
A few commenters asked the
Department to delay extending the safe
harbor to qualified political
subdivisions until after the Department
has had a chance to accumulate and
fully analyze experience data on statesponsored payroll deduction savings
programs.50 Among the concerns these
commenters raised are the potential for
overlapping programs; the uncertainty
that a political subdivision could
establish a program and then drop out
of the safe harbor due to fluctuating
populations; political subdivisions’
assumed inferior level of financial
sophistication, expertise and resources
to properly manage payroll deduction
savings programs; the inherently
subjective nature of attempting to
differentiate between sophisticated and
unsophisticated political subdivisions;
and a perceived lack of consumer
protections. The commenters also
suggested that a delay in implementing
the final rule would allow more time for
states to establish statewide programs,
thereby alleviating the need for
potentially overlapping political
operate and administer their payroll deduction
savings programs as long as the state or political
subdivision retains full responsibility for operating
and administering the program).
50 Comment Letter #8 (American Retirement
Association); Comment Letter #15 (American
Benefits Council); Comment Letter #18 (U.S.
Chamber of Commerce).
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subdivisions to establish separate
programs.
Although the Department declines the
commenters’ requests to delay
implementing this final rule, the final
rule reflects that the Department did
take the commenters’ concerns into
account. As noted above in this
preamble, the final rule addresses the
commenters’ concerns about potentially
overlapping programs by adopting a
new condition that further reduces the
number of political subdivisions that
can meet the safe harbor. That condition
requires that in order to be eligible for
the safe harbor a political subdivision
must already administer a publicemployee retirement program. The
Department believes that this
condition—which a number of
commenters supported—measures, in
objective terms, a political subdivision’s
ability to operate and administer a
payroll deduction savings program for
private-sector employees. The final rule
also clarifies that an otherwise-qualified
political subdivision will not
automatically drop outside the safe
harbor due to a drop in population, and
it adds important consumer protections
by requiring that employers remit
employee wage withholdings to state
and political subdivision programs in a
timely manner. Moreover, the final rule
does not preclude a state from moving
forward with establishing its own
payroll deduction savings program
simply because a political subdivision
within its borders has already done so.
The Department also notes that one
very large political subdivision has
already taken steps to establish a payroll
deduction savings program for its
private-sector employee residents, and,
based on the comments the Department
has received, it seems two others have
expressed a potential interest in doing
so.51 As noted throughout this
preamble, facilitating political
subdivisions’ ability to encourage their
residents to save for retirement by
enrolling them in payroll deduction
savings programs furthers important
state, federal, and Departmental goals
and policies. For these reasons, and
considering the modifications the
Department already made to the final
rule, the Department judges it
appropriate to implement the final rule
at this time.
III. Regulatory Impact Analysis
51 See, e.g., The New York City Nest Egg: A Plan
for Addressing Retirement Security in New York
City, Office of the New York City Comptroller
(October 2016).
B. Background
As discussed in detail above in
Section I of this preamble, several
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A. Executive Order 12866 and 13563
Statement
Executive Orders 12866 and 13563
direct agencies to assess all costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing and
streamlining rules, and of promoting
flexibility. It also requires federal
agencies to develop a plan under which
the agencies will periodically review
their existing significant regulations to
make the agencies’ regulatory programs
more effective or less burdensome in
achieving their regulatory objectives.
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 the
OMB. Section 3(f) of the Executive
Order defines a ‘‘significant regulatory
action’’ as an action that is likely to
result in a rule (1) having an annual
effect on the economy of $100 million
or more, or adversely and materially
affecting a sector of the economy,
productivity, competition, jobs, the
environment, public health or safety, or
state, local or tribal governments or
communities (also referred to as an
‘‘economically significant’’ action); (2)
creating serious inconsistency or
otherwise interfering with an action
taken or planned by another agency; (3)
materially altering the budgetary
impacts of entitlement grants, user fees,
or loan programs or the rights and
obligations of recipients thereof; or (4)
raising novel legal or policy issues
arising out of legal requirements, the
President’s priorities, or the principles
set forth in the Executive Order.
OMB has determined that this
regulatory action is not economically
significant within the meaning of
section 3(f)(1) of the Executive Order.
However, it has determined that the
action is significant within the meaning
of section 3(f)(4) of the Executive Order.
Accordingly, OMB has reviewed the
final rule and the Department provides
the following assessment of its benefits
and costs.
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commenters on the 2015 proposal 52
urged the Department to expand the safe
harbor for state payroll deduction
savings programs to include payroll
deduction savings programs established
by state political subdivisions. In
particular, the commenters argued that
an expansion of the safe harbor is
necessary, because otherwise the safe
harbor would not benefit employees of
employers in political subdivisions that
are located in states that have not
adopted a statewide program and
expressed a strong interest in
establishing such programs.
In response, on August 30, 2016, the
Department published a proposed
rule 53 that would amend the 2016 final
safe harbor regulation for state programs
to include within its scope laws and
programs established by certain state
political subdivisions. The Department
received and carefully reviewed the
public comments submitted in response
to the proposal. The Department now is
publishing a final rule that amends
paragraph (h) of § 2510.3–2 to cover
payroll deduction savings programs of
qualified political subdivisions defined
in paragraph (h)(4) of the final rule. The
Department discusses the benefits and
costs attributable to the final rule below.
C. Benefits and Costs
In analyzing benefits and costs
associated with this final rule, the
Department focuses on the direct effects,
which include both benefits and costs
directly attributable to the rule. These
benefits and costs are limited, because
as stated above, the final rule would
merely establish a safe harbor describing
the circumstances under which
qualified political subdivisions 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 a
retirement savings programs to their
employees.
The Department also addresses
indirect effects associated with the final
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
covered employers to comply with the
requirements of such programs. Indirect
effects vary by qualified political
subdivisions depending on their
52 See
53 See
80 FR 72006 (November 18, 2015).
81 FR 59581 (August 30, 2016).
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program requirements and the degree to
which the final rule might influence
how political subdivisions design their
payroll deduction savings programs.
Although the Department estimates
that approximately 51 political
subdivisions are potentially eligible to
use this final rule,54 the Department
understands that many qualified
political subdivisions may not be
interested in establishing payroll
deduction savings programs. As noted
above, commenters have identified only
three cities—New York City,
Philadelphia, and Seattle—as having
any potential interest to date. Therefore,
the direct benefits and direct costs
attributable to this final rule could be
quite limited.
1. Direct Benefits
The Department believes that political
subdivisions and other stakeholders
would directly benefit from expanding
the scope of the Department’s final safe
harbor regulation to include payroll
deduction savings programs established
by qualified political subdivisions. As
with the states, this action 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 final rule
will reduce legal costs, including
litigation costs political subdivisions
might otherwise 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 will be limited
to qualified political subdivisions
meeting all criteria set forth in this final
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.
54 This estimate is based on the population
estimates from the U.S. Census Bureau, the Census
of Government data from the U.S. Census Bureau
about defined benefit (DB) plans for local
government employees, and BrightScope data about
defined contribution (DC) plans for local
government employees. For qualified political
subdivision with overlapping boundaries, it counts
only one per combination as the final rule
precludes overlapping programs.
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In order to constitute a ‘‘qualified
political subdivision,’’ the proposed
rule required the political subdivision to
have a population equal to or greater
than the population of the least
populous state. Several commenters
asserted that based on this provision, it
is possible that fluctuating populations
could cause a previously qualified
political subdivision to fall below the
required population threshold and fall
outside the safe harbor after it has
established its program. To eliminate
this possibility and reduce uncertainty,
the Department clarified in the final rule
that political subdivisions satisfying the
population threshold when they enact a
payroll deduction savings program
would not lose their qualified status
solely due to subsequent population
fluctuations. This change will especially
benefit political subdivisions close to
the population threshold and encourage
them to establish payroll deduction
savings programs, because they will not
have to continuously monitor their
population if their population is equal
to or greater than the population of the
least populous state when their program
is enacted.
In response to comments, the final
rule clarifies that a qualified political
subdivision would not automatically
lose its qualified political subdivision
status if the state establishes a payroll
deduction savings program after the
political subdivision has done so.
Political subdivisions will benefit from
this provision, because they will not
have to be concerned that their
programs will fall outside the safe
harbor if the state subsequently
establishes a program. The Department
notes that in such situations, it expects
that the state and qualified political
subdivision will coordinate potentially
overlapping programs to ensure a
smooth transition. Although they may
incur some costs associated with
communication and coordination, these
costs would be smaller compared to the
costs that employers and participants
may face if the qualified political
subdivision’s program experiences any
disruptions or unexpected changes due
to the lack of communication and
coordination between the state and
qualified political subdivision.
The Department estimates that there
are approximately eight combinations
where political subdivisions could
potentially establish conflicting payroll
deduction savings programs due to
overlapping boundaries. In the final
rule, the Department mitigated the
possibility that political subdivisions
with overlapping geographic boundaries
could each become qualified political
subdivisions by providing that a
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political subdivision that geographically
overlaps with another political
subdivision cannot be qualified if the
overlapping subdivision already has
enacted a mandatory payroll deduction
savings program for private sector
employees. Thus, the final rule benefits
employers by providing certainty that
they will not be subject to a multiplicity
of overlapping political subdivision
programs. It also benefits qualified
political subdivisions by providing
clarity regarding the circumstances
under which political subdivisions with
overlapping boundaries can enact
payroll deduction savings programs that
qualify for the safe harbor.
The final rule also clarifies the
requirement that states and political
subdivisions assume responsibility for
the security of payroll deduction
contributions in paragraph (h)(1)(iii). A
number of commenters specifically
focused on the need to clarify and
strengthen this provision and some
specifically stressed the importance of
clear and strong standards protecting
payroll deductions. The Department
received similar comments on the 2015
proposed rule for state payroll
deduction savings programs. In
response to these comments, the
Department buttressed paragraph
(h)(1)(iii) in the final rule by including
a new sub-clause clarifying that states
and political subdivisions must (1)
require that employers promptly
transmit wage withholdings to the
payroll deduction savings program, and
(2) provide an enforcement mechanism
to ensure that withheld wages are
promptly transmitted.
These new requirements will benefit
employees by ensuring that their payroll
deductions are transmitted as quickly as
possible to their IRAs, where they
become subject to applicable Internal
Revenue Code provisions, including the
protective prohibited transaction
provisions found in section 4975 of the
Code. States and political subdivisions
may adopt the new required protections
in a variety of ways, including, for
example, through legislation, ordinance,
or administrative rulemaking. The
provision also benefits states and
political subdivisions that create payroll
deduction savings programs and
employers by providing clarity
regarding the specific actions that are
necessary to comply with the
requirement for states and political
subdivisions to assume responsibility
for the security of payroll deductions.55
55 The final regulation does not specifically define
what is meant for wage withholdings to be
transmitted ‘‘promptly.’’ Instead, each state and
qualified political subdivision is best positioned to
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The Department notes that the final
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 final rule would reduce
uncertainty about political subdivision
activity within the safe harbor, it would
not impair political subdivision activity
outside of it. This final regulation is a
safe harbor and as such, it 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 final 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, would
reduce the risks of being 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 final rule.
If a qualified political subdivision
interested in developing its own payroll
deduction savings program overlaps
with another qualified political
subdivision, it would also need to
monitor the activities by the qualified
political subdivision with an
overlapping boundary and communicate
with it to avoid any potential
complications in relying on this safe
harbor rule as the final rule precludes
overlapping payroll deduction savings
programs. Only one qualified political
subdivision, out of approximately eight
possible combinations, with a
potentially overlapping boundary
expressed interest in establishing its
own payroll deduction savings program
to the Department. Thus, the
Department expects the monitoring and
communication costs to be relatively
small.
calibrate the appropriate timeframe for its own
program. Nevertheless, in the interest of providing
certainty to states and political subdivisions, the
final regulation added paragraph (h)(5) to the rule,
which contains a special safe harbor for
promptness. For more detailed information, see the
discussion about consumer protection in the
preamble.
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Qualified political subdivisions may
incur administrative and operating costs
including mailing and form production
costs. These potential costs, however,
are not directly attributable to the final
rule; they are attributable to the political
subdivision’s creation of the payroll
deduction savings program pursuant to
its authority under state law.
