State-Administered IRA Programs: Overview and Considerations for Congress
Updated March 18, 2022
State-Administered IRA Programs: Overview and
Considerations for Congress
Overview
March 2022, seven states (Colorado, Maine, Maryland,
While Congress addresses retirement security at the
New Jersey, New Mexico, New York, and Virginia) and
national level and establishes federal pension and other
two cities (Seattle, WA; and New York City, NY) have
savings incentives, several states have enacted or
enacted auto IRA programs, and four states have
implemented state-administered retirement savings
implemented auto IRAs (California, Connecticut, Oregon,
programs to increase retirement plan access and savings
and Illinois). In November 2021, Colorado and New
among private-sector workers. Because retirement plans,
Mexico announced that their programs would form a
such as 401(k)s or defined benefit plans, are optional for
partnership.
employers to adopt, some workers may not have access to
employment-based retirement benefits. In March 2021,
State-Administered Automatic IRAs
32% of private-sector workers did not have access to a
State-administered auto IRA programs share many features.
workplace retirement plan. State-administered retirement
A state retirement board oversees each program and is
programs are intended to provide savings options for
responsible for making program decisions, such as
workers without a workplace plan.
contracting with an IRA provider. Some programs are
optional for employers to adopt; other programs are
States are taking a variety of approaches to these programs,
mandatory for nonexempt employers. Generally, exempt
including the following: retirement marketplaces, in which
employers (1) are under a certain size or (2) already offer
employers and individuals can purchase a savings plan
an employer-sponsored pension plan. Some programs also
through different state-approved providers; multiple-
allow self-employed workers and those who do not work
employer plans, in which unrelated businesses may jointly
for a participating employer to self-enroll.
sponsor a 401(k) plan; and payroll deduction Individual
Retirement Accounts (IRAs), in which employers deduct a
Among the programs in place as of March 2022, the default
portion of pay from an employee’s paycheck and deposit it
accounts are Roth IRAs. Contributions to Roth IRAs are
into the employee’s own IRA (a tax-advantaged retirement
made with after-tax income, and withdrawals in retirement
savings account regulated at the federal level). This In
are generally tax-free. Some programs also offer a
Focus describes the most common state-administered
traditional IRA option. Contributions to traditional IRAs
program—the payroll deduction IRA.
may be tax deductible for individuals who do not have
access to an employer-sponsored retirement plan. Because
Table 1. State- and City-Administered Retirement
individuals with income over a certain threshold cannot
Savings Program Approaches
contribute to Roth IRAs (e.g., a single filer with income of
(enacted programs as of March 2022)
$144,000 or higher in 2022), some employees may have to
opt out or choose the traditional IRA option.
Program Approach
States
State-administered IRA programs are subject to federal IRA
Retirement Marketplace
NM, WA
contribution limits, which in 2022 are $6,000 ($7,000 for
Multiple-Employer Plan
MA, VT
individuals aged 50 and over). The programs do not permit
employer contributions. They have default contribution
Payroll Deduction IRA
CA, CO, CT, IL, ME, MD, NJ, NM,
rates ranging from 3% to 5%. The default rate is the
NY (and New York City, NY), OR,
percentage of an employee’s pay that is deducted when an
VA, WA (Seattle only)
employee is automatically enrolled but does not choose a
Source: Congressional Research Service (CRS).
contribution rate. Several of the programs also have an
Notes: New Mexico (NM) enacted a combination of approaches. In
auto-escalation feature, which is a gradual increase in the
November 2021, New Mexico and Colorado signed an agreement to
worker’s contribution rate over a specified number of years.
operate a joint IRA program. New York State and New York City
have both enacted programs.
Employees can withdraw original contributions from Roth
IRAs at any point. Any earnings withdrawn prior to age
In some state programs, employer participation is
59½ from accounts that are not at least five years old are
mandatory (with some exceptions). In other programs,
included in taxable income and generally subject to a 10%
employer participation is voluntary. Typically, eligible
penalty. Employees who change employers or move out of
employees of participating employers are automatically
state can keep the same IRA or transfer savings to a
enrolled in a program but can opt out at any time. Because
different IRA.
of the automatic enrollment feature, these plans are
sometimes referred to as automatic, or auto, IRAs. As of
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State-Administered IRA Programs: Overview and Considerations for Congress
State IRA Programs and ERISA
Following Congress’s actions under the CRA, the issue of
Whether federal pension law applies to state-administered
ERISA preemption remains uncertain. While a legal
IRAs has been subject to debate. Congress passed the
challenge to California’s auto-IRA program on such
Employee Retirement Income Security Act of 1974
grounds (Howard Jarvis Taxpayers Assoc. v. Cal. Secure
(ERISA; P.L. 93-406) to protect the benefits of participants
Choice Ret. Sav. Program, No. 20-15591) was dismissed by
in private-sector pension plans. Among other things,
the U.S. Court of Appeals for the Ninth Circuit in May
ERISA sets standards for participation and fiduciary duties
2021 and the Supreme Court declined to hear the case, it is
and outlines reporting requirements for these plans. Private-
possible that future litigants may seek to challenge whether
sector employers that establish or maintain plans that fall
ERISA preempts state laws that establish and administer
within ERISA’s scope must comply with these
auto-IRA state programs. Though there is not currently any
requirements. Stakeholders have questioned whether states,
legislation regarding the issue, it is possible that Congress
in mandating private-sector employers to participate in
could revisit the issue in the future.
