This article is reproduced with permission from Spidell Publishing, Inc.
California is one of 10 states that has enacted a state-sponsored retirement program for private-sector employees. To date, only Oregon and Illinois have actually begun to implement their programs.
When fully implemented, CalSavers (previously named the California Secure Choice Retirement Program) will require private employers that do not already offer a retirement plan to enroll their employees in a CalSavers account, unless:
- the employee(s) opt out; or
- the employer has less than five employees.
The CalSavers program is essentially a payroll deduction Roth IRA program. It is anticipated that CalSavers will roll out a pilot program in late 2018 but will not mandate employer participation until 2020. At that stage, the program will be phased in over a three-year period, with large employers (100+ employees) phased in during the first year.
Imminent Challenges
The first question is, is this legal?
The Obama administration adopted safe harbor regulations that approved these state-sponsored programs. Under this safe harbor, as long as states met specified requirements, the programs would not be barred by the Employee Retirement Income Security Act of 1974 (ERISA). These regulations were repealed by the Trump administration. So the question remains, does CalSavers violate ERISA?
A lawsuit filed by the Howard Jarvis Taxpayers Association in the U.S. District Court in Sacramento is claiming that it does. California counters that the plan does not violate ERISA because it is similar to a payroll-deduction IRA, which the Department of Labor (DOL) has recognized since the mid-1990s. According to California’s analysis, ERISA is not violated because there is limited employer involvement. Employers are not allowed to make contributions, are not paying or charging any fees, and cannot be held liable for the accounts. Employees are also not mandated to participate in the program. Now it is up to the courts to decide.
The Program Currently Envisioned
Under proposed regulations, employers will be required to provide CalSavers enrollment packets to employees during an annual enrollment period. For employees who do not opt out, the employer will be required to collect, remit, and report contributions for each payroll period.
An employee’s initial default contribution rate is 5%, increasing by 1% each year, up to 8%. Employees have the option to opt out or to pay lower or higher contribution rates.
Other states’ programs
Most of the 10 states that have enacted similar legislation are mandating that employers enroll their employees in Roth IRA-type accounts, although some states like Washington and New York are making the programs voluntary. At least 20 other states are exploring enacting similar programs.
To date, the following states have enacted state-sponsored retirement programs:
California
Connecticut
Illinois
Maryland
Massachusetts
New Jersey
New York
Oregon
Vermont
Washington
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