Some commenters 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 final rule
addresses this concern by requiring
political subdivisions to have a
population equal to or greater than the
least populous state and have a
demonstrated capacity to operate a
payroll deduction savings program in
order to be qualified. The premise
underlying these requirements is that
political subdivisions that meet them
are likely to have sufficient existing
resources, experience, and
infrastructure to create and implement
payroll deduction savings programs.
3. Uncertainty
The Department is confident that the
final rule will benefit political
subdivisions and many other
stakeholders otherwise beset by
uncertainty by clarifying the
circumstances under which qualified
political subdivisions can create payroll
deduction savings programs, including
programs with automatic enrollment,
without causing the political
subdivision or employer to create an
ERISA-covered employee benefit
pension plan. However, the Department
is unsure of 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
final 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,
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stakeholders’ propensity to challenge
such actions’ legal status, either absent
or pursuant to the final 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 final 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 final
rule and the reduced risk of an ERISA
preemption challenge, and therefore, the
increased prevalence of such programs
would be indirectly attributable to the
final rule. However, such an increase
would be bounded by the eligibility
restrictions for political subdivisions.
With the authority, population and
demonstrated capacity tests, and the
preclusion of overlapping programs, the
number of political subdivisions that are
potentially eligible to use the safe
harbor is very small (51). Moreover, as
stated above, the Department is aware of
only three political subdivisions that
have expressed an interest in creating
such programs. 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 final
rule could result in an acceleration or
deceleration of payroll deduction
savings 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 that a statewide program no
longer is necessary. On the other hand,
states could feel pressure to create a
statewide 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, the Department solicited
comments regarding whether the final
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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 statewide retirement
savings program after the qualified
political subdivision establishes and
operates its program. Many commenters
suggested that the Department should
leave to the state to determine the
appropriate relationship between the
political subdivision’s and the state’s
programs. Although this may appear to
add another layer of complexity, the
appropriate resolution would depend on
the circumstances of each state and
political subdivision. In some
circumstances, it might be most cost
effective to scale a political
subdivision’s payroll deduction
program up to the entire state, whereas
it might economically make more sense
to maintain a political subdivision’s
program independent of the state’s
under different circumstances. As a
commenter pointed out, it would be
generally more cost effective if payroll
deduction savings programs are able to
take advantage of economies of scale.56
To do so, a state may decide to
discontinue the program established by
a political subdivision and implement
its own statewide program. In this case,
the Department expects the state and the
political subdivision will coordinate the
potentially overlapping programs.
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.
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 final rule narrows
the number of political subdivisions
that are eligible for the safe harbor by
the population and demonstrated
56 Comment Letter #6 (American Payroll
Association).
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capacity tests, 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. These costs would be
incurred disproportionately by small
employers and start-up companies,
which tend to be least likely to offer
pensions. These small employers may
incur additional costs to acquire payroll
software, use on-line payroll programs,
or use external payroll companies to
comply with their political
subdivisions’ programs.57 However,
some small employers may decide to
use payroll software, an on-line payroll
program, or a payroll service to
withhold and remit payroll taxes
independent of their political
subdivisions’ program requirement.
Furthermore, compared to manually
processing payroll taxes, utilizing
payroll software or an on-line payroll
program may be more cost effective for
small employers in the long run.
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. Supporting this view, a
commenter stated that complexity and
administrative costs are often cited by
small employers as barriers to offer
retirement plans for their employees
and argued that savings arrangements
established by political subdivisions
could in fact alleviate small employers’
burdens.58
Employers, particularly those
operating in multiple political
subdivisions, may face potentially
increased costs to comply with several
political subdivision payroll deduction
57 According to one survey, about 60 percent of
small employers do not use a payroll service.
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.
58 See Comment letter #5 (City of Philadelphia
Controller).
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savings programs, depending on
whether and, if so, how, the
requirements of those programs differ.
This can be more challenging for
employers if they operate in states
where not all political subdivisions
have their own payroll deduction
savings programs and/or where some
political subdivisions’ programs differ
in certain ways from others. However,
several states have only one qualified
political subdivision. Even if states have
multiple qualified political
subdivisions, the final rule precludes
overlapping programs. Thus, the
potential burden faced by employers
operating in multiple political
subdivisions is limited. Moreover,
employers operating across several
political subdivision borders are likely
to 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 typically are exempt from
the law enacting such programs.
Furthermore, in order to satisfy the final
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
eligibility to political subdivisions
based on the population, authority, and
demonstrated capacity conditions and
precluding overlapping political
subdivision programs, this final rule
further addresses the concerns raised by
several commenters by substantially
limiting the possibility of conflicting
programs among multiple political
subdivisions.
The Department believes that welldesigned political subdivision-level
payroll deduction savings programs
have the potential to effectively reduce
gaps in retirement security. The
political subdivisions that expressed
interest in establishing their own
payroll deduction savings programs for
private-sector workers in the political
subdivision seem to be motivated by
those workers’ significantly lower
access rates to employment-based
retirement plans compared to the rates
for workers nationwide.59 In order to
59 According to the comment letter submitted by
the city of Philadelphia, in May 2016, 54% of
employees in Philadelphia do not have access to
workplace retirement plans. Similarly, 57% of New
York City private-sector workers lack access to a
retirement plan at their employment place
according to the comment letter submitted by the
office of Comptroller of the City of New York. These
statistics are significantly higher than the nationwide average of 34% lacking access to a retirement
plan through employment for private-sector
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successfully reduce these significant
gaps in retirement savings as intended,
there are several factors to consider.
Relevant variables such as pension
coverage, labor market conditions,60
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.61 Some research
suggests that automatic contribution
policies are effective in increasing
retirement savings and wealth in general
by overcoming behavioral biases or
inertia.62 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 Supplemental Security Income
(SSI), which support low-income
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 final
safe harbor does not allow employer
contributions to political subdivisions’
payroll deduction savings programs.
Additionally, the initiatives potentially
might have some unintended
consequences. Those workers least
workers, according to the National Compensation
Study in June of 2016.
60 See, e.g., U.S. Bureau of Labor Statistics,
‘‘Metropolitan Area Employment and
Unemployment—May 2016,’’ USDL–16–1291 (June
29, 2016).
61 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.
62 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).
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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 final
rule, these demographic characteristics
can be more pronounced, assuming
large political subdivisions tend to have
more diverse workforces. 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.
Commenters have stated another
concern—that political subdivision
initiatives may ‘‘crowd-out’’ ERISAcovered plans. The final rule may
inadvertently encourage employers
operating in multiple political
subdivisions to switch from ERISAcovered 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 final rule
makes clear that political subdivision
programs directed toward employers
that do not offer other retirement plans
fall within this final safe harbor rule.
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However, employers that wish to
provide retirement benefits are likely to
find that ERISA-covered programs, such
as 401(k) plans, have important
advantages for them and their
employees over participation in
political subdivision programs.
Potential advantages include
significantly higher limits on taxfavored contributions that may be
elected by employees ($18,000 in 401(k)
plans and $24,000 for those age 50 or
older) versus $5,500 in IRAs ($6,500 for
those age 50 or older), the opportunity
for employers to make tax-favored
matching or nonmatching contributions
on behalf of employees (allowing a total
of up to $54,000 ($60,000 for those age
50 or older) of employee plus employer
contributions for an employee in a
401(k) plan versus $5,500 or $6,500 in
IRAs), greater flexibility in plan
selection and design, ERISA protections,
and larger positive recruitment and
retention effects.63 Therefore it seems
unlikely that political subdivision
initiatives will ‘‘crowd-out’’ many
ERISA-covered plans, although, if they
do, some workers might lose ERISAcovered plans that could have been
more generous than political
subdivision-based (IRA) benefits.
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.
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D. 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 final 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
63 These contribution limits are for year 2017. For
more details, see: https://www.irs.gov/retirementplans/cola-increases-for-dollar-limitations-onbenefits-and-contributions.
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can properly assess the impact of
collection requirements on respondents.
In accordance with the requirements
of the PRA, the Department solicited
comments regarding its determination
that the proposed rule is not subject to
the requirements of the PRA, because it
does not contain a ‘‘collection of
information’’ as defined in 44 U.S.C.
3502(3). The Department’s conclusion
was based on the premise that the
proposed rule does not require any
action by or impose any requirements
on employers or the political
subdivisions. 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.
The Department did not receive any
comments regarding this assessment.
Therefore, the Department has
determined that the final rule is not
subject to the PRA, because it does not
contain a collection of information. The
PRA definition of ‘‘burden’’ excludes
time, effort, and financial resources
necessary to comply with a collection of
information that would be incurred by
respondents in the normal course of
their activities. See 5 CFR 1320.3(b)(2).
The definition of ‘‘burden’’ also
excludes burdens imposed by a state,
local, or tribal government independent
of a Federal requirement. See 5 CFR
1320.3(b)(3). The final rule imposes no
burden on employers, because political
subdivisions will 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.
E. 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 604 of the RFA requires the
agency to present a final regulatory
flexibility analysis at the time of the
publication of the final rule describing
the impact of the rule on small entities.
Small entities include small businesses,
organizations and governmental
jurisdictions.
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Although several commenters
maintained that the proposed rule
would impose significant costs on small
employers, similar to the proposal, the
final rule merely establishes a new safe
harbor describing circumstances in
which payroll deduction savings
programs established and maintained by
political subdivisions would not give
rise to ERISA-covered employee
pension benefit plans. Therefore, the
final rule imposes no requirements or
costs on small employers, and the
Department believes that it will not
have a significant economic impact on
a substantial number of small
employers. Similarly, because the final
rule does not impose any requirements
or costs on small governments, the
Department believes that it will not
have a significant economic impact on
a substantial number of small
government entities, either.
Accordingly, pursuant to section 605(b)
of the RFA, the Assistant Secretary of
the Employee Benefits Security
Administration hereby certifies that the
final rule will not have a significant
economic impact on a substantial
number of small entities.
F. Unfunded Mandates Reform Act
For purposes of the Unfunded
Mandates Reform Act of 1995 (2 U.S.C.
1501 et seq.), as well as Executive Order
12875, this final rule does not include
any federal mandate that may result in
expenditures by state, local, or tribal
governments, or the private sector,
which may impose an annual burden of
$100 million as adjusted for inflation.
G. Congressional Review Act
The final rule is subject to the
Congressional Review Act provisions of
the Small Business Regulatory
Enforcement Fairness Act of 1996 (5
U.S.C. 801 et seq.) and will be
transmitted to Congress and the
Comptroller General for review. The
final rule is not a ‘‘major rule’’ as that
term is defined in 5 U.S.C. 804, because
it is not likely to result in (1) an annual
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 foreignbased enterprises in domestic and
export markets.
H. Federalism Statement
Executive Order 13132 outlines
fundamental principles of federalism. It
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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 final
rule, by clarifying that payroll
deduction savings programs 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. Therefore, the final rule
does not contain policies with
federalism implications within the
meaning of the Order.
Nonetheless, in respect for the
fundamental federalism principles set
forth in the Order, the Department
affirmatively engaged in outreach,
including meetings, conference calls,
and outreach events, with officials of
political subdivisions and other
stakeholders regarding the final rule and
sought their input on the safe harbor.
The Department also received comment
letters from local governments and their
representatives. Many of the changes in
the final rule stem from suggestions
contained in the comment letters.
List of Subjects in 29 CFR Part 2510
Accounting, Employee benefit plans,
Employee Retirement Income Security
Act, Coverage, Pensions, Reporting.
For the reasons stated in the
preamble, the Department of Labor
amends 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
1. The authority citation for part 2510
is revised to read as follows:
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■
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 727 (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).
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2. In § 2510.3–2, revise paragraph (h)
to read as follows:
■
§ 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,
including by requiring that amounts
withheld from wages by the employer
be transmitted to the program promptly
and by providing an enforcement
mechanism to assure compliance with
this requirement;
(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:
(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
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92653
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 paragraph (h),
the term ‘‘State’’ shall have the same
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meaning as defined in section 3(10) of
the Act.
(4) For purposes of this paragraph (h),
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; and
(ii) At the time of the enactment of the
political subdivision’s payroll
deduction savings program:
(A) 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);
(B) Has no geographic overlap with
any other political subdivision that has
enacted a mandatory payroll deduction
savings program for private-sector
employees and is not located in a State
that has enacted such a program
statewide; and
(C) Has implemented and administers
a plan, fund, or program that provides
retirement income to its employees, or
results in a deferral of income by its
employees for periods extending to the
termination of covered employment or
beyond.
