United States: Mandated IRA Opportunity For Employees In Illinois

Illinois has jumped ahead in the movement to increase employee retirement savings. The Illinois Secure Choice Savings Program Act, Public Law 098-1150, signed by outgoing governor Patrick Quinn on January 4, 2015, applies to employers with more than 25 employees in Illinois that do not already maintain a qualified retirement plan. It requires those employers to automatically enroll employees for payroll deduction contributions of three percent of pay to a state-sponsored Roth IRA program, unless the employee opts out or opts for a different contribution percentage. It does not require any contributions from the employers.

IRAs under the program will be individual accounts in a Secure Choice Savings Program Fund established by the act. The program will offer a life-cycle target date fund, and may add a conservative principal protection fund, a growth fund, an annuity fund or a "secure return" fund. The fund and the program in general will be administered by a seven-member Illinois Secure Choice Savings Board of the state's elected treasurer and comptroller, as well as five others selected by the governor. Day-to-day administration is to be generally handled by the Illinois Department of Revenue.

But none of this will happen immediately. The act contemplates a 24-month (and possibly longer) startup period for the board to actually design the program and make it effective. Once it is effective, employers are given a further nine months to actually enroll their employees before facing penalties.

People in the retirement benefit community have long been dismayed by the low rate of retirement savings. This is particularly true of lower-income employees, who are less likely than their wealthier counterparts to be covered by a benefit plan, or to contribute to a plan (such as a 401(k) plan) when their employer gives them the opportunity. Various forms of mandatory IRA coverage have been promoted as a solution to this, both within particular states and at the national level through the "myRA" proposal. Illinois has now taken concrete action toward this goal through enacted legislation.

Impact on Employers

The mandate applies to employers who

1. are engaged in a business, industry, trade, profession or other enterprise in Illinois;
2. at no time during the previous calendar year had fewer than 25 employees in Illinois;
3. have been in business for at least two years; and
4. have not offered a qualified plan in the preceding two years. An employer excluded from the mandate because it has fewer than 25 employees or has been in business less than two years can nevertheless elect to let its employees participate in the program.

For this purpose, a qualified plan includes a pension or profit-sharing plan qualified under Section 401(a) of the Internal Revenue Code, a 401(k) plan, an annuity plan qualified under Section 403(a) or 403(b), a SEP IRA or SIMPLE IRA arrangement under Section 408(k) or 408(p), and an eligible deferred compensation plan under Section 457(b).

The status of some other arrangements is less clear. For instance, an employer may offer an automatic enrollment payroll deduction for IRAs that is neither a SEP nor a SIMPLE plan. The act stipulates that an employer "shall retain the option at all times" to set up such an arrangement instead of having a payroll deposit arrangement for employee participation in the program. But the statutory language does not literally take that employer out of the mandate.

The statute does not require that employees actually be covered by the qualified plan for the employer to be exempt from the program mandate. Therefore, a qualified plan that covers fewer than all employees, or that has a significant waiting period for new employees, should still suffice to keep the employer and all its employees out of the program's mandate.

The statute makes a valiant attempt to minimize the duties and responsibilities of employers. Most significantly, employers do not contribute to the program. The duties of the employer are mainly to enroll employees (who have not opted out) and deposit their contributions through a payroll deposit retirement savings arrangement to be created by the board. Enrollment obligations include having an open enrollment period at least once every year during which employees who have previously opted out can opt back in. The board is to prepare an enrollment packet for employees, including opt-out and election forms, which the employer must distribute to existing employees when enrollment in the program is opened, and thereafter to new employees as they are hired. (The board is also to prepare an information packet for employers.)

The act sets the deadline for the deposit of contributions deposit as the end of the month after the month in which the money would otherwise have been paid to the employee. However, the board can establish a later date (not later than the date for deposit of withheld (state) income tax or unemployment insurance tax for the relevant payroll period). Employers may be required to report information relevant to their compliance with the program on their state tax returns.

The act immunizes participating employers from critical liabilities. It states that they are not liable for an employee's decision to participate in or opt out of the program, or for the investment decisions of the board or any enrollee (and employees will be told so in their enrollment package). It adds that participating employers are not fiduciaries over the program; bear no responsibility for the administration, investments or investment performance of the program; and are not liable with regard to investment returns, program design or benefits paid to program participants.

However, the act does not immunize participating employers from all liabilities. It provides a penalty of US$250 per employee per calendar year (or portion of a calendar year) during which an employee who should have been enrolled (that is, had not opted out) is not enrolled. Once that penalty has been assessed, it increases to US$500 per employee per calendar year (or portion thereof) if the employee remains unenrolled. The act also creates a procedure, including ultimate judicial review, for appeal of that penalty or denial of claims for refund of that penalty.

Those provisions do not address all potential employer liabilities. There are bound to be innocent (or at worst negligent) mistakes in reconciling the contribution deposit with the appropriate employees and their elections, particularly since employees can change their elected rate of contributions at any time. The amounts involved may be individually small, but still very significant for lower-income employees. Experience with 401(k) plans has demonstrated that retroactive correction of even small contribution or allocation errors and crediting lost earnings can be a time-consuming administrative hassle.

