Private Sector Employers May Need to Facilitate Mandatory, State-run Payroll Deduction IRAs

Private sector employers — including for-profit and non-profit/tax exempt employers — who do not have a tax-qualified retirement plan may need to facilitate mandatory, state-run payroll deduction IRAs for their employees. Six states (California, Connecticut, Illinois, Maryland, New Jersey, and Oregon) and the city of Seattle have enacted such programs, which apply to workers in those states, even if the employer is located elsewhere.
 
Other states are actively considering adopting such programs, including Hawaii, Massachusetts (where three proposals are pending), Minnesota, Missouri, New Mexico and Washington. Many other states have made perennial strides to enact such programs, but so far those efforts have been overtaken by politics or other pressing priorities in very short (but crowded) state legislative sessions. Proponents vow to continue to move forward to enact mandatory, state-run payroll deduction IRA programs in those states.
 
California’s program (branded as “CalSavers”) launches on July 1, 2019, for employers who have at least five employees but do not already have a workplace retirement savings plan. California estimates that about 7.5 million people will be covered by CalSavers. Illinois launched its program (called “Illinois Secure Choice”) in 2018. Oregon was the first to launch its program (known as “OregonSaves”) in 2017. A summary of each of these three programs is set forth in the appendix below.

Click the below links to navigate to summaries of the programs at the end of this alert:
 
CalSavers
Illinois Secure Choice
OregonSaves
 
Launch dates have not yet been announced for Connecticut and Maryland (but both have been moving forward slowly for several years) or for New Jersey (which just enacted its program on March 28, 2019).
 

Why are states doing this?

States are undertaking these programs because they are concerned that the lack of access to workplace retirement savings could lead to a burden on state finances if states have to care for indigent retirees. Although individuals could certainly set up their own IRAs, research shows that automatic enrollment, workplace payroll deduction retirement savings is much more effective.
 

The states that couldn’t wait.

For over a decade, bipartisan federal legislative proposals to create “Universal Savings Accounts” and other mandatory workplace retirement or “rainy day” savings accounts have stalled. While everyone seems to agree that Americans need to save more, politics seems to be preventing progress. Spurred on by the success of their state-run 529 college savings plans,^[1] some states decided to take matters into their own hands to increase individual retirement savings. In fact, states are using some of the same vendors for their long-standing 529 plans and for their new payroll deduction IRA programs. For example, Ascensus is the primary record keeper for California, Illinois and Oregon’s 529 plans and for their auto-IRA programs. Using the same vendors for both programs makes sense, since long term savings and permitting individual access to accounts are goals of each program, and doing so gives both programs a similar look and feel for users.
 
The state programs are intended to give employers a simple, low-cost way to help employees save for retirement, with no fiduciary responsibility for the employer under the federal Employee Retirement Income Security Act (ERISA), no employer contributions, and no fees for the employer (employees pay modest administrative fees). Employers serve a limited role by facilitating the program and submitting employee contributions through automatic enrollment payroll deduction.
 

Common features.

The states that are launching these programs have been working closely together for years, so many features are similar, even though each program is somewhat different. Several states seem to be synchronizing their views and operations on employer eligibility, employer and employee communication strategies, registration and enrollment procedures, and other program features. Examples of common features include the following:
 

• Roth IRAs. To date, all of the mandatory programs are structured as automatic enrollment, payroll deduction after-tax Roth IRAs (but states are considering allowing employees to switch to traditional, pre-tax IRAs once they are enrolled in the program). Employees who earn more than the Roth IRA income limit may not be eligible to contribute.
• Contribution limits. Annual contributions are capped at $6,000 ($7,000 for people who are age 50 or older), as adjusted annually (i.e., contributions are capped at the maximum annual IRS limit on IRA contributions). Generally, employees can change their rate or opt out at any time. Employees (not employers) are responsible for monitoring their eligibility to make contributions and that they do not over contribute.  Employees generally can enroll in the state-run IRA program for each employer that they work for. For example, they may choose to opt out of contributions through an employer or they may contribute through multiple employers at the same time. All contributions are held in a single IRA in the employee’s name (i.e., there aren’t separate IRAs for each employer).
• ERISA. To avoid ERISA coverage, employer contributions are not allowed and employers should remain neutral about their employees’ participation. So employers should neither encourage nor discourage their employees’ participation in state-run auto-IRA programs. Employers are not charged any fees for the programs and are not liable for an employee’s decision to participate or not participate in the state-run program or for any investment decisions.
• Same record keeper. In addition, California, Illinois and Oregon have selected the same record keeper (Ascensus) for their programs (although they selected different investment advisers and other program vendors).
• Oversight and operations. Each program is run by a state retirement savings board, typically chaired by the State Treasurer. Day-to-day operations are generally handled by an executive director and small staff. The programs typically operate through a state-run website. The state provides all necessary program materials, such as education, enrollment, etc.
• Employee signatures are not required. Employee signatures are generally not required to open employee accounts or to start making payroll deductions.
• No W-2 reporting required. State-run auto-IRA programs are payroll deduction IRAs, not “retirement plans” for purposes of Form W-2 reporting. So employee contributions will not be reflected on Form W-2. Rather, the IRA trustee will file a Form 5498 with the IRS and employees will receive a copy no later than May 31 each year. The Form 5498 is not filed with employee’s taxes, but instead documents IRA contributions for a particular year.

