Legislation has been introduced in the Bay State that would expand the Commonwealth’s auto-IRA program for private sector workers and establish a 401(k) parallel, with an employer mandate.
The first bill, SD 1902, introduced by state senator Patricia D. Jehlen, establishes the Massachusetts Secure Choice IRA savings program and extends the offering of the MA CORE Plan to all employers in the Commonwealth, whereas this was previously only available to non-profits.
The second bill, SD 1858, introduced by state senator Sal N. DiDomenico, seeks to establishes the IRAP Secure Choice Individual Retirement Account Program. But it also would establish the MERP Secure Choice Multiple Retirement Plan – an ERISA qualified MEP. Similar legislation was introduced by Sen. DiDomenico in a previous Congress (2017).
SD 1902 calls for workers to be automatically defaulted into the program at 6% of pay, though they may opt out or change that rate at their choice, subject to IRA contribution dollar limits. The bill authorizes the board of the program to change the default rate at its discretion, as well as the opportunity to implement annual increases in each participant’s contribution rate, “by not more than 1% of salary or wages per year up to a maximum of 10%.” No employer contributions are required (or permitted).
The proposal calls for keeping the total fees and expenses of the program “as low as practicable and in any event each year not in excess of 0.75 of one percent (75 basis points) of the total assets of the Program,” though this limit does not apply for the start-up period of three years beginning with the initial implementation of the program.
The proposal calls for the establishment of rules and procedures governing distributions, “with the objectives of maximizing financial security in retirement, helping to protect spousal rights, and assisting Participants with the challenges of decumulation of savings,” and grants the board authority, “in its discretion, to provide for one or more reasonably priced distribution options to provide a source of fixed retirement income, including income for life or for the Participant’s life expectancy…”. The bill also calls for the establishment of rules and procedures “promoting portability of benefits” including the ability to roll program balances to other IRAs or tax-qualified plans, “…provided any roll-over is initiated by participants and not solicited by agents or brokers.”
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The mandate excludes employers that offer a qualified retirement plan, including 401(k), 403(b), SEP or SIMPLE IRA – or an automatic payroll deduction IRA – at any time within the current or two preceding calendar years. The proposal calls for the program to be administered by a nine-member board, with the state treasurer or their designee serving as chair, and the other members appointed by the governor, the Speaker of the House, and the President of the Senate.
Employer penalties for those subject to the mandate that have not established the program include $250 for each covered worker per year (or portion of year) they were not enrolled,
Furthermore, the bill says that any covered employee or “appropriate official of the State may bring a civil action” to require the enrollment of the worker, and “shall recover such costs and reasonable attorney’s fees as may be allowed by the court.” Additionally, for each calendar year beginning after the date on which a penalty has been assessed, there is a fine of $500 for any portion of that calendar year during which the Covered Employee continues to be unenrolled without electing out of participation in the Program. Those penalties are waived in circumstances where the employer did not know that the compliance failure existed, and who exercised “reasonable diligence” to meet the requirements.
The bill calls for establishing the program such that individuals can begin contributing no later than Jan. 1, 2022.
Described as “an Act relative to secure choice retirement savings plan,” under the legislation an eligible employer is exempted from the program’s mandate “to the extent that it offers each of its eligible employees the opportunity to participate in a qualified plan or a payroll deduction IRA.”
Significantly, under this bill the Commonwealth would apply eligibility rules significantly below the current standard of both ERISA and federal tax code of 1,000 hours to 750 hours – potentially wreaking havoc for current ERISA plans (who might then have workers covered by ERISA, but not the state standard) – and – designed to be an ERISA qualified plan – triggering concerns about ERISA preemption.
Specifically, it extends eligibility for workers generally to anyone who “for any calendar year has provided (or is expected to provide) 750 or more hours of service to the eligible employer, with eligibility continuing even if service in later years is less than 750 hours,” though they would have to be 18 before the beginning of the calendar year.
As for the mandate, the terms of the program are vague – calling for a default automatic contribution rate “for both employers and employees” and a “default escalation of contribution levels,” but without specifying the rates or scale of either.
It is paired with a multiple employer plan (MEP) called “MERP,” which is designed to be qualified under 401(a) as a defined contribution profit-sharing plan, governed by ERISA, “permitting the voluntary participation of employers with employees working in the Commonwealth,” and would allow for employee 401(k) contributions through payroll deduction, as well as employer contributions.
Similarly, the investment of funds with the MEP is outlined only as being “professionally managed” in pooled accounts that could be managed via private sector partnerships, the State Treasurer, or in whole or part under contract with the PRIM Board or private money managers – or both. It would be overseen by a board of seven, which would have the authority to establish “one or more” payroll savings arrangements, employ staff and/or appoint a recordkeeper, investment managers, custodians, trustees, attorneys, etc., and have the authority to make rules and regulations regarding the program – including setting the default rates and escalation mentioned, but not detailed earlier.
As with SD 1902, penalties will be assessed for noncompliance by employers – specifically up to $250 per eligible employee. However, participating employers won’t be considered a fiduciary with regard to the operation of the MERP, “except with respect to contribution amounts not remitted in a timely fashion.”
With an effective date of Jan. 1, 2020, the legislation contemplates imposition of the mandate three months after the program is opened, though the board is allowed to delay those dates in its discretion.
It’s far from certain at this point that either bill will move forward – but these go beyond the state-run IRA design and create mandates for state-run 401(k)s/MEP options that could pose a threat to private sector options.