And there will undoubtedly be employers who make their deposits late and some who may not turn over the withheld funds at all. (Although the act carefully stipulates the deadline for deposits, it does not contain any particular penalties for failing to meet the deadline.) But egregious cases of failure to deposit funds withheld from employees' pay may lead to criminal penalties under generally applicable law.

Minimizing the role and responsibilities of employers under the act undoubtedly reduced the intensity of opposition that might otherwise have been expected from employers subject to the act's new mandate. It also serves to almost automatically satisfy the standards under the existing regulations for determining when employer involvement in an IRA arrangement does not create an plan subject to the US Employee Retirement Income Security Act of 1974 (ERISA).

The act requires the board to request an opinion from the US Department of Labor that the program is not subject to ERISA, and provides that the program will not be implemented if it is determined to be subject to ERISA. Just last month, the Department of Labor issued an informational letter to the effect that President Obama's myRA proposal did not create an ERISA plan. As currently contemplated, myRA will not have automatic enrollment, but is otherwise quite similar in its limited role for employers. So the required assurance that ERISA is not a factor should be forthcoming.

Administration and Funding

The program is to be run by a board composed of the state treasurer, the state comptroller, the director of the Governor's Office of Management and Budget (or their respective designees), two public representatives with expertise in retirement savings plan administration or investment, a representative of enrollees and a representative of participating employers. The last four of these are to be appointed by the governor, subject to the approval of the treasurer and the advice and consent of the Illinois Senate.

The act requires board members to take an oath to diligently and honestly administer the affairs of the board and not knowingly violate or permit the violation of any law applicable to the program. The law also specifically imposes fiduciary duties, in language similar but not identical to ERISA, requiring board members to act for the exclusive purpose of providing benefits and defraying expenses, and to invest with the care, skill, prudence and diligence of a prudent person. But the act is silent on who, if anyone, is responsible (or permitted) to enforce the act's standard of care.

It is the board that over the next two years will actually have to design and implement the program, and it has its work cut out for it. Among many other specific assignments, the act requires the board to explore and establish the investment options specified by the act; to engage investment managers after an open bid process; to contract with them, contract with financial service companies and with third-party administrators to actually receive and process the employee elections and payroll deposits; to establish the process for allocating interest and investment earnings and losses; and to review the performance of investment vendors and other parties.

The board serves as the trustee of the Illinois Secure Choice Savings Program Fund, which is created to hold the employee contributions in individual accounts for each enrolled employee. The accounts are intended to qualify as Roth IRAs. The act contemplates, though, that the board will appoint a trustee to the IRA fund so as to comply with IRA requirements of Section 408 and 408A of the Internal Revenue Code. (The board itself may not qualify as a permissible IRA trustee or custodian under the existing regulations under Section 408, which generally require a bank trustee.)

The act also establishes a trust called the Illinois Secure Choice Administrative Fund to cover startup expenses of the program. But how this fund is actually to be funded is obscure. The act provides that this fund may receive grants or other moneys designated for administrative purposes from the state, from the federal or any local government or from any other person. But it also makes clear that contributions from the state are subject to the regular appropriations process. If the board does not obtain adequate funds to implement the program within the 24-month startup period that the act calls for, the board may delay the implementation of the program.

After the startup period, the act calls for regular administrative expenses to be funded out of the earnings on the contributions under the program, with the stipulation that annual expenses may not exceed 0.75 percent of the total fund trust balance (a cap that may prove overly optimistic). Administrative fees are allocated to IRAs in the program on a pro rata basis.

The intended result of all this is that employees will be encouraged to contribute to low-cost Roth IRAs. A life-cycle target date fund will exist and be the default fund. However, the act permits the board to establish any or all of an additional conservative principal protection fund, growth fund, an annuity fund or a "secure return" fund. The secure return fund is intended to provide a stable and low-risk rate of return through an insurance, annuity or similar product. These funds will be managed by one or more professional outside managers. Employees can change their investment selection (and contribution rate) at any time.

Employees will receive an informational packet prepared by the board that will include a disclosure form explaining the benefits and risks of the program, as well as explaining how to make contributions, opt out, change their contribution percentage and withdraw their retirement savings. They will be told that if they want financial advice they should contact financial advisors, and that employers are neither in a position to provide financial advice nor liable for decisions employees make. They will also be advised that the program is not an employer-sponsored retirement plan, and that the program fund is not guaranteed by the state.

The act requires the board to facilitate education and outreach to employers and employees, but the act does not seem particularly concerned with providing investment education. Indeed, one of the goals of the program is to make retirement saving simple for employees by minimizing the choices they have to make.

The act requires the board to ensure that the accounts do qualify as IRAs and to obtain an appropriate ruling to that effect. The board may not implement the program if its IRA arrangements fail to qualify for the favorable federal income tax treatment ordinarily accorded to IRAs. Thus the usual IRA administrative requirements (such as for the IRA disclosure statement) should apply, and the usual tax rules for Roth IRAs should also apply to distributions.

While the act legislatively launches Illinois into an automatic IRA Program, it is sketchy on many details. These will be filled in during the 24-month startup period, and may well occasion further discussion and debate among available choices. The decisions over the next 24 months will ultimately determine the impact and success of the program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.