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August 4, 2020
State-Administered IRA Programs: Overview and
Considerations for Congress
Overview of State-Administered
enrolled in a state program but can opt out at any time.
Retirement Plans
Because of the automatic enrollment feature, these plans are
While Congress addresses retirement security at the
sometimes referred to as automatic, or auto, IRAs. As of
national level and establishes federal pension law and
July 2020, six states have enacted auto IRA programs
savings incentives, several states have enacted or
(Maryland, Colorado, Connecticut, New Jersey, New
implemented state-administered retirement savings
Mexico, and New York), and three states have implemented
programs to increase retirement plan access and savings
auto IRAs (California, Oregon, and Illinois). Employer
among private-sector workers. Because retirement plans,
participation in New Mexico and New York is optional (see
such as 401(k)s or defined benefit plans, are optional for
Table 1). One city—Seattle, WA—has also enacted an auto
employers to adopt, some workers may not have access to
IRA program.
employment-based retirement benefits. In March 2019,
33% of private-sector workers did not have access to a
State-Administered Automatic IRAs
workplace retirement plan. State-administered retirement
State-administered auto IRA programs share many features.
programs are intended to provide savings options for
A state retirement board oversees each program and is
workers whose employer does not offer a workplace plan.
responsible for making program decisions, such as
contracting with an IRA provider. Some programs are
States are taking a variety of approaches to these programs,
optional for employers to adopt; other programs are
including the following: retirement marketplaces, in which
mandatory for nonexempt employers. Generally, exempt
employers and individuals can purchase a savings plan
employers (1) are under a certain size or (2) already offer
through different state-approved providers; multiple-
an employer-sponsored pension plan. The programs in
employer plans, in which unrelated businesses may jointly
place also allow self-employed workers and those who do
sponsor a 401(k) plan; and payroll deduction Individual
not work for a participating employer to self-enroll.
Retirement Accounts (IRAs), in which employers deduct a
portion of pay from an employee’s paycheck and deposit it
Among the programs in place as of July 2020, the default
into the employee’s own IRA (a tax-advantaged retirement
accounts are Roth IRAs. Contributions to Roth IRAs are
savings account regulated at the federal level). This In
made with after-tax income, and withdrawals in retirement
Focus describes the most common state-administered
are generally tax-free. The programs also offer a traditional
program—the payroll deduction IRA.
IRA option. Contributions to traditional IRAs may be tax
deductible for individuals who do not have access to an
Table 1. State- and City-Administered Retirement
employer-sponsored retirement plan. Because individuals
Savings Program Approaches
with income over a certain threshold cannot contribute to
(enacted programs as of July 2020)
Roth IRAs (e.g., a single filer with income of $139,000 or
higher in 2020), some employees may have to opt out or
Program Approach
States
choose the traditional IRA option.
Retirement Marketplace
NM, WA
State-administered IRA programs are subject to federal IRA
Multiple-Employer Plan
MA, VT
contribution limits, which in 2020 generally are $6,000
($7,000 for individuals aged 50 and over). The programs in
Payrol Deduction IRA
CA, CO,a CT, IL, MD, NJ, NM,a
place do not allow for employer contributions. They each
NY,a OR, WA (Seattle only)
have a 5% default contribution rate, which means that 5%
Source: Congressional Research Service (CRS).
of an employee’s pay is deducted when an employee is
Notes: New Mexico (NM) enacted a combination of approaches.
automatically enrolled but does not choose a contribution
rate. The state-administered programs in place also have an
a. New Mexico and New York have payroll deduction Individual
auto-escalation feature, which is a gradual increase in the
Retirement Account (IRA) programs that are optional for
worker’s contribution rate over a specified number of years.
employers to adopt; other states’ programs are mandatory for
Contributions from individuals with income under certain
employers. Both program types al ow employees to opt out
thresholds may be eligible for the federal Retirement
once enrol ed. Colorado program details are not yet available.
Savings Contribution Credit.
In some state programs, employer participation is
Employees can withdraw original contributions from Roth
mandatory (with some exceptions). In other state programs,
IRAs at any point. Any earnings withdrawn prior to age
employer participation is voluntary. Typically, eligible
59½ from accounts that are not at least five years old are
employees of participating employers are automatically
included in taxable income and generally subject to a 10%
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State-Administered IRA Programs: Overview and Considerations for Congress
penalty. Employees who change employers or move out of
safe harbors for savings arrangements established by
state can keep the same IRA or transfer savings to a
qualified state political subdivisions and by states (P.L.
different IRA.