 

Employers who have workplace retirement plans are exempt.

An important feature of all of these programs is that they exempt employers who already have workplace retirement plans. To date, all of the programs exempt employers who have a retirement plan anywhere in its controlled group, even if some employees cannot participate. For example, many plans say that employees cannot join the plan until they are age 21 and have completed 1,000 hours of service. Some plans exclude entire groups (like hourly or union employees). Excluding those employees from participating in the plan would not subject the employer to the state mandate (even if that means the excluded employees won’t have access to the employer’s retirement plan or the state’s auto-IRA).
 
In addition, if an employer has employees in multiple states and offers a workplace retirement plan to some employees in those other states, generally the employer is not required to facilitate the state-run auto-IRA program for employees in states that have such programs. For example, if an employer has employees in Indiana, Ohio, Michigan and Illinois and the employer offers a workplace retirement plan only to employees in Ohio, the employer is not required to facilitate Illinois Secure Choice for its Illinois employees.
 

Employers may need to claim exemption.

Employers who are exempt from having to facilitate state-run, mandatory payroll deduction IRA programs may need to take some nominal action to claim their exempt status. The process for claiming the exemption varies from state to state. Oregon and Illinois are in the process of aligning their exemption procedures to minimize burdens on employers and avoid potential ERISA (federal law) pre-emption challenges. California “requests” that employers inform CalSavers of their exemption on the program’s website.
 

Are there penalties for noncompliance?

Some states have noncompliance penalties and others do not. States may impose penalties on employers for failure to timely remit deductions in violation of state wage and hour laws.
 

What should employers do now?

All employers (including for-profit and non-profit/tax-exempt employers) with any employees in California, Connecticut, Illinois, Maryland, New Jersey, Oregon and Seattle should review the program rules for those jurisdictions (even if the employer is located elsewhere). The employer may be exempt due to its number of employees (which varies by state) or because it already has a workplace retirement plans (even if not all of the employees in that state are covered by the plan). Employers should learn what steps (if any) are needed to claim its exemption from the state-run program or to enroll employees in the program. BDO can help.

 

