The State of Connecticut has announced that in January 2019 it will begin requiring private-sector employers without their own workplace-based retirement plans to enroll employees in Individual Retirement Arrangements (IRAs) sponsored by the state. The requirement stems from legislation enacted in 2016 that is intended to help employees save for retirement.
The 2016 legislation established the Connecticut Retirement Security Authority (CRSA) to oversee a state-run IRA program for private-sector employees.1 The program was initially intended to take effect in January 2018, but the CRSA determined that was not administratively feasible. Scott D. Jackson, Commissioner of the Connecticut Department of Revenue Services and chairman of the CRSA, recently announced that beginning in January 2019 the program will be implemented in phases modeled on the way Oregon phased in its state-run IRA program called OregonSaves. Oregon is phasing in the program over three years, starting with the state's largest employers. Connecticut has not yet specified the details of how its phase-in will be structured.
What Does Connecticut's IRA Program Require?
Under the Connecticut statute, eligible employees who do not receive pensions or have 401(k) plans from their employers will be automatically enrolled in the state IRA plan. The program applies to employers that, on October first of the preceding calendar year, employed five or more individuals in the state and paid each such individual at least $5,000 in taxable wages in the preceding calendar year.2
Within 30 days of hiring an eligible employee,3 an employer must provide the employee with informational materials regarding the state-run IRA program. Within 60 days after the employer provides this information to the employee, the employer must enroll the employee in the state-run IRA program at the participant's chosen contribution level. The employee may elect to make contributions up to the maximum allowed by federal law. Absent an election, the contribution level will be 3% of the participant's taxable wages. A covered employee may opt out of the program by electing a contribution level of zero.
Contributions deducted from employees' wages must be remitted to the CRSA for investment in a Roth IRA account that the CRSA will maintain for the employee. The CRSA will be required to invest each participant's account in an age-appropriate target date fund with the vendor selected by the participant, or in an age-appropriate target date fund that most closely matches the participant's normal retirement age, if the participant does not select a specific vendor.
Employers that maintain workplace-based retirement plans permitted under the Internal Revenue Code will be exempt from Connecticut's mandatory IRA program. Exempt employers will have no obligation to provide their employees with informational materials regarding the state-run IRA program or enroll employees in the program.
The Connecticut IRA accounts will be funded only with contributions deducted from participating employees. Employers will not be required to match employee contributions and, in fact, will be prohibited from making any contributions to the program on behalf of employees. A private employer with four or fewer employees may, however, voluntarily make the state program available to its employees.
What are the Penalties for Noncompliance?
If a qualified employer fails to enroll an eligible employee, the employee, or the Labor Commissioner acting on behalf of the employee, may bring a civil action to require the employer to enroll the employee and to pay litigation costs and reasonable attorneys' fees. If a qualified employer fails to remit contributions to the program in the time period specified in the statute (not later than the tenth business day after the contribution was withheld), such failure will be deemed an unlawful withholding of wages that may subject the employer to civil and possibly criminal penalties.
The impact of the Employee Retirement Income Security Act (ERISA) requirements on Connecticut's state-run IRA program is unclear. The United States Department of Labor finalized a "safe harbor" rule in 2016 outlining conditions under which state mandatory IRAs would not be subject to ERISA requirements.4 Congress, however, repealed the safe harbor rule in 2017. While state-run mandatory IRA programs, like regular IRAs, arguably should not be subject to ERISA because even with auto-enrollment employee participation is voluntary, possible ERISA preemption has not yet been ruled on by the courts.
To help ensure compliance with the law, employers should consider the following steps once the program is implemented:
- Provide the required information regarding the state-run IRA program to each eligible employee in a timely manner and document that this has been done;
- Deduct and remit employee contributions properly and in a timely manner; and
- Make clear that the employer does not endorse or recommend any of the vendors provided as options in the state program.
1 Connecticut General Statutes § 31-410, et seq.
2 The statute excludes employers that were not in existence at all times during the current calendar year and the preceding calendar year.
3 An eligible employee is defined as an individual who (a) has been employed by a qualified employer for a period of not less than 120 days; (b) who is at least 19 years old; (c) who performs services within the state for purposes of Connecticut General Statutes § 31-222; and (d) is not exempt from "employment" as established in § 31-222(a)(5).
4 See 29 CFR § 2509.99-1 and 29 CFR § 2510.3-2(d).