115-24 and P.L. 115-35, respectively). Senator Mitch
McConnell contended that state-administered auto IRA
State-Administered IRA Programs and
programs would free states and cities from federal
ERISA
consumer protections and would create a competitive
Whether federal pension law applies to state-administered
advantage for the programs compared to private-sector
IRAs is subject to debate. Congress passed the Employee
plans. Following Congress’s actions under the CRA, the
Retirement Income Security Act of 1974 (ERISA; P.L. 93-
issue of ERISA preemption remains uncertain. Despite this
406) to protect the benefits of participants in private-sector
uncertainty, some states have indicated that they are
pension plans. Among other things, ERISA sets standards
continuing with program implementation. Congressional
for participation and fiduciary duties and outlines reporting
action could resolve the uncertainty legislatively.
requirements for these plans. Private-sector employers that
establish or maintain plans that fall within ERISA’s scope
Considerations for Congress
must comply with these requirements. In mandating
The goal of state-administered auto IRA programs is to
private-sector employers to participate in payroll deduction
increase retirement savings for individuals without access
savings programs, some stakeholders question whether
to employer plans. Although all individuals with wage
states are unintentionally compelling employers to establish
income can establish and contribute to an IRA on their own,
ERISA plans, subject to the act’s comprehensive
many do not. Advocates for the state-administered
requirements.
programs cite research that employees are more likely to
save for retirement if they are offered a plan through their
If state-administered IRA programs are considered ERISA
workplace. If these programs were to increase individuals’
plans, this may create challenges for the programs. The
savings above what they would have otherwise saved given
issue is one of federal preemption. Section 514 of ERISA
the lack of access to an employer plan, states and the
broadly preempts “any and all” state laws that “relate to”
federal government could see reductions in demand for
ERISA-covered employee benefit plans. Accordingly, if a
social services when workers retire.
state-administered IRA program establishes an ERISA plan
(or the state program is an ERISA plan itself), it is possible
Some stakeholders have expressed concern that state-
that state laws underlying the program may be superseded
administered auto IRA programs may replace existing
by ERISA and judicially invalidated. A legal challenge to
employer-sponsored plans. State-administered payroll
California’s IRA program on such grounds is currently
deduction plans differ from employer-sponsored defined
pending before the U.S. Court of Appeals for the Ninth
contribution plans, such as 401(k) plans, in multiple ways.
Circuit (Howard Jarvis Taxpayers Assoc. v. Cal. Secure
For example, IRA contribution limits are lower than those
Choice Ret. Sav. Program, No. 20-15591 (9th Cir. 2020)).
for 401(k) plans, and IRAs generally lack employer
contributions. In 2020, the annual IRA contribution limit is
The Department of Labor (DOL) has issued regulations
$6,000; the 401(k) plan limit is $17,500 (and the combined
addressing ERISA’s relationship to private-sector payroll
employer and employee 401(k) contribution limit is
deduction IRAs. A 1975 regulation (29 C.F.R. §2510.3-
$57,000). Compared with participants in a 401(k) plan,
2(d)) outlined four conditions for a payroll deduction IRA
those enrolled in a payroll deduction IRA may not
to not be considered an ERISA plan: (1) the employer
accumulate savings at the same rate. Stakeholders have also
makes no contributions, (2) employee participation is
expressed concern that state-administered plans lack
completely voluntary, (3) the employer does not endorse
adequate measures to protect participants’ benefits (e.g.,
the program and merely facilitates it, and (4) the employer
whether deposits would be made in a timely manner, fees
receives no consideration except for its own expenses. In
would be reasonable, investment choices prudent, and
August 2016, DOL issued a safe harbor regulation that
decisionmakers held to a standard high enough). Existing
established criteria for designing state-administered payroll
state law or provisions in authorizing state legislation might
deduction IRAs “as to reduce the risk of ERISA
alleviate some of these concerns. In addition, employers
preemption” (29 C.F.R. §2510.3-2(h) (2016)). Under this
that operate in multiple states could be required to
regulation, state programs were required to be
participate in several programs, which could be
(1) authorized in state law and (2) administered by the state
administratively challenging. For example, employers
that established the program. The regulations specified that
might have to monitor employee eligibility for different
employer participation must be required by state law and
state programs based on residence or office location.
limited the employer role to activities such as collecting
payroll deductions and distributing program information. In
Further Information
December 2016, DOL issued another rule that expanded the
CRS Report RL34397, Traditional and Roth Individual
applicability of the safe harbor to qualified state political
Retirement Accounts (IRAs): A Primer.
subdivisions, which applied to cities that established payroll
deduction IRA programs.
“Proceedings and Debates of the 115th Congress, First
Session,” Congressional Record, vol. 163, part 55 (March
In April 2017 and May 2017, Congress used the procedures
29, 2017), p. S2055.
in the Congressional Review Act (CRA, enacted as part of
the Small Business Regulatory Enforcement Fairness Act of
Elizabeth A. Myers, Analyst in Income Security
1996; P.L. 104-121) to nullify DOL’s regulations creating
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State-Administered IRA Programs: Overview and Considerations for Congress
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