“Obamacare, but for retirement plans” is one way to describe recent state initiatives to establish automatic enrollment into individual retirement accounts (IRAs). One big difference, of course, is that the Affordable Care Act is federal law, whereas auto-IRA programs in California, Connecticut, Illinois, and Oregon are state-based retirement plans established with encouragement from the White House after a federal solution never materialized.
Maryland Small Business Retirement Savings Program and Trust
In Maryland, House Bill 1378 and Senate Bill 1007 would establish the Maryland Small Business Retirement Savings Program and Trust. The bill would require eligible private-sector employers with at least 10 employees to participate in the program. Participation in the program requires employers to remit employee contributions deducted from payroll into an IRA. Employees of a participating employer are automatically enrolled to contribute 3% of their compensation, but they may opt out. Employers are not required to (and may not) contribute additional amounts.
Eligible Employers
The program generally requires participation by any private employer, whether for profit or nonprofit, that (1) employs 10 or more eligible employees (described below) who work 30 or more hours per week and (2) pays compensation through a payroll system or service. Consequently, even though the program is ostensibly titled for small businesses, medium- to large-sized employers may be required to participate.
An employer is exempted from participation if the employer (1) currently offers an employer-sponsored retirement plan, (2) terminated an employer-sponsored plan within the last two years, or (3) has not been in business at all times during the current and preceding calendar years.
Eligible Employees
The program covers common-law employees of eligible employers, subject to certain exceptions. Excepted employees include those eligible to participate in an employer-sponsored plan, collectively bargained employees covered by a multiemployer plan, and employees under age 18.
Incentives to Employers
Employers that participate in the program or otherwise offer an employer-sponsored retirement plan are exempted from Maryland’s annual filing fee for corporations and business entities, which is generally $300 per year.
The bill also expressly limits liability for employers participating in the program. Specifically, a participating employer is not liable for (1) an employee’s decision to participate in or opt out of the program; (2) investment decisions of participating employees; and (3) design, administration, and investment performance of the program. In addition, participating employers are not considered a fiduciary of the program, relieving them of the higher standard of care expected of a fiduciary.
Effective Date
If the bill passes and is signed into law, it will be effective July 1, 2016. But the program itself would not be operative until certain conditions are met. For starters, the program must qualify for favorable federal income tax treatment and be exempt from the federal Employee Retirement Income Security Act of 1974 (ERISA).
A Mandate with No Penalty?
One open question about the bill is that it appears to establish a mandate without a penalty. That is, Maryland employers are required to either sponsor their own retirement plan or automatically enroll their employees in the program. The bill is less than clear, however, about the consequences for nonparticipation by an employer that is otherwise required to participate in the program. At the very least, a nonparticipating employer would not be entitled to a waiver of the annual filing fee. Otherwise, the bill has no specific penalty to enforce mandatory participation by employers. The lack of a penalty might become a point of contention because one of the conditions for exemption from ERISA is that employers’ participation in the program must be required by state law.
Nevertheless, there is confidence that the bill will pass both chambers of the Maryland legislature, albeit with possible amendments, and Governor Hogan has not expressed an intention to veto the bill. So it will be worth watching to see if Maryland joins the handful of states experimenting with auto-IRA programs to address the lack of retirement plan coverage of private-sector employees.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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