Appendix

CalSavers
 

Question	Answer
Which employers are subject to the mandate?	All private sector employers with five or more employees located in California, including for-profit, non-profit and tax exempt employers are “eligible employers.”   Although participation is mandatory, employers that offer an employer-sponsored retirement plan (e.g., defined benefit, 401(k), 403(a), 403(b), SEP, or SIMPLE) or an automatic enrollment payroll deduction IRA are exempt if the plan or IRA qualifies for favorable tax treatment.
When must employers register or claim an exemption?	Eligible employers may register at any time on or after July 1, 2019, but: Employers with more than 100 California employees must register by June 30, 2020. Employers with more than 50 California employees must register by June 30, 2021. Employers with five or more California employees must register by June 30, 2022. The program will notify employers when their registration deadline is approaching. Employers need an access code to register for the program, which can be obtained from the CalSavers website.
What must employers do to claim an exemption from participating in the program?	Exempt employers may (but need not) inform CalSavers of their exemption from the program on the CalSavers website.
Can exempt employers join anyhow?	Employers who already offer a retirement plan may not facilitate CalSavers with automatic enrollment. But they may facilitate contributions from employees or independent contractors who already have a CalSavers account (or enrolled on their own).
What must employers do to facilitate the program?	During registration, employers designate a payroll representative and provide employee data. After registration, employers remit payroll deductions and update employee data as needed. Employers must add new eligible employees to the program within 30 days after their date of hire or date of eligibility.
Which employees are eligible?	“Eligible employee” means: Any employee of a participating employer who is (i) at least age 18; (ii) is an “employee” under California Unemployment Insurance Code Sections 621 et seq; (iii) receives an Internal Revenue Service Form W-2 with California wages from such employer A sole proprietor (self-employed owner/employee) A partner in a partnership that is an eligible employer Business owners who are also employees of their business are eligible to participate.   Business owners that are not employees of their business may enroll as individuals and make automatic contributions from their bank account.   The following individuals cannot join CalSavers: Employees covered under the Railway Labor Act Employees engaged in interstate commerce who are not subject to state legislative powers Employees covered by a collective bargaining agreement that provides for a union pension plan
Is auto-enrollment mandatory?	Yes, and it must begin within 30 days after the employer registers with the program unless the employee opts out.
Can employees opt in or opt out?	Yes.
What is the default contribution rate?	5% of gross pay,
Is auto-escalation mandatory?	Yes. In the first payroll of each new calendar year, the employee’s contribution will automatically be increased by 1% (up to 8% of pay), unless the employee opts out or unless the employee has been in the program for under 6 months.
What do employees need to do to join the program?	About 30 days before automatic enrollment begins, employees will receive a notice asking them to set up their account, opt out or wait to be automatically enrolled at the default contribution rate.
What if an employee already has an IRA?	If an employee already has another Roth or traditional IRA, the amount he or she can contribute to the program must be reduced by the contributions made to the other IRA.
Who owns the IRA?	Each employee owns his or her IRA.
Who names beneficiaries?	Each employee can name his or her own beneficiaries. The default beneficiary for married participants is their spouse and for unmarried participants is their estate. Beneficiaries can take a lump-sum or receive installments.
Is there a default investment?	Yes. The first $1,000 will be invested in a money market fund and additional contributions will be invested in target date funds based on the employee’s age.
Can employees self-direct investments?	Yes. Employees can decide at any time whether to keep the default investments or choose from a simple menu of other investment options.
When can employees access the funds?	Anytime, but withdrawals are subject to IRA tax rules.
What distribution forms are available?	Lump sum or installments, as elected by the employee.
Is the IRA portable?	Yes. Employees keep the IRA if they terminate employment and can directly or indirectly roll over the IRA to another financial institution (but IRS rules only allow one IRA rollover per year). Employees cannot make payroll deduction contributions if they are working outside of California. But they can continue to contribute through their own bank account, even if they move out of California.
Are there fees?	Yes. Employee accounts will be charged an annual asset-based fee of 0.825% to 0.95%, depending on investment choices. Thus, employees will pay between 83 cents and 95 cents per year for every $100 in their account, depending on investment choices.
Are there penalties for noncompliance?	Yes. Eligible employers that, without good cause, fail to allow eligible employees to participate in the program may be subject to a penalty of $250 per eligible employee if noncompliance extends 90 days or more after receipt of notice. If found to be in noncompliance 180 days or more after the notice, an additional penalty of $500 per eligible employee applies.
Can employees who participate in CalSavers qualify for the IRS’s “Saver’s Tax Credit”?	Yes, if the employee’s income falls within certain limits he or she may qualify for up to a $1,000 federal income tax credit.
When was CalSavers enacted?	September 28, 2012, (initial study) and September 29, 2016 (implementing legislation)
Program contact information	Employer Assistance: 855-650-6916 Employee Assistance: 855-650-6918 [email protected] https://www.calsavers.com/