(5) For purposes of paragraph
(h)(1)(iii) of this section, amounts
withheld from an employee’s wages by
the employer are deemed to be
transmitted promptly if such amounts
are transmitted to the program as of the
earliest date on which such
contributions can reasonably be
segregated from the employer’s general
assets, but in no event later than the last
day of the month following the month
in which such amounts would
otherwise have been payable to the
employee in cash.
Signed at Washington, DC, this 9th day of
December, 2016.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits
Security Administration, U.S. Department of
Labor.
[FR Doc. 2016–30069 Filed 12–19–16; 8:45 am]
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BILLING CODE 4510–29–P
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DEPARTMENT OF DEFENSE
Office of the Secretary
32 CFR Part 89
[Docket ID: DOD–2015–OS–0020]
RIN 0790–AJ33
Interstate Compact on Educational
Opportunity for Military Children
Under Secretary of Defense for
Personnel and Readiness, DoD.
ACTION: Final rule.
AGENCY:
DoD is establishing policies to
implement the Interstate Compact on
Educational Opportunity for Military
Children (referred to as the ‘‘Compact’’)
within the DoD, informed by the sense
of Congress, and in furtherance of the
operation of DoD schools. The final rule
provides components with policies to
support the intent of the Compact,
which is to aid the transition of schoolage children in military families
between school districts (to include
between Department of Defense
Educational Activity (DoDEA) schools
and state school districts). Each state
joining the Compact agrees to address
specific school transition issues in a
consistent way and minimize school
disruptions for military children
transferring from one state school
system to another. The Compact
consists of general policies in four key
areas: Eligibility, enrollment, placement,
and graduation. Children of active duty
members of the uniformed services,
National Guard and Reserve on active
duty orders, and members or veterans
who are medically discharged or retired
for one year are eligible for assistance
under the Compact.
DATES: This rule is effective on January
19, 2017.
FOR FURTHER INFORMATION CONTACT:
Marcus Beauregard, 571–372–5357.
SUPPLEMENTARY INFORMATION: On March
7, 2016 (81 FR 11698–11706), the
Department of Defense published a
proposed rule titled Interstate Compact
on Educational Opportunity for Military
Children for a 60-day public comment
period. The public comment period
closed on May 6, 2016. Ten public
comments were received. The preamble
to this final rule addresses the
comments. Due to one of the public
comments received, the Department has
revised the final rule to reflect that the
Military Departments will nominate
military representatives by position to
act as liaisons to State Councils and the
Deputy Assistant Secretary of Defense
for Military Community and Family
SUMMARY:
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Frm 00106
Fmt 4700
Sfmt 4700
Policy (DASD(MC&FP)) will designate
them in this manner.
Edits were made to adjust the process
established to designate DoD liaisons to
State Councils, so that liaisons are
designated by position rather than by
individual.
As the result of further internal
coordination, administrative edits were
made to the regulatory text.
Comment: ‘‘This regulation is very
beneficial for the States and as the DoD
is to handle the majority of the cost, it
has the promise of doing a great deal of
good for the children of active duty
military without being overly
burdensome to the States participating.
However, as the participation in the
Compact is voluntary, it is possible that
the degree of implementation will vary
from state to state, perhaps by a large
degree. This potential for variation
would run against the purpose of the
regulation. It is not always desirable to
have penalties as part of a regulation,
especially one that is voluntary, but
without a clear idea of how the
regulation would be enforced, the goals
of the Compact may not be successful.’’
Response: All fifty states and the
District of Columbia (DC) have accepted
the Compact into their state statutes.
Consequently, complying with the
provisions of the Compact is based on
compliance with state law.
Additionally, the Compact (approved by
all fifty states and DC) includes the
oversight of the Compact by a
Commission composed of member
states, with rules governing noncompliance and dispute resolution.
Also, support for the administration of
the Compact and the Commission is
funded entirely by the member states
without support from the federal
government.
Comment: ‘‘This new policy will not
only bring awareness to schools, but
will open up a need for additional staff
to require training and employment in
the schools to assist these [military]
families. This rule will also open doors
for additional policy to be made and
other services not being addressed to
have priority in legislation in the
upcoming years so that the military
families can have less strain than they
already do with having a parent serve
our country.’’
Response: The fifty states and DC
enacted laws approving the Compact
with the understanding that
implementation of the Compact would
not require additional staffing in
schools. Additionally, since enactment
of the Compact in the 50 states and DC
between 2008 and 2014, there have not
been additional policies or services to
address educational needs of children in
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]]>Agencies
[Federal Register Volume 81, Number 244 (Tuesday, December 20, 2016)]
[Rules and Regulations]
[Pages 92639-92654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30069]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2510
RIN 1210-AB76
Savings Arrangements Established by Qualified State Political
Subdivisions for Non-Governmental Employees
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This document contains an amendment to a final regulation that
describes how states may design and operate payroll deduction savings
programs for private-sector employees, including programs that use
automatic enrollment, without causing the states or private-sector
employers to have established employee pension benefit plans under the
Employee Retirement Income Security Act of 1974 (ERISA). The amendment
expands the final regulation beyond states to cover qualified state
political subdivisions and their programs that otherwise comply with
the regulation. This final rule affects individuals and employers
subject to such programs.
DATES: This rule is effective 30 days after the date of publication in
the Federal Register.
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
A. The 2016 Final Safe Harbor Regulation
On August 30, 2016, the Department issued a final regulation
establishing a safe harbor pursuant to which state governments can
establish payroll deduction savings programs for private-sector
employees, including programs with automatic enrollment, without
causing either the state or the employers of those employees to have
established employee pension benefit plans subject to ERISA. The
Department published the safe harbor regulation in response to
legislation in some states, and strongly-expressed interest in others,
to encourage private-sector employees to save for retirement by giving
those employees broader access to retirement savings arrangements
through their employers. The safe harbor regulation became effective on
October 31, 2016.
As the Department noted in the final regulation's preamble,
concerns that tens of millions of America's workers do not have access
to workplace retirement savings arrangements led some states to
establish state-administered programs that allow private-sector
employees to contribute salary withholdings to tax-favored individual
retirement accounts described in 26 U.S.C. 408(a), individual
retirement annuities described in 26 U.S.C. 408(b), and Roth IRAs
described in 26 U.S.C. 408A (collectively, IRAs). California,
Connecticut, Illinois, Maryland, and Oregon, for example, have adopted
laws along these lines.\1\ Those programs generally require certain
employers that do not offer workplace savings arrangements to
automatically deduct a specified amount of wages from their employees'
paychecks, unless an employee affirmatively chooses not to participate
in the program, and to remit those payroll deductions to state-
administered programs consisting of IRAs established for each
participating employee. All of these state initiatives allow employees
to stop payroll deductions at any time once they have begun, and they
typically require that employers provide employees with program-
generated information, including information on employees' rights and
various program features. None of the programs, however,
[[Page 92640]]
currently require employers to make matching or other employer
contributions to employee accounts, while some programs expressly
prohibit employer contributions and other programs do not address that
issue.
---------------------------------------------------------------------------
\1\ California Secure Choice Retirement Savings Trust Act, Cal.
Gov't Code Sec. Sec. 100000-10044 (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. 24 (H.B. 1378)
(2016); Oregon Retirement Savings Board Act, Ch. 557 (H.B. 2960)
(2015).
---------------------------------------------------------------------------
The Department also noted in the 2016 final safe harbor
regulation's preamble that some stakeholders had expressed concern that
their payroll deduction savings programs might cause either the state
or the covered employers to inadvertently establish ERISA-covered
plans, despite the states' express intent to avoid such a result. The
states' concern is based in part on ERISA's broad definition of
``employee pension benefit plan'' and ``pension plan,'' which ERISA
defines, 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\ That definition's broad scope is further evident in the fact
that the Department and the courts have broadly interpreted the phrase
``established or maintained'' as requiring only minimal involvement by
an employer or employee organization.\3\ Thus, for example, it is
possible for an employer to establish an ERISA plan simply by
purchasing insurance products for an individual employee or employees.
Given these expansive definitions, which Congress deemed essential to
ERISA's purpose of protecting plan participants by ensuring the
security of promised benefits, ERISA applies to nearly all benefit
arrangements that private-sector employers establish 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).
---------------------------------------------------------------------------
The states' desire to avoid inadvertently creating ERISA plans
through their payroll deduction savings programs stems from the fact
that, with certain exceptions, ERISA preempts state laws that relate to
ERISA-covered employee benefit plans.\4\ Thus, if a state program
requires private employers to take actions that effectively cause those
employers to establish ERISA-covered plans, the state law underlying
the program would likely be preempted. Similarly, if the state-
sponsored program itself were deemed to be an ERISA plan, ERISA would
likely preempt any state law that mandates private-sector employers to
enroll their employees in that program. It is important to note in this
regard that although ERISA does exempt from its scope benefit plans
that states establish for their own employees, the state payroll
deduction savings programs at issue here would not fit that
definition.\5\
---------------------------------------------------------------------------
\4\ ERISA section 514(a), 29 U.S.C. 1144(a).
\5\ ERISA section (3)(32), 29 U.S.C. 1002(32).
---------------------------------------------------------------------------
The Department responded to these concerns by publishing the 2016
final safe harbor regulation, which described specific conditions
pursuant to which state payroll deduction savings programs, including
those with automatic enrollment, would not result in the state or
private-sector employers having established ERISA-covered employee
pension benefit plans. The 2016 final safe harbor regulation thus helps
states to establish and operate payroll deduction savings programs in a
manner that reduces the risk that ERISA would preempt their laws and
programs. That final regulation did not, however, include within its
scope payroll deduction savings programs established by state political
subdivisions.
B. Proposed Amendment to the 2016 Safe Harbor Regulation
1. Expanding the Safe Harbor To Include Political Subdivisions
On August 30, 2016, the Department published in the Federal
Register a proposed rule amending the 2016 final safe harbor regulation
to include within its scope laws and programs established by certain
state political subdivisions.\6\ The proposed amendment addressed
certain public comments the Department received after it first
published the safe harbor regulation in 2015 as a proposed rule.\7\ In
particular, several commenters had expressed the view that the
Department's definition of ``State'' in the 2015 proposed safe harbor
regulation was too narrow because it did not include political
subdivisions. Some of these commenters identified New York City as
being interested in offering a program. The 2015 proposal defined the
term ``State'' by referencing section 3(10) of ERISA, which provides,
in relevant part, 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.'' That definition
excludes from the safe harbor any payroll deduction savings program
established by state political subdivisions, such as a cities or
counties.
---------------------------------------------------------------------------
\6\ See 81 FR 59581 (August 30, 2016).
\7\ Id. See also 80 FR 72006 (November 18, 2015). On the same
day that the 2015 proposed rule 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. A number of commenters asked the
Department to amend the Interpretive Bulletin to reflect this view.
Such an amendment is beyond the scope of this rulemaking.
---------------------------------------------------------------------------
Although the Department retained the section 3(10) definition in
the 2016 final safe harbor regulation, the Department nevertheless
agreed with commenters that there may be good reasons for expanding the
safe harbor, subject to certain conditions, to cover political
subdivisions and their programs. While it is not clear to the
Department how many such political subdivisions eventually will have an
interest in establishing programs of the kind described in the final
safe harbor regulation, thus far the Department has only received
written letters of interest from representatives of Seattle,
Philadelphia and New York City.\8\ Accordingly, the Department proposed
amending the 2016 final safe harbor regulation to add to Sec. 2510.3-2
paragraph (h) the term ``or qualified political subdivision'' wherever
the term ``State'' appears. That change would cause the regulation's
safe harbor to apply to ``qualified'' political subdivision payroll
deduction savings programs in the same manner as it applies to state
programs.
---------------------------------------------------------------------------
\8\ See, e.g., Comment Letter #4 (Seattle City Councilmember Tim
Burgess); Comment letter #5 (City of Philadelphia Controller);
Comment Letter #20 (New York City Mayor).
