When the U.S. Department of Labor released its finalized safe harbor for state-administered retirement plans this past August, the agency laid out specific conditions by which states could mandate participation in retirement plans without exposing employers to the Employee Retirement Income Security Act’s fiduciary requirements.

Several states had legislated, or were in the process of legislating, state-administered retirement plans prior to the safe harbor’s finalization.

But questions lingered as to whether or not state payroll deduction programs would inadvertently cause participating employers to establish ERISA-covered plans, creating “a serious impediment to the wider adoption” of state-run programs, according to Labor Department analysis published with the safe harbor.

Related: Does new EBRI data bolster argument for state mandates?

With several of its core provisions, the safe harbor, created at the behest of the White House, crystalizes how states can mandate employer participation while avoiding exposure to ERISA preemption. Among its more vital provisions is that states can mandate automatic enrollment, so long as employees are allowed to opt out of plans.

But in other areas, the Labor Department has left discretion to states in how they craft their laws. That has some industry insiders concerned for how new state laws will impact employers that don’t already sponsor a savings plan, and, potentially, those who do as well.

“Nothing in the safe harbor prohibits states from mandating that non-eligible workers in existing 401(k) plans will have to be enrolled in state plans,” said Allison Klausner, director of government relations for Buck Consultants at Xerox.

Most 401(k) plans have eligibility carve-outs. Under existing law, employers do not have to enroll workers under age 21. And plans can require up to two years of service before workers are eligible to receive employer contributions, so long as they are allowed to make elective deferrals on their own after one year.

According to the Plan Sponsor Council of America, about 40 percent of employers require six months of service before new hires can participate in a 401(k), and another 27 percent have a one-year waiting period.

Moreover, part-time workers can be deemed ineligible if they don’t have at least 1,000 hours of service in a year’s time.

Related: 5 reasons why workers can't even get access to retirement plans

“States may say to sponsors — you have to identify who the ineligible workers are, and enroll them in the state-run plan,” said Klausner.

Ambiguity over employers with operations in multiple states

A potentially greater impact is the discretion Labor Department's safe harbor leaves to states when considering how to treat employers with operations in multiple states, noted Klausner.

In the finalized safe harbor, the Labor Department notes that some stakeholders wanted the guidance to limit state mandates to employees that live in the impacted state and are employed by an employer in that state.

Businesses may have operations in multiple states, with employees in multiple states. And an employer based in one state may have employees that reside in another, noted stakeholders in comments prior to the safe harbor’s finalization.

Ultimately, the Labor Department passed on addressing the issue, saying that “states are in the best position” to determine how they mandate participation relative to employers with operations and workers in multiple states.

That potential ambiguity concerns industry, said Klausner. “Employers that don’t sponsor a plan may end up having to comply with more than one state mandate. And sponsors of existing plans may be impacted by multiple state mandates relative to ineligible employees.”

Klausner says the safe harbor creates the “potential layering of complexity” for employers.

Potentially exacerbating that complexity, Labor Department has proposed a safe harbor intended to allow large municipalities and counties to sponsor plans that mandate participation. That could create further compliance issues for employers that don’t sponsor a plan, and employers that do and have ineligible employees, she said.

Those complexities could add compliance burdens and costs to employers, said Klausner.

Under the safe harbor, states are allowed to refund employers’ costs in helping administer enrollment in state plans.

But if an employer is required to comply with more than one mandate, “there is no certainty that they will be able to recoup all of the costs” to comply, said Klausner.

“I respect that not every potential issue can be solved up front, but there are a lot of unknowns and what ifs. That’s not a criticism but a reality,” said Klausner, who underscored that industry will support the safe harbor, even if it “stays put” on the question of employers’ potential exposure to multiple mandates.

Erosion of ERISA’s preemptive power?

The clear policy initiative behind the DOL's safe harbor is to close the access gap to retirement savings plans. The Labor Department says that 39 million working Americans lack access to a savings option through their employer.

Throughout President Obama’s administration, proposed budgets from the White House have included a provision to mandate 401(k) enrollment requirements at the federal level. Congress has shown little appetite for creating a nationwide mandate, in spite of the extensive legislation introduced aimed at encouraging more employers to sponsor plans.

In lieu of a federal mandate, the best course of action from the administration’s point of view was to give power to the states, and in order to successfully do that, the Labor Department had to get ERISA out of the picture, says Seth Safra, a partner in the Employee Benefits and Executive Compensation Group at law firm Proskauer.

“The DOL clearly cares deeply about the access issue, as well they should,” said Safra. “The policy objective is a good thing, but what concerns me is the perspective of small business owners.”

The “carrot and stick” voluntary system under ERISA has been fortified by its preemptive power over state law. In voluntarily sponsoring a retirement plan, employers assume fiduciary obligations under ERISA, and employees have the right to bring a claim against employers if they feel their rights have been breached.

But with its safe harbor, Safra, along with other ERISA experts, fears the Labor Department may have eroded ERISA’s preemptive power. “The DOL is effectively saying that state-run plans are not a benefit plan, even if they look an awfully lot like one,” said Safra.

Allison Klausner said it is too early to tell whether state-run retirement plans will lead to a significant erosion of ERISA’s preemptive power, and whether that will ultimately affect participants’ protections under the law.

But she does not rule out the possibility. “Once we start allowing well-intended states to step in to address the access gap, we could end up in a position where the flood gates open and states, and potentially municipalities, take charge of an area of the law that Congress reserved for the federal government.”

Safra says ERISA’s preemptive power over state law was a key feature in Congress’ design of the statute.

“Now, for the first time, the federal government is clearing the path to mandate participation in retirement plans, without an act of Congress. That’s concerning,” he said.

In the press conference announcing the finalization of the safe harbor, Labor Secretary Thomas Perez expressed confidence that the safe harbor would hold up in a potential claim against a participating employer, so long as state plans comply with the safe harbor.

Ultimately, courts will address the question of whether or not a state-run plan preempts ERISA, Safra said.

“It’s impossible for the DOL to create complete protection with the safe harbor, because they can’t make law, only Congress can do that,” said Safra. “At the end of the day, anyone can sue anyone.”