The New Law
The Maryland Small Business Retirement Savings Program (the “Program”) was created on July 1, 2016, with the laudable goal of expanding workers’ access to tax-advantaged retirement savings programs. The Program promises to be the most significant expansion of retirement savings arrangements in decades, but as noted below, there are a number of issues that must be resolved before the Program can become operational.
The name and scope of the Program are a bit of a misnomer. Although the Program bears the State’s name, it is not a savings plan for the employees of state and local governments. Instead, its target participants are the employees of the many businesses and non-profit organizations in the state that do not provide retirement savings plans. The Program’s name also suggests that it would apply only to the many “small businesses” in the state, but its reach is in fact much greater than that. The Program is a state-mandated retirement savings program for all of the workers of non-governmental employers. Employers who do business in Maryland will be required either to offer a retirement savings arrangement to their employees in Maryland (such as a 401(k) plan) or to make arrangements to withhold an amount or percentage of their employees’ wages and deposit the withholdings in an individual retirement account (“IRA”) for the employee. Employers who comply with the new law will be eligible for a new exemption from the state’s $300 annual filing fee for corporations and business entities.
The Program is administered by the newly created Maryland Small Business Retirement Savings Board, which held its first meeting on November 17, 2016. The Board consists of eleven members: the State Treasurer (or designee), the Secretary of Labor, Licensing and Regulation (or designee), three individuals appointed by the Governor, three individuals appointed by the President of the Senate, and three individuals appointed by the Speaker of the House of Delegates. The Board is charged with establishing the substantive rules that will govern the Program’s operation, including the investment policy for amounts deposited in workers’ IRAs and the Program’s risk management and oversight programs. One of the Board’s first responsibilities is to determine whether the Program will be self-sustaining, qualifies for favorable federal tax treatment, and is not considered an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA). Once those determinations are made, the Program is to become effective.
The Need for the New Law
Small employers significantly outnumber large employers, but fewer of them offer payroll-based retirement savings plans for their workers. According to a report from the Georgetown University Center for Retirement Initiatives,1 approximately 23 percent of people who work for employers with less than ten employees are covered by a payroll-based retirement savings plan. By way of comparison, almost 74 percent of people who work for employers with more than 1,000 employees are covered.
Maryland’s small employers play a significant role in the state’s economy. Firms with 20 or fewer employees account for almost 68 percent of the state’s employers and employ about 17 percent of the state’s non-governmental workers.2 As a result, many workers in small businesses lack a tax-advantaged, payroll-based means of saving for retirement. This is not a new issue. The low rate of retirement plan coverage for workers of small employers has been a chronic issue even after the passage of ERISA in 1974. By moving forward with its Program, Maryland joins an increasing number of states that are trying to do something about the low coverage rates. Other states that have passed similar laws include California, Connecticut, Illinois, Massachusetts, New Jersey, Oregon and Washington. A number of additional states and large cities are continuing to evaluate their own ideas.
The Details of the New Law
The Program broadly covers all employers that pay Covered Employees “through a payroll system or service.”3 This includes both for-profits and not for-profits. There are only two types of employers that may qualify for an exemption from participation:
The Program does not apply to governmental entities (federal, state, county, and municipal).
The Program broadly covers all employees in the state except for employees who are (1) covered under the federal Railway Labor Act, (2) covered by a “Qualifying Retirement Plan,” (3) covered under a collective bargaining agreement that provides for participation in a multi-employer retirement plan described in 26 U.S.C. 414(f), (4) under the age of eighteen at the beginning of the year, or (5) not subject to the legislative powers of the state government.
Most of the substantive rules that will govern the Program are not found in the new law; rather, they are to be established by the Board. Some of the Board’s more significant powers and responsibilities are as follows:4
Although employees may opt-out of participation in the Program, the default rule under the Program is for mandatory participation as of the employee’s date of hire. The law does not set a mandatory contribution rate, but the Board is supposed is to set the contribution rate as well as establish the investments options, including the default investment(s).
Employers that participate in the Program, or otherwise offer a retirement savings arrangement to their employees, are exempt from the state’s $300 annual filing fee for corporations and business entities after the program becomes operational.