---------------------------------------------------------------------------
The proposed amendment also added a new subparagraph (h)(4) to
define the term ``qualified political subdivision'' as any governmental
unit of a state, including any city, county, or similar governmental
body that met three criteria. First, the political subdivision must
have the authority, under state law, whether implicit or explicit, to
require employers' participation in the
[[Page 92641]]
payroll deduction savings program. Second, the political subdivision
must have a population equal to or greater than the population of the
least populous state.\9\ Third, the political subdivision cannot be
within a state that has a statewide retirement savings program for
private-sector employees.\10\
---------------------------------------------------------------------------
\9\ 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.
\10\ The proposal's paragraph (h)(4) definition would not,
however, 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).
---------------------------------------------------------------------------
The Department's goal in defining ``qualified political
subdivision'' in this way was to reduce the number of political
subdivisions that can fit within the safe harbor and focus the
authority on those subdivisions most likely to have the capacity to
implement successful programs. As the Department noted in the proposed
rule's preamble, the U.S. Census Bureau reports that there are
approximately 90,000 local governmental units in the United States,
many of which could be considered ``political subdivisions'' for
purposes of the proposed regulation.\11\ Given this large number, the
Department was concerned that expanding the safe harbor to all
political subdivisions would result in overlapping programs within a
given state.\12\ The Department also had some concerns about expanding
the safe harbor to very small political subdivisions, as the U.S.
Census Bureau has reported that approximately 83% of state subdivisions
have populations of less than 10,000 people.\13\ These statistics led
the Department to propose to further limit the types of political
subdivisions that can fall within the safe harbor to those that are
sufficiently large and sophisticated to have the ability to oversee and
safeguard payroll deduction savings programs.
---------------------------------------------------------------------------
\11\ This figure represents 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
(https://www.census.gov/govs/cog/).
\12\ This could occur in situations where, for example, an
employer operates in a state (or states) with multiple political
subdivisions.
\13\ 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 (https://www.census.gov/govs/cog/).
---------------------------------------------------------------------------
2. Criteria Limiting Political Subdivision Eligibility for the Safe
Harbor
The first proposed criterion limiting the potential number of
political subdivisions eligible for the safe harbor requires that the
political subdivision have either explicit or implicit authority under
state law to establish and operate a payroll deduction savings program
and to require employers within its jurisdiction to participate. In the
case of programs with automatic enrollment, that authority must
encompass the power to require employers to execute payroll deduction
wage withholdings.\14\ This criterion will effectively limit the safe
harbor's scope to so-called ``general-purpose'' subdivisions, which are
political subdivisions that have the authority to exercise traditional
sovereign powers, such as the power of taxation, the power of eminent
domain, and the police power. It includes county governments, municipal
governments, and township governments.\15\ According to the U.S. Census
Bureau, there are approximately 40,000 ``general-purpose'' political
subdivisions in the United States.\16\ By contrast, ``special-purpose''
subdivisions, such as utility districts or transit authorities,
ordinarily would not have this kind of authority under state law. Thus,
the Department expects that this criterion alone will reduce the
universe of political subdivisions potentially eligible for the safe
harbor from the approximate total of 90,000 U.S. political subdivisions
to approximately 40,000.
---------------------------------------------------------------------------
\14\ 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. Other criteria in (h)(4) also serve this
purpose by reducing the likelihood that an employer might become
involved with the arrangement beyond the limits of the safe harbor.
\15\ See U.S. Census Bureau, Government Organization Summary
Report: 2012 Census of Governments (https://www.census.gov/govs/cog/).
\16\ 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.
---------------------------------------------------------------------------
The second proposed criterion limiting the number of potentially-
eligible political subdivisions requires that the political subdivision
have a population equal to or greater than the population of the least
populous U.S. state (excluding the District of Columbia and the
territories listed in section 3(10) of the ERISA). Based on the most
recent U.S. Census Bureau statistics available, the least populous U.S.
state had approximately 600,000 residents.\17\ This criterion will
significantly reduce the possibility of overlap by further limiting the
universe of potentially-eligible political subdivisions from
approximately 40,000 to a subset of approximately 136.\18\
---------------------------------------------------------------------------
\17\ Wyoming was 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/).
\18\ As of 2015, there were approximately 136 general-purpose
political subdivisions with populations equal to or greater than the
population of Wyoming.
---------------------------------------------------------------------------
The proposal's third criterion further limited the safe harbor to
political subdivisions in states that do not offer their own statewide
retirement savings program for private-sector employees.\19\ As
presented in the proposal, this criterion would have applied to state
retirement savings programs described in the safe harbor rule itself,
29 CFR 2510.3-2(h), and also to programs described or referenced in the
Department's Interpretive Bulletin found at 29 CFR 2509.2015-02. This
criterion excluded from the safe harbor approximately 48 additional
political subdivisions that otherwise meet the proposal's population
threshold, thereby further limiting the universe of potentially
eligible political subdivisions to approximately 88 as of the date of
the proposed rule.
---------------------------------------------------------------------------
\19\ Eight states have already adopted laws to implement some
form of statewide retirement savings program for private-sector
employees. 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, Public Law
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).
---------------------------------------------------------------------------
3. Solicitation of Comments on the Proposed Amendment
The Department solicited public comments on all aspects of the
proposed amendment, including comments on criteria the Department did
not specifically address in the proposal, but which might be useful in
refining the qualified political subdivision definition. In addition,
the Department also requested comments on other facets of the safe
harbor more generally. In response to these solicitations, the
Department received approximately 27 written comments, many of which
are discussed under the topical headings below.
[[Page 92642]]
II. Final Rule
A. General Overview
The final rule largely adopts the proposal's general structure.
Specifically, it amends paragraph (h) of Sec. 2510.3-2 by adding the
term ``or qualified political subdivision'' wherever the term ``State''
appears in the regulation. Thus, with these amendments, the final
regulation's safe harbor provisions generally apply in the same manner
to qualified political subdivision payroll deduction savings programs
as they apply to state programs.
The final rule also adopts proposed new subparagraph (h)(4), but
with modifications. In the final rule, paragraph (h)(4) defines the
term ``qualified political subdivision'' as any governmental unit of a
state, including any city, county, or similar governmental body that
meets four criteria.\20\ First, the political subdivision must have
implicit or explicit authority under state law to require employers'
participation in the payroll deduction savings program. 29 CFR 2510.3-
2(h)(4)(i).\21\ Second, the political subdivision must have a
population equal to or greater than the population of the least
populous state.\22\ 29 CFR 2510.3-2(h)(4)(ii)(A). Third, the political
subdivision cannot be within a state that has enacted a mandatory
statewide payroll deduction savings program for private-sector
employees; nor can the political subdivision have geographic overlap
with another political subdivision that has enacted such a program. 29
CFR 2510.3-2(h)(4)(ii)(B).\23\ Fourth, the political subdivision must
implement and administer a retirement plan for its employees. 29 CFR
2510.3-2(h)(4)(ii)(C).\24\ Compliance with the latter three conditions
is determined as of the date the political subdivision's program is
enacted.
---------------------------------------------------------------------------
\20\ This new definition does not apply for other purposes under
ERISA, such as for determining whether an entity is a political
subdivision for purposes of the definition of a ``governmental
plan'' in section 3(32) of ERISA, 29 U.S.C. 1002(32).
\21\ This provision reduces the approximate number of
potentially eligible political subdivisions from 90,000 to 40,000.
\22\ This provision reduces the approximate number of
potentially eligible political subdivisions from 40,000 to 128. For
purposes of this provision, 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.
\23\ This provision reduces the approximate number of
potentially eligible political subdivisions from 128 to 80.
\24\ This provision reduces the approximate number of
potentially eligible political subdivisions from 80 to 51.
---------------------------------------------------------------------------
B. The Authority Test
The final rule adopts the proposal's requirement that in order to
be ``qualified'' a political subdivision must have the ``authority,
implicit or explicit, under State law to require employers'
participation in the program . . . .'' Sec. 2510.3-2(h)(4)(i). This
provision serves two purposes. The main purpose is to ensure that the
political subdivision has the authority under state law to require
employers within its jurisdiction to participate in the payroll
deduction savings program and, in the case of programs with automatic
enrollment, to require wage withholding. This is not to say, however,
that a state law must explicitly authorize the political subdivision to
establish a payroll deduction savings program; rather, it means that
the political subdivision must have some measure of legal authority,
even if implicit, to establish and operate the program and to compel
employers to participate.\25\ The provision's second purpose is to
limit the qualified political subdivision definition--and by extension
to limit the safe harbor's scope--to general-purpose subdivisions, a
limitation that greatly reduces the approximate number of potentially-
eligible subdivisions from 90,000 to 40,000. For these reasons, and
noting that the Department did not receive significant or notable
comments on this particular provision, the Department incorporates this
provision in the final rule without change.
---------------------------------------------------------------------------
\25\ This particular purpose is central to the Department's
analysis under section 3(2) of ERISA and to its conclusion that
employers are not establishing or maintaining ERISA-covered plans.
81 FR 59464, 70-71 (Aug. 30, 2016).
---------------------------------------------------------------------------
C. The Population Test
The final rule adopts the proposal's population test for safe
harbor qualification, with one modification. As noted above, the final
rule states, in relevant part, that a political subdivision must have
``a population equal to or greater than the population of the least
populated State,'' and defines the term ``State'' to have the same
meaning as in section 3(10) of ERISA (excluding the District of
Columbia and territories listed in that section). 29 CFR 2510.3-
2(h)(4)(ii)(A).\26\ The final rule modifies the proposal by adding to
(h)(4)(ii) the phrase ``[a]t the time of the enactment of the political
subdivision's payroll deduction savings program,'' and applying this
requirement to the population test, as well as the two other conditions
that a political subdivision must satisfy to be a qualified political
subdivision.
---------------------------------------------------------------------------
\26\ The U.S. Census Bureau currently identifies Wyoming as the
least populous state, with approximately 600,000 residents.
---------------------------------------------------------------------------
The Department has two primary policy reasons for adopting the
population test. First, it is important that the safe harbor not
include political subdivisions that may not have the experience,
capacity, and resources to establish and oversee payroll deduction
savings programs. Second, the Department is interested in reducing the
possibility that employers would be subject to a multiplicity of
overlapping political subdivision programs. It is the Department's view
that the population test is an important measure in achieving both of
those purposes. In the preamble to the proposed rule, the Department
articulated these policy considerations for public notice and comment.
The Department received a number of comments on this issue that
reflected apparently conflicting viewpoints. Some commenters supported
the population test because they agree with the Department that
population size correlates with a political subdivision having the
experience, capacity, and resources to implement the necessary
structures to establish and oversee payroll deduction savings programs
and meet the safe harbor regulation's various requirements.\27\ These
commenters state that political subdivisions with larger populations
are more likely to share states' concerns about the effect of
inadequate retirement savings on social welfare programs. Other
commenters disagreed with the population test's underlying premise, as
they believe that a population test is arbitrary and does not prove
either that the least populated state has sufficient capacity to
establish and oversee a payroll deduction savings program or that
political subdivisions with lesser populations are per se incapable of
competently overseeing such a program.
---------------------------------------------------------------------------
\27\ See Comment Letter #11 (Corporation for Enterprise
Development); Comment Letter #14 (AARP); Comment Letter #17
(AFSCME).
---------------------------------------------------------------------------
The Department agrees with those commenters who recognize a
relationship between population, on the one hand, and resources,
experience, and capacity on the other. This is because larger cities
and counties (in terms of population) likely have, among other things,
a larger tax base and governmental infrastructure, which provides
access to greater resources, experience, and capacity than smaller
[[Page 92643]]
cities and counties.\28\ In this regard, population can serve as one
indicator of whether a city or county is likely to have sufficient
resources, experience, and capacity to safely and competently establish
and oversee a payroll deduction savings program. By keying off the
least populated state, the final regulation's population test
effectively establishes a federal floor, such that no political
subdivision could qualify for the safe harbor unless the subdivision
has a level of capacity and resources equal to or greater than the
capacity and resources of the least populated state, using population
as a proxy for capacity and resources.
---------------------------------------------------------------------------
\28\ For similar reasons, the population test also would reduce
the likelihood of employer involvement beyond the limits of the safe
harbor regulation. For instance, larger cities and counties with
greater resources, experience and capacity likely will be better
able to assert and maintain complete control over their programs
such that there will be few or no occasions for participating
employers to exercise their own discretion or control with respect
to the program.
