Under a recently approved law, some California employers in the private sector will have to offer an estimated 7,000,000 employees an automatic retirement savings arrangement that sends payroll deductions to a state retirement program, if they do not otherwise offer a retirement savings plan or individual retirement account (IRA). In other words, eligible employers can avoid the program by adopting a tax-qualified retirement plan.
The California Secure Choice Retirement Savings Program
Governor Jerry Brown recently approved the California Secure Choice Retirement Savings Program (Senate Bill 1234), and authorized the California Secure Choice Retirement Savings Investment Board to begin developing the Program. The Board may issue additional regulations regarding the Program, including guidance on employer roles and responsibilities.
The Program is slated to take effect January 1, 2017, and will include one or more payroll deduction IRA arrangements, assuming California can act quickly enough to satisfy certain preconditions. “Eligible employers” (generally, non-governmental employers with five or more employees) will be able to remit employee contributions to their IRAs on behalf of their “eligible employees,” and may (but are not required to) make employer contributions to the IRAs to the extent doing so would not create an ERISA employee benefit plan and would be permitted under federal tax law.
Other than imposing another deduction requirement on certain employers (and perhaps the obligation to distribute another EDD pamphlet yet to be prepared by the Board), the law does not appear to place too much of a burden on employers, although not all of the kinks have been worked out. We expect that January 1, 2017 is an overly optimistic goal and would not be surprised to see that date slip. The current schedule for phasing in the Program is:
- Eligible employers with more than 100 eligible employees – within 12 months after the Board opens the Program for enrollment
- Eligible employers with more than 50 eligible employees – within 24 months after the Board opens the Program for enrollment
- All other eligible employers – within 36 months after the Board opens the Program for enrollment
Under the Program, eligible employees are automatically enrolled unless they opt out. The initial default contribution rate is 3 percent of pay, but is subject to adjustment, and the Board may decide to implement annual automatic escalation within certain limits. Employees may specify a different contribution rate, and may opt out of automatic escalation.
Limits on Employer Liability
Employers have no civil liability, and no cause of action may be brought against an employer, for acting pursuant to the Board’s regulations. They are not liable as sponsors or fiduciaries of the Program, and bear no responsibility for the administration, investment, or investment performance of the program. Employers also have no liability for an employee’s participation in the Program, decision to opt out, or investment decisions. It is not yet clear what enforcement mechanisms will apply to employers that do not comply with the Program’s requirements.
The California Secure Choice Retirement Savings Program is the latest in a string of state-led efforts to help workers close the retirement gap, but there are still a few gaps in the law itself. Employers and employees in California will be watching to see how effective the state will be at bridging both.