The (Individual) States of America vs The United States of America

States vs US

The states and the federal government are engaged in a tug-of-war over the ability to issue rules affecting key HR and benefits matters. This is a game with no winners.

Employee benefits professionals often focus on the details of a specific event — such as a new regulation or a new court case. Such focus is important; these details are critical to plan design and administration. But, it is also important to be cognizant of broader trends. This blog is about one of those trends.

There is currently an ongoing conflict between the federal government and individual states over benefits and HR policies. This conflict occurs when (i) the federal government pulls back on a regulatory front; (ii) states move in to fill the gaps created by the federal pullback, and (iii) the federal government (or affected entities) claim that the federal position established in the pullback must preempt the individual states’ efforts.

Although this sounds somewhat abstract, here are some real examples:

•      Fiduciary Status: The federal government’s actions have created significant gaps in the protections available to retirement plan participants and investors. The DOL’s failure to defend the (now defunct) fiduciary rule was questionable both from a legal and public policy perspective and disregarded a vast body of research detailing the risks posed by conflicted advisors. Similarly, the SEC’s recently finalized Regulation BI relies heavily on disclosure and disregarded specific provisions of the Dodd-Frank Act that directed more meaningful changes in the standards that should apply to brokers.

In response, a number of states (including New York, Massachusetts, and Nevada) have adopted their own sets of investor protections, relying on these state’s authority to regulate insurance and administer state securities laws. However, opponents of these state measures are brandishing federal preemption as a likely basis for challenging these state protections. And, the SEC has left open the possibility that Regulation BI will preempt state initiatives–footnote 1163 of Regulation BI specifically notes that “Whether Regulation Best Interest would have a preemptive effect on any state law would be determined in future judicial proceedings, and would depend on the language and operation of the particular state law at issue.”

•      State-Sponsored Small Employer Retirement Plans. Several states (including California, Illinois and Oregon) have adopted programs to facilitate retirement savings for individuals not covered by an employer-sponsored retirement plan. Generally, these plans are structured as Roth-IRAs, funded through employee payroll deductions; employers’ role is limited to enabling a feed from the payroll system to the state plan and employees can choose to opt out of these IRAs. Although a federal district court has already ruled that the California program is not preempted by ERISA (Howard Jarvis Taxpayers Assoc. v. California Secure Choice Retirement Program), the federal government has recently expressed an “interest” in participating the appeal of the dismissal and has filed a brief taking the position that the California plan is preempted by ERISA.

In effect, the federal government would seek to block state efforts to facilitate enrollment in IRAs for individuals not covered by an employer-sponsored plan.

One can anticipate this battle playing out across a range of other HR issues, such as state initiatives to fill gaps created by the federal effort to shrink the scope of the Affordable Care Act or state efforts to provide protection against discrimination for members of the LBGTQ community.

This federal/state tug-of-war leaves employers and employees in the middle and provides neither the clarity and consistency of a uniform federal standard nor the ability to plan for state-by-state compliance. And, employers who are whipsawed between federal and state initiatives are unlikely to have the bandwidth to consider the design changes and innovations that actually help employees and employers.

At this point, there is not much that employers can do as this state/federal conflict plays out. Perhaps the best course of action for employers is to focus on developing the right programs and policies for their employees while the federal government and the states duke it out. At the same time, employers should consider deferring implementation of new rules in these battleground areas as long as possible. In effect, if the states and federal government are going to engage in a tug-of-war, employers may be well-advised to stand clear.