May 25, 2017

Will repeal of federal safe harbors be the death knell of Illinois’ Secure Choice Savings Program?

On May 17, 2017, President Trump signed legislation removing protections for state-run private sector retirement plans and IRAs.

Such action repealed an August 2016 Department of Labor (DOL) regulation that exempted from the Employee Retirement Income Security Act (ERISA) state-administered IRAs that cover private sector employees.

Opponents of the safe harbor regulation argued that exempting these state-run “plans” from ERISA, and the plan participant protections that ERISA provides, was not in the best interest of plan participants. Many feared that if the safe harbor regulation had been enforced, employers who currently sponsor qualified plans or were considering adopting a qualified plan might be tempted to terminate or forego such plans, and, instead offer the state-run IRAs. By doing so, the employer sponsors would no longer be subject to the rules and fiduciary liabilities imposed by ERISA. Finally, such safe harbors were viewed as being contrary to the DOL’s fiduciary rule that is effective June 9, 2017.

In contrast, supporters of reinstating the safe harbor exemption argue that such safe harbors are needed to provide retirement income to the millions of Americans who otherwise will rely solely on Social Security benefits. Supporters believe that such safe harbors are needed to protect employers in the states which have established or will be establishing state-run plans. Illinois is one such state.

The Illinois Secure Choice Savings Program Act (Secure Choice), scheduled to become effective in 2018, applies to Illinois businesses which:

  • have been in business for at least two (2) years;
  • employ at least twenty-five (25) employees; and
  • do not currently provide a qualified retirement plan.

Secure Choice requires such employers to automatically enroll their employees in a state-administered Roth IRA and to withhold three percent from the pay of any employee who fails to make an election. Unless otherwise invested by the employee, the withheld wages will be invested in a default target-date fund. The primary launch of Secure Choice is planned to take place in 2018 and will be administered by the Illinois State Treasurer’s office.

Despite the repeal of these safe harbor protections for employers, Illinois’ Treasurer Michael Frerichs issued a statement on May 3, 2017, that “the Illinois Secure Choice Program will go forward.”

So, if you have been in business in Illinois for at least two years, employ at least 25 individuals, and do not have a qualified plan, now is the time to learn more about Secure Choice.

Or, if you wish to avoid having to participate in a Secure Choice IRA, contact the tax and employee benefits attorneys at Chuhak & Tecson to learn about adopting a qualified plan. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Patricia Cadagin O'Brien, Principal

This alert originally appeared in the May 2017 Employment Focus newsletter.