Employers who do business in Maryland no doubt will want assurances that compliance with the new law and resulting participation in the Program will not open them up to any new or increased liabilities, such as the fiduciary duties under the ERISA. Accordingly, the new law provides the following reassuring language for employers:
Compliance with this Title and participation in the Program by itself does not create a fiduciary obligation of an employer with respect to the operation of the Program or funds contributed to the Program.5
The new law also goes even further by effectively charging the Board and the Program Administrator with important duties that otherwise would apply to an ERISA fiduciary:
The Board, the Program Administrator, and staff shall discharge the duties with respect to the Trust solely in the interest of the Program participants as follows: (1) for the exclusive purposes of providing benefits to Program Participants and defraying reasonable expenses of administering the Program; and (2) by selecting investment options or programs that will invest with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with those matters would use in the conduct of an enterprise of a like character and with like aims.6
U.S. Department of Labor Regulations
The details of the new law show that the Maryland legislature followed the blueprint from the U.S. Department of Labor (DOL) for “designing and operating payroll deduction savings programs, using automatic enrollment, for private-sector employees without causing the states or private sector employers to establish employee pension benefit plans under [ERISA].7
The DOL’s blueprint for IRAs is set forth under two final rules issued in August and December of 2016, the first of which provides a safe harbor exemption from ERISA to state IRA plans, and the second of which provides a similar safe harbor to IRA plans run by political subdivisions such as cities and counties.
On February 15, 2017, the U.S. House of Representatives passed resolutions to block the DOL’s final rules for government-run IRAs. These resolutions were passed in accordance with the Congressional Review Act (CRA), which allows Congress to overturn a rule finalized by a federal agency. On March 30, 2017, the resolutions passed in the Senate without amendment. While the resolutions passed easily in the House by a 43-vote margin, they were approved in the Senate by only a single vote margin.
Congressional resolutions under the CRA must either be signed by the President, or must be passed over the President's veto by two-thirds of both Houses of Congress. On April 13, 2017, the President signed the resolutions into law.8
The resolutions are supported by many large employers that already sponsor retirement plans subject to ERISA. Some of these employers could be required to amend their plans in order to secure exemptions from state and/or local mandates.
Other critics of the DOL’s final rules argue that the availability of government-run IRAs could deter smaller employers from sponsoring their own 401(k) plans (or similar retirement vehicles). They point to the fact that contribution limits under such IRAs are lower than the limits under ERISA-covered 401(k) plans. Coupled with the fact that employers cannot contribute to such IRAs, they assert that a growth of government-run IRAs will result in fewer workers covered under employer-sponsored plans with better features.
However, even in the absence of an ERISA safe harbor, Maryland may move forward with its Program. Joshua Gotbaum, the chairman of the Program, has stated that the DOL’s safe harbor merely articulates what is already permitted under ERISA’s exemptions for government-sponsored plans and for private sector arrangements under which employers perform no administrative functions other than allowing payroll deductions.
If Maryland moves forward with its Program, Congress’s invocation of the CRA to block the DOL’s safe harbor will complicate the Board’s mandate “to ensure that the Program is not preempted by federal law and that it does not lead to the creation of employee benefit plans that are covered under ERISA.”
Once implemented, the Maryland Small Business Retirement Savings Program promises to be a significant expansion of retirement savings arrangements. However, there are still a great number of additional details and rules that must be written before the Program becomes operational. The President's recent signing of Congress's resolutions under the CRA to block the DOL’s safe harbor will further complicate – and will likely delay – the implementation of the Program.
John R. Paliga and Chase A. Tweel
This article was updated as of April 21, 2017.
2 U.S. Census Bureau (2016), 2014 Statistics of U.S. Businesses, “Data by Enterprise Employment Size: U.S. & States.” http://www.census.gov/data/tables/2014/econ/susb/2014-susb-annual.html.
3 “Covered Employer means a person engaged in a business, an industry, a profession, a trade, or any other enterprise in the State, whether for profit or not for profit.” Annotated Code of Maryland, Labor and Employment Article, Section 12-101(D).
4 Annotated Code of Maryland, Labor and Employment Article, Section 12-204.
5 Annotated Code of Maryland, Labor and Employment Article, Section 12-402(D).
6 Annotated Code of Maryland, Labor and Employment Article, Section 12-203; compare 29 U.S.C. § 1104(a).
7 See U.S. Department of Labor, Savings Arrangements Established by State Political Subdivisions for Non-Governmental Employees 81 FR 59581 (August 30, 2016).
8 Public Law No: 115-24.