payroll deduction savings programs, are unintentionally
compelling employers to establish ERISA plans, subject to
Considerations for Congress
the act’s comprehensive requirements.
The goal of state-administered auto IRA programs is to
increase retirement savings for individuals without access
Section 514 of ERISA broadly preempts “any and all” state
to employer plans. Although all individuals with wage
laws that “relate to” ERISA-covered employee benefit
income can establish and contribute to an IRA on their own,
plans. Accordingly, if a state-administered IRA program
many do not. Advocates for state-administered programs
establishes an ERISA plan (or the state program is an
cite research that employees are more likely to save for
ERISA plan itself), it is possible that state laws underlying
retirement if they are offered a plan through their
the program may be superseded by ERISA and judicially
workplace. If these programs were to increase individuals’
invalidated.
savings above what they would have otherwise saved given
the lack of access to an employer plan, states and the
The Department of Labor (DOL) has issued regulations
federal government could see reductions in demand for
addressing ERISA’s relationship to private-sector payroll
social services when workers retire.
deduction IRAs. A 1975 regulation (29 C.F.R. §2510.3-
2(d)) outlined four conditions for a payroll deduction IRA
Others have expressed concern that state-administered IRA
to not be considered an ERISA plan: (1) the employer
programs may replace existing employer-sponsored plans.
makes no contributions, (2) employee participation is
State-administered IRA programs differ from employer-
completely voluntary, (3) the employer does not endorse
sponsored defined contribution plans, such as 401(k) plans,
the program and merely facilitates it, and (4) the employer
in multiple ways. For example, annual IRA contribution
receives no consideration except for its own expenses.
limits ($6,000 [$7,000 for those 50 and older] in 2022) are
Some may question application of this regulation to state
lower than those for 401(k) plans, and IRAs generally lack
auto-IRA programs, for example, regarding the “completely
employer contributions. The 401(k) employee contribution
voluntary” criteria required for payroll deduction IRAs. In
limit is $20,500 ($27,000 for those 50 and older); the
August 2016, DOL issued a safe harbor regulation that
combined employer and employee limit is $61,000
established criteria for designing state-administered payroll
($67,500 for those 50 and older). Compared with
deduction IRAs “as to reduce the risk of ERISA
participants in 401(k) plans, those enrolled in payroll
preemption” (29 C.F.R. §2510.3-2(h) (2016)). Under this
deduction IRAs may not accumulate savings at the same
regulation, state programs were required to be
rate. Stakeholders have also expressed concern that state-
(1) authorized in state law and (2) administered by the state
administered plans in some states might lack adequate
that established the program. The regulations specified that
measures to protect participants’ benefits (e.g., whether
employer participation must be required by state law and
deposits would be made in a timely manner, fees would be
limited the employer role to activities such as collecting
reasonable, and investment choices prudent). Depending on
payroll deductions and distributing program information. In
the state, existing state law or provisions in authorizing
December 2016, DOL issued another rule that expanded the
legislation might alleviate some of these concerns. Another
applicability of the safe harbor to qualified state political
concern is that employers operating in multiple states could
subdivisions, which applied to cities that established payroll
be required to participate in several programs, which could
deduction IRA programs.
be administratively challenging. For example, employers
might have to monitor employee eligibility for different
In April 2017 and May 2017, Congress used the procedures
state programs based on residence or office location.
in the Congressional Review Act (CRA, enacted as part of
P.L. 104-121) to nullify DOL’s regulations creating safe
Further Information
harbors for savings arrangements established by qualified
“Proceedings and Debates of the 115th Congress, First
state political subdivisions and by states (P.L. 115-24 and
Session,” Congressional Record, vol. 163, part 55 (March
P.L. 115-35, respectively). Senator Mitch McConnell
29, 2017), p. S2055
contended that state-administered auto IRA programs
would free states and cities from federal consumer
CRS Report RL34397, Traditional and Roth Individual
protections and would create a competitive advantage for
Retirement Accounts (IRAs): A Primer
the programs compared to private-sector plans.
Elizabeth A. Myers, Analyst in Income Security
IF11611
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State-Administered IRA Programs: Overview and Considerations for Congress
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