On Aug. 25, 2016, the U.S. Department of Labor’s Employee Benefits Security Administration announced its final rule on state-run retirement plans—specifically, payroll deduction IRA accounts.

The final rule provides guidance for states in designing programs by providing a safe harbor from coverage under the federal Employee Retirement Income Security Act to reduce the risk of ERISA preemption of the relevant state laws.

In particular, the new federal rule exempts state-run retirement plans from ERISA consumer protection provisions prohibiting states from restricting state-plan participants from withdrawing money from their IRAs—or moving their money into private-sector retirement plans.

In other words, under the rule, states can choose to limit what plan participants can do with the money in their retirement plans, the idea being that withdrawing money for short-term purposes runs counter to the government’s goal of ensuring that workers provide for their long-term financial welfare.

The new rule also stipulates that workers’ participation in a state-run plan must be voluntary, thus giving them the ability to opt out of automatic enrollment arrangements.

Connecticut’s Mandate

Connecticut passed its own retirement plan mandate last spring, which already provides the opportunity for workers to opt out of auto-enrollment.

Although nothing in Connecticut’s law suggests that the state will restrict employees’ ability to withdraw money from their retirement accounts, the plan is still in its design phase and could, in its final form, contain such restrictions.

Under the rule, states can limit what participants do with the money in their retirement plans.
In addition, one would assume that a withdrawal and failure to roll over the money to a similar retirement account in a timely manner will have financial penalties or tax consequences similar to those applicable to IRA or 401(k) plans under current IRS regulations.

Connecticut is joined by seven other states—California,  Illinois, Maryland, New Jersey, Oregon, Massachusetts, and Washington—that have already passed laws creating their own retirement savings arrangements.

Most of those laws require employers that do not offer workplace savings arrangements to automatically enroll their employees in payroll deduction IRAs administered by the states, while other state laws—including Connecticut’s—create a marketplace of retirement savings options geared toward employers that do not offer workplace plans.

Connecticut’s program applies to businesses with five or more employees and requires employers to automatically enroll any employee not eligible for an employer-sponsored retirement plan into an approved IRA plan.

The proposal originally called for a single retirement plan administered by the state, but as a condition of passage, the governor and Democratic leadership agreed that the language of the bill be modified to provide multiple private-sector retirement plan options.

New Quasi-Public Authority

State lawmakers are now in the process of naming appointees to the Connecticut Retirement Security Authority by Jan. 1, 2017.

CRSA is the quasi-public authority responsible for designing and implementing the retirement plan mandate.

The group is charged with creating a retirement plan exchange and approving plans to be included in it, hiring vendors needed to establish the program, and creating informational materials employers will be required to distribute.

CRSA also will determine the penalties that will be imposed on businesses for failing to comply with the new mandate.

CBIA is monitoring all CRSA meetings.

Mandate Underscores Importance of Election

The business community strongly opposed this program during the 2016 legislative session because of the number of new administrative tasks and obligations it would impose on businesses.

The mandate should serve as a powerful reminder of the importance of voting for pro-business, pro-growth candidates on November 8.
In addition, the mandate likely will have a negative impact on many local banks and insurance brokers once the state enters the retirement market.

The legislation calls for employers to begin enrolling employees into the exchange by January 1, 2018.

The retirement mandate’s passage should serve as a powerful reminder of the importance of voting for pro-business, pro-growth candidates on November 8.

Do you know whether your state senator and representative voted for or against the mandate?

See how your senator and representative voted on business-critical bills, including the retirement mandate, over the last two years, and decide if they would work to strengthen Connecticut’s economy and business climate.


For more information, contact CBIA’s Eric Gjede (860.244.1931) | @egjede