---------------------------------------------------------------------------
The provisions of the Department's safe harbor pertaining to state
payroll deduction savings programs assume that even the least populated
states have the capacity and resources to manage a payroll deduction
savings program. In the Department's view, political subdivisions that
are the population size of small states could, in the right
circumstances, have similar capacity and resources as their state
counterparts of the same size. For that reason, the Department has
decided not to flatly exclude such entities from coverage under the
safe harbor. At the same time, however, the Department notes that
states necessarily have a breadth of responsibilities, administrative
systems, and experience that may not be matched by political
subdivisions of equal size. Accordingly, the final regulation also
adopts the demonstrated capacity test for these subdivisions, as
discussed below. Together these tests ensure a high likelihood that
qualified political subdivisions will have sufficient resources,
experience, and capacity to safely and competently establish and
oversee a payroll deduction savings programs. The application of both
the size restriction and the demonstrated capacity test reduce the
possibility that employers would be subject to a multiplicity of
overlapping political subdivision programs. The population test
directly advances this important policy interest by limiting the
universe of political subdivisions potentially eligible for the safe
harbor from approximately 40,000 general purpose political subdivisions
to a far smaller number. As of 2015, there were approximately 136
general-purpose political subdivisions with populations equal to or
greater than the population of Wyoming.
Even though the final regulation excludes smaller political
subdivisions from the safe harbor, the Department acknowledges that
cities and counties are not per se incapable of competently overseeing
a payroll deduction savings program solely because they fail the final
rule's population test. Indeed, many localities that fall below the
population threshold may have sufficient experience, capacity, and
resources to safely establish and oversee payroll deduction savings
programs in a manner that sufficiently protects employees.
Nevertheless, based on the public record, the Department's view
continues to be that smaller political subdivisions do not, in general,
have experience, resources, and capacity comparable to that of the
least populous state, and therefore the Department chooses not to
extend safe harbor status to such localities and their programs. It is
also important to note that the final regulation does not--and the
Department could not--bar smaller localities from establishing and
maintaining payroll deduction savings programs for private-sector
employees that fall outside the Department's safe harbor regulation.
As noted above, the Department did make one technical improvement
to the proposed population test. Public comments raised concerns about
the possibility that fluctuating populations could cause a qualified
political subdivision to fall below the required population threshold--
and therefore drop outside the safe harbor--after it had already
enacted a payroll deduction savings program. To eliminate this
possibility and its attendant uncertainty, the final rule contains new
language to clarify that such cities and counties would not lose their
qualified status merely because of population fluctuations. In that
regard, the final regulation adds to paragraph (h)(4)(ii) the phrase
``[a]t the time of the enactment of the political subdivision's payroll
deduction savings program.''
Finally, some commenters suggested that, because population size is
only a rough indicator of a political subdivision's capacity and
ability to safely operate a payroll deduction savings program, the
Department should consider pairing the population test with some other
more refined test or indicator. As mentioned above, the Department
agrees that the population test could be improved by being paired with
an additional criterion to gauge whether a sufficiently-large political
subdivision should nonetheless fail to qualify under the safe harbor
for lack of experience. The section below discusses the changes made to
accomplish this result.
D. Demonstrated Capacity Test
The final regulation adopts a ``demonstrated capacity'' test in
addition to the population test. As noted in the preceding sections,
the population test removed from the safe harbor a significant number
of smaller political subdivisions based solely on their size. The
demonstrated capacity test, on the other hand, focuses on a political
subdivision's ability to operate a payroll deduction savings program by
requiring direct and objectively verifiable evidence of a political
subdivision's experience, capacity, and resources to operate or
administer such programs. The two tests (population test and
demonstrated capacity test) combine to ensure a strong likelihood that
political subdivisions that meet the safe harbor have sufficient
experience, capacity, and resources to safely establish and oversee
payroll deduction savings programs in a manner that sufficiently
protects private-sector employees and that would not require employer
involvement beyond the limits of the safe harbor regulation.
The Department adopted this new test in response to a significant
number of commenters that strongly support this idea. These commenters
encouraged the Department to consider two different approaches for
developing a demonstrated capacity test. The first suggested approach
focuses on whether the political subdivision has implemented and
administers a retirement plan for its own employees.\29\ The second
suggested approach focuses on whether the political subdivision has an
existing infrastructure for assessing and collecting income, sales, use
or other similar taxes.\30\ The apparent rationale behind these
suggested approaches is that political subdivisions that are
sophisticated enough to operate a retirement plan or levy and collect
their own taxes should possess sufficient experience, capacity, and
resources to safely establish and oversee a payroll deduction savings
program. In addition, retirement plan administration and tax
administration entail administrative activities that are highly
comparable to the type of administrative activity that would be
necessary to establish and oversee a successful
[[Page 92644]]
payroll deduction savings program for private-sector employees.
---------------------------------------------------------------------------
\29\ See, e.g., Comment Letter #16 (Investment Company
Institute).
\30\ See, e.g., Comment Letter #19 (Georgetown University Center
for Retirement Initiatives).
---------------------------------------------------------------------------
The final regulation adopts the suggested plan sponsorship approach
as the sole basis for a demonstrated capacity test. Thus, in order to
be qualified for the safe harbor under the final regulation, a
political subdivision must implement and administer its own retirement
plan. The Department agrees with the commenters that administering a
public retirement plan for the political subdivision's own employees is
sufficiently similar to establishing and overseeing a payroll deduction
savings program for employees of other entities that successfully
performing the former is strong evidence of an ability to successfully
perform the latter. Both endeavors require, for example, receiving
contributions, custodianship, investing assets or selecting investment
options, deciding claims, furnishing account statements, meeting
reporting requirements, distributing benefit payments, or selecting and
overseeing others to perform some or all of these tasks. A political
subdivision that does not implement and administer a retirement plan
for its own employees, on the other hand, will fail to qualify under
the safe harbor even if it passes the population test and all the other
safe harbor conditions set forth in the qualified political subdivision
definition.
The Department declined to adopt as part of the demonstrated
capacity test the second of the commenters' suggested approaches, i.e.,
the existence of a tax infrastructure. In support of that approach, the
commenters suggested that a political subdivision's levying and
collecting its own income, wage, or similar taxes may provide evidence
that the political subdivision has the capacity to establish and
oversee payroll deduction savings programs. The commenters noted that
effective tax and program administration require political subdivisions
to safely and efficiently exchange data and money with employers in a
timely and ongoing fashion, usually by way of electronic payroll and
other systems. In the Department's view, however, plan sponsorship is a
better and more directly relevant indicator of a subdivision's ability
to sponsor and administer a retirement savings program. Additionally,
the Department is unable to verify the precise number of political
subdivisions that both levy and collect their own income, wage, or
similar taxes. Without such information, the Department is unable to
assess the effect of this suggested approach on the safe harbor's
scope. For these reasons, the Department declined to include this
approach in the final rule's demonstrated capacity test.
Finally, the new test does not prescribe the type or size of plan a
political subdivision must implement and administer in order to meet
the safe harbor's new ``plan administration'' criterion. Thus, a
political subdivision can satisfy this criterion by administering a
defined benefit plan, an individual account plan, or both. Although a
number of commenters suggested that the Department consider a plan size
requirement, such as a minimum level of assets under management or
number of participants covered, the Department declines to adopt these
suggestions in the final rule.\31\ As long as the plan provides
retirement benefits for some or all of the political subdivision's
employees, and provided that the political subdivision administers the
plan directly or is responsible for selecting and overseeing others
performing plan administration, the retirement plan is a ``plan, fund,
or program'' within the meaning of paragraph (h)(4)(ii)(C) of the final
regulation.
---------------------------------------------------------------------------
\31\ See, e.g., Comment Letter #9 (New York City Comptroller).
---------------------------------------------------------------------------
E. Consumer Protections
The final rule eliminates lingering ambiguity regarding the
requirement in proposed paragraph (h)(1)(iii) that the state or
political subdivision must assume responsibility for the security of
payroll deductions. The Department previously attempted to clarify this
requirement in the preamble to the final regulation dealing with state
payroll deduction savings programs.\32\ Despite those earlier efforts,
commenters on the proposal continued to ask the Department to further
clarify the meaning of this requirement. A number of commenters
specifically focused on the need to clarify and strengthen proposed
paragraph (h)(1)(iii), with some specifically stressing the importance
of clear and strong standards protecting payroll deductions.\33\ Many
commenters also raised a generic concern that the proposal does not
contain sufficient consumer protections as compared to the protections
ERISA would offer.\34\ The Department received similar comments on the
2015 proposed rule for state payroll deduction savings programs. Many
of those commenters specifically referenced and supported a rule
similar to the Department's regulation at 29 CFR 2510.3-102 (defining
when participant contributions become ``plan assets'' for the purpose
of triggering ERISA's protections).
---------------------------------------------------------------------------
\32\ 81 FR 59470 (August 30, 2016).
\33\ See, e.g., Comment Letter #12 (AFL-CIO); Comment Letter #16
(ICI) (incorporating comments from January 19, 2016 letter
pertaining to state payroll deduction savings programs); Comment
Letter #22 (American Council of Life Insurers) (``The inclusion of a
payroll deduction transmission timing requirement in a safe harbor--
especially one that provides for auto-enrollment--will provide a
powerful incentive for those seeking to use the safe harbor
protection to ensure that employee payroll deductions are
transmitted safely, appropriately, and in a timely manner as non-
compliance will subject the plan to ERISA's Title I
requirements.'').
\34\ See, e.g., Comment Letter #12 (AFL-CIO); Comment Letter #16
(ICI); Comment Letter #17 (AFSCME); Comment Letter #18 (U.S. Chamber
of Commerce); Comment Letter #22 (American Council of Life
Insurers); Comment Letter #26 (Economic Studies at Brookings).
---------------------------------------------------------------------------
In response to these concerns, the final rule clarifies and
strengthens the requirement that states and political subdivisions must
assume responsibility for the security of payroll deductions.
Specifically, paragraph (h)(1)(iii) contains a new sub-clause
clarifying that this requirement--to assume responsibility for the
security of payroll deductions--includes two subsidiary requirements.
The first subsidiary requirement is that states and political
subdivisions must require that employers promptly transmit wage
withholdings to the payroll deduction savings program. The second
subsidiary requirement is that states and political subdivisions must
provide an enforcement mechanism to ensure employer compliance with the
first subsidiary requirement. These new requirements protect employees
by ensuring that their payroll deductions are transmitted to their IRAs
as quickly as possible, where they become subject to applicable
Internal Revenue Code provisions, including the protective prohibited
transaction provisions found in section 4975 of the Code.\35\ States
and political subdivisions may meet the new requirements in a variety
of ways, including, for example, through legislation, ordinance, or
administrative rulemaking.
---------------------------------------------------------------------------
\35\ See 81 FR 59469 (August 30, 2016).
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The final regulation does not prescribe what is meant for wage
withholdings to be transmitted ``promptly.'' Instead, each state and
qualified political subdivision is best positioned to calibrate the
appropriate timeframe for its own program. Nevertheless, in the
interest of providing certainty to states and political subdivisions,
the final regulation contains a special safe harbor for promptness.
Paragraph (h)(5) provides that, for purposes of paragraph (h)(1)(iii),
employer wage withholdings are ``deemed to be transmitted promptly'' if
such amounts are
[[Page 92645]]
transmitted to the program as of the earliest date on which such
contributions can reasonably be segregated from the employer's general
assets, but in no event later than the last day of the month following
the month in which such amounts would otherwise have been payable to
the employee in cash. This standard is closely aligned with the rules
in 29 CFR 2510.3-102 for plans involving SIMPLE IRAs, as described in
section 408(p) of the Internal Revenue Code.\36\ Paragraph (h)(5) is
not, however, the only method of complying with the promptness
requirement in paragraph (h)(1)(iii) of the final regulation.
---------------------------------------------------------------------------
\36\ 29 CFR 2510.3-102(b)(2). See, e.g., DOL Advisory Opinion
83-25A (May 24, 1983).