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Illinois Secure Choice
 

Question	Answer
Which employers are subject to the mandate?	All private sector employers, including for-profit, non-profit and tax exempt employers are “eligible employers” if they have each of the following: They have employed 25 or more employees in Illinois at all times during the previous calendar year. They have been in business at least 2 years. They have not offered a qualified retirement plan (e.g., defined benefit, 401(k), 403(a), 403(b), SEP, or SIMPLE) in the preceding two years (payroll deduction IRAs are not considered qualified retirement plans).
What must employers do to claim an exemption from participating in the program?	Illinois has updated its state tax forms so that employers (1) not subject to the program or (2) subject to the program but offer a qualified retirement plan to employees will check Box “C” on Form IL-941 (2019 Illinois Withholding Income Tax Return). Employers that do not check Box “C” may be contacted by the program regarding the mandate to participate in the program.
When must employers register or claim an exemption?	The program will notify employers when they must register and will provide employers with the required access code. Employers with 500+ employees had to register in November 2018. Employers with 100-499 employees must register in July 2019. Employers with 25-99 employees must register in November 2019.
Can exempt employers join anyhow?	No.
What must employers do to facilitate the program?	During registration, employers designate a payroll representative and provide employee data. After registration, employers remit payroll deductions and update employee data as needed. Employers must add new eligible employees to the program within 30 days after their date of hire or date of eligibility.
Which employees are eligible?	“Eligible employee” means any employee (including part-time and full-time employees) who is (1) at least age 18; (2) is employed by an eligible employer; (3) has wages allocable to Illinois during a calendar year under the Illinois Income Tax Act. Employees who live in other states are eligible if their employment is based in Illinois. Seasonal employees are eligible if they have worked for the employer for more than 60 days. Full-time students in work-study programs are not eligible for the program. Business owners who are also employees of their business are eligible to participate.
Is auto-enrollment mandatory?	Yes, and it must begin within 30 days after the employer registers with the program unless the employee opts out.
Can employees opt in or opt out?	Yes.
What is the default contribution rate?	5% of gross pay.
Is auto-escalation mandatory?	Yes. Increases 1% as of each January 1, unless the employee opts out.
What do employees need to do to join the program?	About 30 days before automatic enrollment begins, employees will receive a notice asking them to set up their account, opt out or wait to be automatically enrolled at the default contribution rate.
What if an employee already has an IRA?	If an employee already has another Roth or traditional IRA, the amount he or she can contribute to the program must be reduced by the contributions made to the other IRA.
Who owns the IRA?	Each employee owns his or her IRA.
Who names beneficiaries?	Each employee can name his or her own beneficiaries. The default beneficiary is their estate. Beneficiaries can take a lump-sum or receive installments.
Is there a default investment?	Yes. For the first 90 days of participation in the program, contributions will be invested in a money market fund and then moved into a target date fund based on the employee’s age.
Can employees self-direct investments?	Yes. Employees can decide at any time whether to keep the default investments or choose from a simple menu of other investment options.
When can employees access the funds?	Anytime, but withdrawals are subject to IRA tax rules.
What distribution forms are available?	Lump sum or installments, as elected by the employee.
Is the IRA portable?	Yes. Employees keep the IRA if they terminate employment and can directly or indirectly roll over the IRA to another financial institution (but IRS rules only allow one IRA rollover per year). Employees cannot make payroll deduction contributions if they are working outside of Illinois.
Are there fees?	Yes. Employees pay a fee to cover program administration and operating expenses. This fee is an annual asset-based fee of approximately 0.75%. This means employees pay approximately 75 cents per year for every $100 in their account. The fee is automatically deducted from accounts.
Are there penalties for noncompliance?	An employer who fails to timely enroll an employee without reasonable cause (unless the employee opted out) is subject to a penalty of $250 for each employee for the calendar year (or partial calendar year) during which the employee was not enrolled in the program. In subsequent calendar years, the penalty is $500 per employee.
Can employees who participate in the program qualify for the IRS’s “Saver’s Tax Credit”?	Yes, if the employee’s income falls within certain limits such employee may qualify for up to a $1,000 federal income tax credit.
When was the program enacted?	January 4, 2015.
Program contact information	Employer Assistance: (855) 650‑6913 Employee Assistance: (855) 650‑6914 [email protected] https://www.ilsecurechoice.com/home.html