---------------------------------------------------------------------------
F. Overlap
The proposed rule limited the safe harbor to political subdivisions
that are not located in a state that establishes a statewide retirement
savings program for private-sector employees.\37\ The purpose behind
this criterion was to reduce the number of political subdivisions that
could potentially meet the safe harbor, thereby mitigating the
potential for overlap or duplication between political subdivision
programs and state programs. In the proposal's preamble, the Department
interpreted the term ``state-wide retirement savings program'' to
include retirement savings programs described in the Department's
Interpretive Bulletin found at 29 CFR 2509.2015-02, such as the
voluntary marketplace and exchange models adopted by Washington State
and New Jersey.\38\
---------------------------------------------------------------------------
\37\ See paragraph (h)(4)(iii) of the proposed rule; 81 FR
59581, 92 (Aug. 30, 2016).
\38\ 81 FR 59581, 85 (Aug. 30, 2016).
---------------------------------------------------------------------------
A number of commenters expressed concern that including non-
mandatory state programs within this limiting criterion is overly
broad.\39\ The commenters noted that where a state establishes the
types of voluntary programs described in the Interpretive Bulletin,
such as voluntary marketplaces and exchanges, there is little risk that
employers would be subject to overlapping requirements or duplication
because statewide information marketplaces and exchanges are merely
vehicles for providing employees access to information about retirement
savings options.\40\ Thus, such programs would not impose upon
employers any obligations that might conflict or overlap with a
political subdivision's mandatory payroll deduction savings program.
These commenters urged the Department to clarify in the final rule that
a political subdivision is precluded from meeting this safe harbor
condition only when the political subdivision is in a state that
establishes a mandatory statewide payroll deduction savings program
that requires employers to participate.
---------------------------------------------------------------------------
\39\ See, e.g., Comment Letter #3 (Washington State Department
of Commerce); Comment Letter #4 (Seattle City Councilmember Tim
Burgess); Comment Letter #7 (Economic Opportunity Institute);
Comment Letter #9 (New York City Comptroller); Comment Letter #14
(AARP); Comment Letter #17 (AFSCME); Comment Letter #19 (Georgetown
University Center for Retirement Initiatives); Comment Letter #20
(New York City Mayor); Comment Letter #26 (Economic Studies at
Brookings).
\40\ See Comment Letter #9 (New York City Comptroller).
---------------------------------------------------------------------------
Commenters also expressed concern that the proposed rule's
provision excluding a political subdivision from the safe harbor if the
state subsequently enacts its own payroll deduction savings program
could, in certain circumstances, result in legitimate political
subdivision programs automatically dropping out of the safe harbor.\41\
Specifically, the commenters pointed out that under the proposed rule,
a political subdivision could be ``qualified'' at the time it enacts a
payroll deduction savings program, but then suffer automatic
disqualification if its state subsequently enacts a statewide
program.\42\ This is because the proposed rule excludes from the safe
harbor any political subdivision that is in a state that ``enacts'' its
own program, without regard to whether the political subdivision had
enacted its own program before the state acted.
---------------------------------------------------------------------------
\41\ See, e.g., Comment Letter #4 (Seattle City Councilmember
Tim Burgess); Comment Letter #8 (American Retirement Association).
\42\ See Comment Letter #8 (American Retirement Association);
Comment Letter #20 (New York City Mayor).
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1. Clarifying ``Statewide Retirement Savings Program''
The Department agrees with the commenters that this criterion was
overly broad. Accordingly, the final rule modifies the proposed rule to
clarify that in order to be eligible for the safe harbor a political
subdivision must not be located in a state that has enacted a mandatory
statewide payroll deduction savings program for private sector
employees. See Sec. 2510.3(h)(4)(ii)(B). This modified language will
continue to exclude from the safe harbor political subdivisions located
in states (such as California, Connecticut, Illinois, Maryland, and
Oregon) that have enacted a mandatory state payroll deduction savings
program, as well as other political subdivisions that seek to enact a
safe harbor program after the state in which they are located has
already done so. Revised paragraph (h)(4)(ii)(B) does not, however,
exclude from the safe harbor political subdivisions located in states
that have enacted only voluntary programs such as those Massachusetts,
New Jersey, and Washington State had enacted as of the date this final
rule was published.\43\
---------------------------------------------------------------------------
\43\ Mass. Gen. Laws ch. 29, Sec. 64E (2012); New Jersey Small
Business Retirement Marketplace Act, Public Law 2015, ch. 298;
Washington State Small Business Retirement Savings Marketplace Act,
Wash. Rev. Code Sec. Sec. 43.330.730-750 (2015).
---------------------------------------------------------------------------
2. Timing--Political Subdivisions Enacting Programs Before the State
The Department agrees with commenters that an otherwise-qualified
political subdivision that has relied on the safe harbor to enact a
payroll deduction savings program should not automatically lose its
qualified status when its state subsequently enacts its own program. To
allow an otherwise-qualified, pre-existing program to precipitously
drop outside the safe harbor due to actions outside of its control
would impose upon affected employers and participants undesirable
uncertainty and complexities.\44\ The final rule therefore revises
paragraph (h)(4) to exclude from the safe harbor political subdivisions
that are located in a state that already has enacted a mandatory
statewide payroll deduction savings program before the political
subdivision enacts its own program. Thus, if a state enacts such a
program after the political subdivision has done so, the political
subdivision does not automatically fall outside the safe harbor.
Rather, in such instances it is incumbent upon the state and the
political subdivision to determine how to coordinate the potentially
overlapping programs in a way that does not require employer
involvement beyond the limits of the safe harbor regulation, whether
that means carving out the political subdivision from the state
program, incorporating the political subdivision's program into the
state program, or employing some other alternative.
---------------------------------------------------------------------------
\44\ See, e.g., Comment Letter #8 (American Retirement
Association); Comment Letter #20 (New York City Mayor).
---------------------------------------------------------------------------
3. Elimination of Overlapping Political Subdivision Programs
Some commenters asked the Department to clarify how the safe harbor
would apply to political subdivisions that each enact a mandatory
payroll deduction savings program for employees within their
potentially overlapping jurisdictions. Some of those commenters further
suggested that the Department should
[[Page 92646]]
establish a rule that the larger political subdivision's program (e.g.,
a county program) should take priority over any political subdivision
program within its jurisdiction (e.g., a city program), regardless of
which program was first enacted.\45\
---------------------------------------------------------------------------
\45\ See, e.g., Comment Letter #6 (American Payroll
Association); Comment Letter #15 (American Benefits Council);
Comment Letter #20 (New York City Mayor); Comment Letter #23
(Financial Services Institute).
---------------------------------------------------------------------------
As a practical matter, and in view of the fact that only three
political subdivisions have expressed a potential interest in
establishing payroll deduction savings programs, the Department does
not anticipate that there will be overlapping programs among political
subdivisions. After careful deliberation, however, the Department
decided to address concerns regarding the potential for conflicting
requirements by modifying the proposed rule to preclude potentially
overlapping political subdivision programs. As explained in the
proposed rule's preamble, the Department has taken substantial measures
to mitigate the potential that overlapping programs could
simultaneously meet the safe harbor,\46\ but there remains some
potential for overlap. To eliminate any remaining potential for
overlap, the Department has decided to extend the first-in-time
coordination rule (the provisions of paragraph (h)(4)(ii)(B) of the
rule that exclude from the safe harbor an otherwise qualified political
subdivision when the state in which it is located has already enacted a
mandatory payroll deduction savings program) to apply in situations
where a mandatory payroll deduction savings program has already been
enacted in another political subdivision. Thus, to the extent that a
political subdivision meets the other conditions to be qualified but
has a geographic overlap with another political subdivision that has
already enacted a mandatory payroll deduction saving program for
private-sector employees, the former political subdivision would be
precluded from enacting a mandatory payroll deduction saving program
that would satisfy the safe harbor. The Department has determined that
this first-in-time rule will eliminate the few remaining situations in
which the possibility of overlap among political subdivisions might
otherwise exist.
---------------------------------------------------------------------------
\46\ See 81 FR 59581, 59585-86.
---------------------------------------------------------------------------
G. Petition Process
Some commenters suggested that political subdivisions could
petition or apply to the Department for an individual opinion or
decision regarding whether or not the political subdivisions qualify
for the safe harbor. These commenters propose that such a process could
be available for political subdivisions that meet at least some of the
four conditions in paragraph (h)(4) of the final regulation, but fail
to meet all of the conditions. For example, the process could be
available for a city or county that satisfies the demonstrated capacity
test but not the population test, or vice-versa. These commenters
envision a process in which the petitioner or applicant would present
to the Department its best case for safe harbor status using a list of
factors or criteria to be developed by the Department. This approach
would give ``close-call'' cities and counties an avenue to obtain
qualified status, while reserving to the Department the ability to deny
potentially unsafe or improper applicants.
The Department declines to adopt this suggestion. The qualified
political subdivision definition in paragraph (h)(4) of the final rule
consists of four criteria, each of which is a bright-line measure that
is either met or not. These objective criteria enable interested
parties to readily determine whether or not they meet the definition.
The commenters' suggested petition or application process, by contrast,
is inherently subjective, and thus runs entirely counter to the
Department's objective approach. Moreover, under the commenters'
proposed model, the outcome in any particular case would depend on,
among other things, the Department's view of the relevant facts and its
weighing and balancing of a given list of factors or criteria. The
present public record provides little, if any, direction on the type of
criteria or factors the Department could or should adopt under such an
approach, or whether each individual criterion or factor should be
given equal weight. Apart from these significant shortcomings, the
commenters' suggested proposal also raises Departmental budgetary and
resource issues that are beyond the scope of this rulemaking.
H. Responsibility and Liability for Program Operations
The proposal required that states and political subdivisions assume
and retain full responsibility for the payroll deduction savings
programs they implement and administer. More specifically, the proposal
provided that states and political subdivisions must assume
responsibility (i) for investing employee savings or for selecting
investment alternatives; (ii) for the security of payroll deductions
and employee savings; and (iii) for operating and administering their
programs, even if they delegate those functions to service or
investment providers.\47\ The proposal thus made it clear that in order
for a program to qualify for the safe harbor, states and political
subdivisions must assume and retain responsibility for operating and
administering their programs.
---------------------------------------------------------------------------
\47\ See Sec. Sec. 2510.3-2(h)(1)(ii), (h)(1)(iii), and
(h)(2)(ii), respectively.
---------------------------------------------------------------------------
At least one commenter requested that the Department clarify what
it means for a state or political subdivision to assume and retain full
responsibility for program operations, especially where the state or
political subdivision chooses to delegate some of its responsibilities
to third-party experts.\48\ In the commenter's view, this requirement
effectively prevents states and political subdivisions from delegating
responsibilities and liabilities to third-party experts who are willing
to assume such duties and liabilities. This commenter argues that this
provision exposes states and political subdivisions to broader
responsibility--and greater liability for third-party management--than
they would have under ERISA's fiduciary standards, or possibly even
under state statutes or common law. The commenter therefore asked the
Department to modify the proposal to clarify that states and political
subdivisions can delegate some of their management responsibility and
attendant liability to third-party service or investment providers, on
the condition that the state or political subdivision prudently selects
and appropriately monitors those service providers.
---------------------------------------------------------------------------
\48\ See Comment Letter #20 (New York City Mayor).
---------------------------------------------------------------------------
The final regulation contains no such modification. The essence of
the regulation's requirement that states and political subdivisions
assume and retain full responsibility for operating and administering
their payroll deduction savings programs is simply that states and
political subdivisions must retain ultimate authority over those
programs. Such authority includes, for example, determining whether or
not to hire and fire qualified third-party service providers, and
determining the scope of those service providers' duties. In drafting
this rule, the Department fully anticipated that states and political
subdivisions might choose to delegate program administration to
qualified service providers that the states or political subdivisions
oversee.\49\ In that
[[Page 92647]]
regard, the Department recognizes that prudently-selected third parties
with relevant program administration and investment experience and
expertise may, in many circumstances, be better equipped than a state
or political subdivision to discharge the specialized duties associated
with operating and managing payroll deduction savings programs. Thus,
given that this requirement does not preclude sponsoring states and
political subdivisions from delegating or assigning some or all of
their administrative responsibilities to third-party service providers,
states and political subdivisions would not lose their safe harbor
status by doing so. It is important to note, however, that this
requirement does not in any way govern the assignment of liability
between states and political subdivisions and those to whom they
delegate such responsibilities. Rather, issues of liability, such as
whether and how states or political subdivisions and their service
providers allocate liabilities among themselves, are matters for state
and local law, and for applicable provisions of the Internal Revenue
Code.
---------------------------------------------------------------------------
\49\ See Sec. 2510.3-2(h)(2)(ii) (states and political
subdivisions may, without falling outside the safe harbor, utilize
service or investment providers to operate and administer their
payroll deduction savings programs as long as the state or political
subdivision retains full responsibility for operating and
administering the program).
---------------------------------------------------------------------------
I. Timing
A few commenters asked the Department to delay extending the safe
harbor to qualified political subdivisions until after the Department
has had a chance to accumulate and fully analyze experience data on
state-sponsored payroll deduction savings programs.\50\ Among the
concerns these commenters raised are the potential for overlapping
programs; the uncertainty that a political subdivision could establish
a program and then drop out of the safe harbor due to fluctuating
populations; political subdivisions' assumed inferior level of
financial sophistication, expertise and resources to properly manage
payroll deduction savings programs; the inherently subjective nature of
attempting to differentiate between sophisticated and unsophisticated
political subdivisions; and a perceived lack of consumer protections.
The commenters also suggested that a delay in implementing the final
rule would allow more time for states to establish statewide programs,
thereby alleviating the need for potentially overlapping political
subdivisions to establish separate programs.
---------------------------------------------------------------------------
\50\ Comment Letter #8 (American Retirement Association);
Comment Letter #15 (American Benefits Council); Comment Letter #18
(U.S. Chamber of Commerce).
---------------------------------------------------------------------------
Although the Department declines the commenters' requests to delay
implementing this final rule, the final rule reflects that the
Department did take the commenters' concerns into account. As noted
above in this preamble, the final rule addresses the commenters'
concerns about potentially overlapping programs by adopting a new
condition that further reduces the number of political subdivisions
that can meet the safe harbor. That condition requires that in order to
be eligible for the safe harbor a political subdivision must already
administer a public-employee retirement program. The Department
believes that this condition--which a number of commenters supported--
measures, in objective terms, a political subdivision's ability to
operate and administer a payroll deduction savings program for private-
sector employees. The final rule also clarifies that an otherwise-
qualified political subdivision will not automatically drop outside the
safe harbor due to a drop in population, and it adds important consumer
protections by requiring that employers remit employee wage
withholdings to state and political subdivision programs in a timely
manner. Moreover, the final rule does not preclude a state from moving
forward with establishing its own payroll deduction savings program
simply because a political subdivision within its borders has already
done so.
The Department also notes that one very large political subdivision
has already taken steps to establish a payroll deduction savings
program for its private-sector employee residents, and, based on the
comments the Department has received, it seems two others have
expressed a potential interest in doing so.\51\ As noted throughout
this preamble, facilitating political subdivisions' ability to
encourage their residents to save for retirement by enrolling them in
payroll deduction savings programs furthers important state, federal,
and Departmental goals and policies. For these reasons, and considering
the modifications the Department already made to the final rule, the
Department judges it appropriate to implement the final rule at this
time.
---------------------------------------------------------------------------
\51\ See, e.g., The New York City Nest Egg: A Plan for
Addressing Retirement Security in New York City, Office of the New
York City Comptroller (October 2016).
---------------------------------------------------------------------------
III. Regulatory Impact Analysis
A. Executive Order 12866 and 13563 Statement
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing and streamlining rules, and
of promoting flexibility. It also requires federal agencies to develop
a plan under which the agencies will periodically review their existing
significant regulations to make the agencies' regulatory programs more
effective or less burdensome in achieving their regulatory objectives.
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 the OMB. Section 3(f) of the Executive Order defines a ``significant
regulatory action'' as an action that is likely to result in a rule (1)
having an annual effect on the economy of $100 million or more, or
adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or state, local or tribal governments or communities (also
referred to as an ``economically significant'' action); (2) creating
serious inconsistency or otherwise interfering with an action taken or
planned by another agency; (3) materially altering the budgetary
impacts of entitlement grants, user fees, or loan programs or the
rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal requirements, the
President's priorities, or the principles set forth in the Executive
Order.
OMB has determined that this regulatory action is not economically
significant within the meaning of section 3(f)(1) of the Executive
Order. However, it has determined that the action is significant within
the meaning of section 3(f)(4) of the Executive Order. Accordingly, OMB
has reviewed the final rule and the Department provides the following
assessment of its benefits and costs.
B. Background
As discussed in detail above in Section I of this preamble, several
[[Page 92648]]
commenters on the 2015 proposal \52\ urged the Department to expand the
safe harbor for state payroll deduction savings programs to include
payroll deduction savings programs established by state political
subdivisions. In particular, the commenters argued that an expansion of
the safe harbor is necessary, because otherwise the safe harbor would
not benefit employees of employers in political subdivisions that are
located in states that have not adopted a statewide program and
expressed a strong interest in establishing such programs.
---------------------------------------------------------------------------
\52\ See 80 FR 72006 (November 18, 2015).
---------------------------------------------------------------------------
In response, on August 30, 2016, the Department published a
proposed rule \53\ that would amend the 2016 final safe harbor
regulation for state programs to include within its scope laws and
programs established by certain state political subdivisions. The
Department received and carefully reviewed the public comments
submitted in response to the proposal. The Department now is publishing
a final rule that amends paragraph (h) of Sec. 2510.3-2 to cover
payroll deduction savings programs of qualified political subdivisions
defined in paragraph (h)(4) of the final rule. The Department discusses
the benefits and costs attributable to the final rule below.
---------------------------------------------------------------------------
\53\ See 81 FR 59581 (August 30, 2016).
---------------------------------------------------------------------------
C. Benefits and Costs
In analyzing benefits and costs associated with this final rule,
the Department focuses on the direct effects, which include both
benefits and costs directly attributable to the rule. These benefits
and costs are limited, because as stated above, the final rule would
merely establish a safe harbor describing the circumstances under which
qualified political subdivisions 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 a retirement savings programs to their employees.
The Department also addresses indirect effects associated with the
final 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 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 final rule might
influence how political subdivisions design their payroll deduction
savings programs.
Although the Department estimates that approximately 51 political
subdivisions are potentially eligible to use this final rule,\54\ the
Department understands that many qualified political subdivisions may
not be interested in establishing payroll deduction savings programs.
As noted above, commenters have identified only three cities--New York
City, Philadelphia, and Seattle--as having any potential interest to
date. Therefore, the direct benefits and direct costs attributable to
this final rule could be quite limited.
---------------------------------------------------------------------------
\54\ This estimate is based on the population estimates from the
U.S. Census Bureau, the Census of Government data from the U.S.
Census Bureau about defined benefit (DB) plans for local government
employees, and BrightScope data about defined contribution (DC)
plans for local government employees. For qualified political
subdivision with overlapping boundaries, it counts only one per
combination as the final rule precludes overlapping programs.
---------------------------------------------------------------------------
1. Direct Benefits
The Department believes that political subdivisions and other
stakeholders would directly benefit from expanding the scope of the
Department's final safe harbor regulation to include payroll deduction
savings programs established by qualified political subdivisions. As
with the states, this action 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
final rule will reduce legal costs, including litigation costs
political subdivisions might otherwise 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 will be
limited to qualified political subdivisions meeting all criteria set
forth in this final 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.
In order to constitute a ``qualified political subdivision,'' the
proposed rule required the political subdivision to have a population
equal to or greater than the population of the least populous state.
Several commenters asserted that based on this provision, it is
possible that fluctuating populations could cause a previously
qualified political subdivision to fall below the required population
threshold and fall outside the safe harbor after it has established its
program. To eliminate this possibility and reduce uncertainty, the
Department clarified in the final rule that political subdivisions
satisfying the population threshold when they enact a payroll deduction
savings program would not lose their qualified status solely due to
subsequent population fluctuations. This change will especially benefit
political subdivisions close to the population threshold and encourage
them to establish payroll deduction savings programs, because they will
not have to continuously monitor their population if their population
is equal to or greater than the population of the least populous state
when their program is enacted.
In response to comments, the final rule clarifies that a qualified
political subdivision would not automatically lose its qualified
political subdivision status if the state establishes a payroll
deduction savings program after the political subdivision has done so.
Political subdivisions will benefit from this provision, because they
will not have to be concerned that their programs will fall outside the
safe harbor if the state subsequently establishes a program. The
Department notes that in such situations, it expects that the state and
qualified political subdivision will coordinate potentially overlapping
programs to ensure a smooth transition. Although they may incur some
costs associated with communication and coordination, these costs would
be smaller compared to the costs that employers and participants may
face if the qualified political subdivision's program experiences any
disruptions or unexpected changes due to the lack of communication and
coordination between the state and qualified political subdivision.
The Department estimates that there are approximately eight
combinations where political subdivisions could potentially establish
conflicting payroll deduction savings programs due to overlapping
boundaries. In the final rule, the Department mitigated the possibility
that political subdivisions with overlapping geographic boundaries
could each become qualified political subdivisions by providing that a
[[Page 92649]]
political subdivision that geographically overlaps with another
political subdivision cannot be qualified if the overlapping
subdivision already has enacted a mandatory payroll deduction savings
program for private sector employees. Thus, the final rule benefits
employers by providing certainty that they will not be subject to a
multiplicity of overlapping political subdivision programs. It also
benefits qualified political subdivisions by providing clarity
regarding the circumstances under which political subdivisions with
overlapping boundaries can enact payroll deduction savings programs
that qualify for the safe harbor.
The final rule also clarifies the requirement that states and
political subdivisions assume responsibility for the security of
payroll deduction contributions in paragraph (h)(1)(iii). A number of
commenters specifically focused on the need to clarify and strengthen
this provision and some specifically stressed the importance of clear
and strong standards protecting payroll deductions. The Department
received similar comments on the 2015 proposed rule for state payroll
deduction savings programs. In response to these comments, the
Department buttressed paragraph (h)(1)(iii) in the final rule by
including a new sub-clause clarifying that states and political
subdivisions must (1) require that employers promptly transmit wage
withholdings to the payroll deduction savings program, and (2) provide
an enforcement mechanism to ensure that withheld wages are promptly
transmitted.
These new requirements will benefit employees by ensuring that
their payroll deductions are transmitted as quickly as possible to
their IRAs, where they become subject to applicable Internal Revenue
Code provisions, including the protective prohibited transaction
provisions found in section 4975 of the Code. States and political
subdivisions may adopt the new required protections in a variety of
ways, including, for example, through legislation, ordinance, or
administrative rulemaking. The provision also benefits states and
political subdivisions that create payroll deduction savings programs
and employers by providing clarity regarding the specific actions that
are necessary to comply with the requirement for states and political
subdivisions to assume responsibility for the security of payroll
deductions.\55\
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\55\ The final regulation does not specifically define what is
meant for wage withholdings to be transmitted ``promptly.'' Instead,
each state and qualified political subdivision is best positioned to
calibrate the appropriate timeframe for its own program.
Nevertheless, in the interest of providing certainty to states and
political subdivisions, the final regulation added paragraph (h)(5)
to the rule, which contains a special safe harbor for promptness.
For more detailed information, see the discussion about consumer
protection in the preamble.
---------------------------------------------------------------------------
The Department notes that the final 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
final rule would reduce uncertainty about political subdivision
activity within the safe harbor, it would not impair political
subdivision activity outside of it. This final regulation is a safe
harbor and as such, it 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 final 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, would
reduce the risks of being 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 final rule. If a qualified political subdivision
interested in developing its own payroll deduction savings program
overlaps with another qualified political subdivision, it would also
need to monitor the activities by the qualified political subdivision
with an overlapping boundary and communicate with it to avoid any
potential complications in relying on this safe harbor rule as the
final rule precludes overlapping payroll deduction savings programs.
Only one qualified political subdivision, out of approximately eight
possible combinations, with a potentially overlapping boundary
expressed interest in establishing its own payroll deduction savings
program to the Department. Thus, the Department expects the monitoring
and communication costs to be relatively small.
Qualified political subdivisions may incur administrative and
operating costs including mailing and form production costs. These
potential costs, however, are not directly attributable to the final
rule; they are attributable to the political subdivision's creation of
the payroll deduction savings program pursuant to its authority under
state law.