 
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Oregon Saves
 

Question	Answer
Which employers are subject to the mandate?	All private sector employers with one or more employees located in Oregon, including for-profit, non-profit and tax exempt employers are “eligible employers.” Although participation is mandatory, employers that offer an employer-sponsored retirement plan (e.g., defined benefit, 401(k), 403(a), 403(b), SEP, or SIMPLE) are exempt from OregonSaves. Payroll deduction IRAs do not qualify for exemption from OregonSaves.
When must employers register or claim an exemption?	Eligible employers may register at any time, but: Employers with 0 to 4 Oregon employees must register by May 15, 2020. Employers with 5 to 9 Oregon employees must register by November 15, 2019. Employers with 10 to 19 Oregon employees must have registered by May 15, 2019. Employers with 20 to 49 Oregon employees must have registered by December 15, 2018. Employers with 50 to 99 Oregon employees must have registered by May 15, 2018. Employers with 100 or more Oregon employees must have registered by November 15, 2017. The program will notify employers when their registration deadline is approaching. Employers need an access code to register for the program, which can be obtained from the OregonSaves website.
What must employers do to claim an exemption from participating in the program?	Exempt employers generally must claim their exemption on OregonSaves website. But pursuant to a litigation settlement, employers who are members of the ERISA Industry Committee (ERIC) need only inform OregonSaves that they are ERIC members. In June 2019, Oregon enacted a new law (SB 165) that requires all employers in Oregon to indicate on their annual tax withholding return submitted to Oregon Department of Revenue whether they offer a qualified retirement plan and are thus exempt from offering employees enrollment in OregonSaves.   In fall 2018, OregonSaves began using Form 5500 data as the basis for sending employers a “notice of presumed exemption” when a Form 5500 indicates that an employer offers a retirement plan. Temporary rules provide that an employer that receives such a notice is exempt from OregonSaves and does not have to take any action as long as it continues to offer a plan to some or all of its employees. A plan sponsor that does not receive a notice of presumed exemption would still be required to file a Certificate of Exemption.
Can exempt employers join anyhow?	Employers who already offer a retirement plan will not need to participate in OregonSaves. However, the board will establish the “process and requirements” for an employer to obtain an “exemption” from the mandate.   Moreover, if OregonSaves is not available through an individual’s job, they can sign up for OregonSaves and contribute through their individual bank account.
What must employers do to facilitate the program?	During registration, employers designate a payroll representative and provide employee data. After registration, employers remit payroll deductions and update employee data as needed. Employers must add new eligible employees to the program within 30 days after their date of hire or date of eligibility.
Which employees are eligible?	“Eligible employees” must be: Age 18 or older; have earned income; are eligible to make Roth IRA contributions; employed in the state of Oregon. OregonSaves rules provide that an employer is “any employing unit” with at least one employee “in each of 18 separate weeks during any calendar year” or in which the unit’s total payroll during any calendar quarter amounts to $1,000 or more. Employees who live in other states are eligible if their employment is based in Oregon. Seasonal employees are eligible if they have worked for the employer for more than 60 days. Full-time students in work-study programs are not eligible for the program. Self-employed individuals can contribute through their bank account.
Is auto-enrollment mandatory?	Yes, and it must begin within 30 days after the employer registers with the program unless the employee opts out.
Can employees opt in or opt out?	Yes.
What is the default contribution rate?	5% of gross pay.
Is auto-escalation mandatory?	Yes. On January 1 each year (for employees who began contributing before July 1 of the prior year), the employee’s contribution will automatically be increased by 1% (up to 10% of pay), unless the employee opts out.
What do employees need to do to join the program?	About 30 days before automatic enrollment begins, employees will receive a notice asking them to set up their account, opt out or wait to be automatically enrolled at the default contribution rate.
What if an employee already has an IRA?	If an employee already has another Roth or traditional IRA, the amount he or she can contribute to the program must be reduced by the contributions made to the other IRA.
Who owns the IRA?	Each employee owns his or her IRA.
Who names beneficiaries?	Each employee can name his or her own beneficiaries. The default beneficiary is their estate. Beneficiaries can take a lump-sum or receive installments.
Is there a default investment?	Yes. The first $1,000 will be invested in a money market fund and additional contributions will be invested in target date funds based on the employee’s age.
Can employees self-direct investments?	Yes. Employees can decide at any time whether to keep the default investments or choose from a simple menu of other investment options.
When can employees access the funds?	Anytime, but withdrawals are subject to IRA tax rules.
What distribution forms are available?	Lump sum or installments, as elected by the employee.
Is the IRA portable?	Yes. Employees keep the IRA if they terminate employment and can directly or indirectly roll over the IRA to another financial institution (but IRS rules only allow one IRA rollover per year). Employees cannot make payroll deduction contributions if they are working outside of Oregon. But they can continue to contribute through their own bank account, even if they move out of Oregon.
Are there fees?	Yes. Employee accounts will be charged an “all in” annual fee equal to 1% of plan assets ($1.00 for every $100 saved).
Are there penalties for noncompliance?	Noncompliant employers face civil penalties of up to $100 per affected employee, capped at $5,000 total per calendar year. The penalty can be adjusted up or down for mitigating or aggravating circumstances.
Can employees who participate in OregonSaves qualify for the IRS’s “Saver’s Tax Credit”?	Yes, if the employee’s income falls within certain limits he or she may qualify for up to a $1,000 federal income tax credit.
When was OregonSaves enacted?	June 25, 2015 (although other states enacted their programs sooner, Oregon was the first state to begin operating their program).
Program contact information	Employer assistance: (844) 661-1256 Employee assistance: (844) 661-6777 [email protected] https://www.oregonsaves.com/

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