Some commenters 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 final rule
addresses this concern by requiring political subdivisions to have a
population equal to or greater than the least populous state and have a
demonstrated capacity to operate a payroll deduction savings program in
order to be qualified. The premise underlying these requirements is
that political subdivisions that meet them are likely to have
sufficient existing resources, experience, and infrastructure to create
and implement payroll deduction savings programs.
3. Uncertainty
The Department is confident that the final rule will benefit
political subdivisions and many other stakeholders otherwise beset by
uncertainty by clarifying the circumstances under which qualified
political subdivisions can create payroll deduction savings programs,
including programs with automatic enrollment, without causing the
political subdivision or employer to create an ERISA-covered employee
benefit pension plan. However, the Department is unsure of 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 final 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,
[[Page 92650]]
stakeholders' propensity to challenge such actions' legal status,
either absent or pursuant to the final 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 final 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 final rule and the reduced risk of an ERISA preemption
challenge, and therefore, the increased prevalence of such programs
would be indirectly attributable to the final rule. However, such an
increase would be bounded by the eligibility restrictions for political
subdivisions. With the authority, population and demonstrated capacity
tests, and the preclusion of overlapping programs, the number of
political subdivisions that are potentially eligible to use the safe
harbor is very small (51). Moreover, as stated above, the Department is
aware of only three political subdivisions that have expressed an
interest in creating such programs. 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 final rule could result in an
acceleration or deceleration of payroll deduction savings 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 that a statewide program no longer is necessary. On the
other hand, states could feel pressure to create a statewide 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, the Department solicited
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 statewide retirement savings program after the qualified
political subdivision establishes and operates its program. Many
commenters suggested that the Department should leave to the state to
determine the appropriate relationship between the political
subdivision's and the state's programs. Although this may appear to add
another layer of complexity, the appropriate resolution would depend on
the circumstances of each state and political subdivision. In some
circumstances, it might be most cost effective to scale a political
subdivision's payroll deduction program up to the entire state, whereas
it might economically make more sense to maintain a political
subdivision's program independent of the state's under different
circumstances. As a commenter pointed out, it would be generally more
cost effective if payroll deduction savings programs are able to take
advantage of economies of scale.\56\ To do so, a state may decide to
discontinue the program established by a political subdivision and
implement its own statewide program. In this case, the Department
expects the state and the political subdivision will coordinate the
potentially overlapping programs.
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\56\ Comment Letter #6 (American Payroll Association).
---------------------------------------------------------------------------
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.
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 final rule narrows
the number of political subdivisions that are eligible for the safe
harbor by the population and demonstrated capacity tests, 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. These
costs would be incurred disproportionately by small employers and
start-up companies, which tend to be least likely to offer pensions.
These small employers may incur additional costs to acquire payroll
software, use on-line payroll programs, or use external payroll
companies to comply with their political subdivisions' programs.\57\
However, some small employers may decide to use payroll software, an
on-line payroll program, or a payroll service to withhold and remit
payroll taxes independent of their political subdivisions' program
requirement. Furthermore, compared to manually processing payroll
taxes, utilizing payroll software or an on-line payroll program may be
more cost effective for small employers in the long run. 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. Supporting this view, a commenter stated that
complexity and administrative costs are often cited by small employers
as barriers to offer retirement plans for their employees and argued
that savings arrangements established by political subdivisions could
in fact alleviate small employers' burdens.\58\
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\57\ According to one survey, about 60 percent of small
employers do not use a payroll service. 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.
\58\ See Comment letter #5 (City of Philadelphia Controller).
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Employers, particularly those operating in multiple political
subdivisions, may face potentially increased costs to comply with
several political subdivision payroll deduction
[[Page 92651]]
savings programs, depending on whether and, if so, how, the
requirements of those programs differ. This can be more challenging for
employers if they operate in states where not all political
subdivisions have their own payroll deduction savings programs and/or
where some political subdivisions' programs differ in certain ways from
others. However, several states have only one qualified political
subdivision. Even if states have multiple qualified political
subdivisions, the final rule precludes overlapping programs. Thus, the
potential burden faced by employers operating in multiple political
subdivisions is limited. Moreover, employers operating across several
political subdivision borders are likely to 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 typically are
exempt from the law enacting such programs. Furthermore, in order to
satisfy the final 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 eligibility to political
subdivisions based on the population, authority, and demonstrated
capacity conditions and precluding overlapping political subdivision
programs, this final rule further addresses the concerns raised by
several commenters by substantially limiting the possibility of
conflicting programs among multiple political subdivisions.
The Department believes that well-designed political subdivision-
level payroll deduction savings programs have the potential to
effectively reduce gaps in retirement security. The political
subdivisions that expressed interest in establishing their own payroll
deduction savings programs for private-sector workers in the political
subdivision seem to be motivated by those workers' significantly lower
access rates to employment-based retirement plans compared to the rates
for workers nationwide.\59\ In order to successfully reduce these
significant gaps in retirement savings as intended, there are several
factors to consider. Relevant variables such as pension coverage, labor
market conditions,\60\ 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.\61\ Some research suggests that automatic contribution policies
are effective in increasing retirement savings and wealth in general by
overcoming behavioral biases or inertia.\62\ 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 Supplemental Security Income
(SSI), which support low-income Americans, including older Americans.
---------------------------------------------------------------------------
\59\ According to the comment letter submitted by the city of
Philadelphia, in May 2016, 54% of employees in Philadelphia do not
have access to workplace retirement plans. Similarly, 57% of New
York City private-sector workers lack access to a retirement plan at
their employment place according to the comment letter submitted by
the office of Comptroller of the City of New York. These statistics
are significantly higher than the nation-wide average of 34% lacking
access to a retirement plan through employment for private-sector
workers, according to the National Compensation Study in June of
2016.
\60\ See, e.g., U.S. Bureau of Labor Statistics, ``Metropolitan
Area Employment and Unemployment--May 2016,'' USDL-16-1291 (June 29,
2016).
\61\ 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.
\62\ 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 final safe harbor does not allow employer
contributions to political subdivisions' payroll deduction savings
programs. Additionally, the initiatives potentially 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 final rule, these demographic characteristics can be
more pronounced, assuming large political subdivisions tend to have
more diverse workforces. 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.
Commenters have stated another concern--that political subdivision
initiatives may ``crowd-out'' ERISA-covered plans. The final 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 final rule makes clear that political
subdivision programs directed toward employers that do not offer other
retirement plans fall within this final safe harbor rule.
[[Page 92652]]
However, employers that wish to provide retirement benefits are likely
to find that ERISA-covered programs, such as 401(k) plans, have
important advantages for them and their employees over participation in
political subdivision programs. Potential advantages include
significantly higher limits on tax-favored contributions that may be
elected by employees ($18,000 in 401(k) plans and $24,000 for those age
50 or older) versus $5,500 in IRAs ($6,500 for those age 50 or older),
the opportunity for employers to make tax-favored matching or
nonmatching contributions on behalf of employees (allowing a total of
up to $54,000 ($60,000 for those age 50 or older) of employee plus
employer contributions for an employee in a 401(k) plan versus $5,500
or $6,500 in IRAs), greater flexibility in plan selection and design,
ERISA protections, and larger positive recruitment and retention
effects.\63\ Therefore it seems unlikely that political subdivision
initiatives will ``crowd-out'' many ERISA-covered plans, although, if
they do, some workers might lose ERISA-covered plans that could have
been more generous than political subdivision-based (IRA) benefits.
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\63\ These contribution limits are for year 2017. For more
details, see: https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions.
---------------------------------------------------------------------------
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.
D. 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 final 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.
In accordance with the requirements of the PRA, the Department
solicited comments regarding its determination that the proposed rule
is not subject to the requirements of the PRA, because it does not
contain a ``collection of information'' as defined in 44 U.S.C.
3502(3). The Department's conclusion was based on the premise that the
proposed rule does not require any action by or impose any requirements
on employers or the political subdivisions. 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.
The Department did not receive any comments regarding this
assessment. Therefore, the Department has determined that the final
rule is not subject to the PRA, because it does not contain a
collection of information. The PRA definition of ``burden'' excludes
time, effort, and financial resources necessary to comply with a
collection of information that would be incurred by respondents in the
normal course of their activities. See 5 CFR 1320.3(b)(2). The
definition of ``burden'' also excludes burdens imposed by a state,
local, or tribal government independent of a Federal requirement. See 5
CFR 1320.3(b)(3). The final rule imposes no burden on employers,
because political subdivisions will 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.
E. 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 604 of the RFA requires the agency to present a final
regulatory flexibility analysis at the time of the publication of the
final rule describing the impact of the rule on small entities. Small
entities include small businesses, organizations and governmental
jurisdictions.
Although several commenters maintained that the proposed rule would
impose significant costs on small employers, similar to the proposal,
the final rule merely establishes a new safe harbor describing
circumstances in which payroll deduction savings programs established
and maintained by political subdivisions would not give rise to ERISA-
covered employee pension benefit plans. Therefore, the final rule
imposes no requirements or costs on small employers, and the Department
believes that it will not have a significant economic impact on a
substantial number of small employers. Similarly, because the final
rule does not impose any requirements or costs on small governments,
the Department believes that it will not have a significant economic
impact on a substantial number of small government entities, either.
Accordingly, pursuant to section 605(b) of the RFA, the Assistant
Secretary of the Employee Benefits Security Administration hereby
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities.
F. Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1501 et seq.), as well as Executive Order 12875, this final rule does
not include any federal mandate that may result in expenditures by
state, local, or tribal governments, or the private sector, which may
impose an annual burden of $100 million as adjusted for inflation.
G. Congressional Review Act
The final rule is subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the
Comptroller General for review. The final rule is not a ``major rule''
as that term is defined in 5 U.S.C. 804, because it is not likely to
result in (1) an annual 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.
H. Federalism Statement
Executive Order 13132 outlines fundamental principles of
federalism. It
[[Page 92653]]
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 final rule, by clarifying that
payroll deduction savings programs 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.
Therefore, the final rule does not contain policies with federalism
implications within the meaning of the Order.
Nonetheless, in respect for the fundamental federalism principles
set forth in the Order, the Department affirmatively engaged in
outreach, including meetings, conference calls, and outreach events,
with officials of political subdivisions and other stakeholders
regarding the final rule and sought their input on the safe harbor. The
Department also received comment letters from local governments and
their representatives. Many of the changes in the final rule stem from
suggestions contained in the comment letters.
List of Subjects in 29 CFR Part 2510
Accounting, Employee benefit plans, Employee Retirement Income
Security Act, Coverage, Pensions, Reporting.
For the reasons stated in the preamble, the Department of Labor
amends 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 727 (2012),
E.O. 12108, 44 FR 1065 (Jan. 3, 1979) and 29 U.S.C. 1135 note. Sec.
2510.3-38 is also issued under sec. 1, Pub. L. 105-72, 111 Stat.
1457 (1997).
0
2. In Sec. 2510.3-2, revise paragraph (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, including by
requiring that amounts withheld from wages by the employer be
transmitted to the program promptly and by providing an enforcement
mechanism to assure compliance with this requirement;
(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:
(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 paragraph (h), the term ``State'' shall
have the same
[[Page 92654]]
meaning as defined in section 3(10) of the Act.
(4) For purposes of this paragraph (h), 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; and
(ii) At the time of the enactment of the political subdivision's
payroll deduction savings program:
(A) 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);
(B) Has no geographic overlap with any other political subdivision
that has enacted a mandatory payroll deduction savings program for
private-sector employees and is not located in a State that has enacted
such a program statewide; and
(C) Has implemented and administers a plan, fund, or program that
provides retirement income to its employees, or results in a deferral
of income by its employees for periods extending to the termination of
covered employment or beyond.
(5) For purposes of paragraph (h)(1)(iii) of this section, amounts
withheld from an employee's wages by the employer are deemed to be
transmitted promptly if such amounts are transmitted to the program as
of the earliest date on which such contributions can reasonably be
segregated from the employer's general assets, but in no event later
than the last day of the month following the month in which such
amounts would otherwise have been payable to the employee in cash.
Signed at Washington, DC, this 9th day of December, 2016.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, U.S.
Department of Labor.
[FR Doc. 2016-30069 Filed 12-19-16; 8:45 am]
BILLING CODE 4510-29-P
