Starting Jan. 1, 2017, the California Secure Choice Retirement Savings Program (Senate Bill 1234) will begin the development and build-out of a program to require employers who do not already offer a tax-qualified retirement plan to employees to offer the new California state-run retirement program to their employees. It is estimated that approximately 7 million employees in California are not currently offered tax-qualified retirement plans through their employers. The new law is targeted to fill this gap, so that all California employees may benefit from a tax-deferred retirement account and directly contribute to such savings from their paychecks. The California Treasurer’s Office is calling it the “most ambitious push to expand retirement security since the passage of Social Security in the 1930s.”
Who’s Impacted by the New Law?
Only those employers with five or more employees and that do not already offer a tax-qualified retirement plan to employees – such as a 401(k), IRA, pension or profit-sharing plan – will be required to offer the new California state-run retirement program to their employees. The Secure Choice Board, chaired by California Treasurer John Chiang, will develop the program. The California Treasurer’s Office champions the act to employers as enabling them to “offer employees access to an automatic IRA account with limited administrative duties and no fiduciary responsibility.” In addition, required employers would be exempt from the requirements of ERISA (Employee Retirement Income Security Act) in accordance with a new safe harbor rule announced by the U.S. Department of Labor, which exempts compliant state-run retirement programs from federal ERISA preemption.
After the program is open for enrollment (which will follow the California Treasurer’s Office development and build-out process), the program will be phased in as follows:
- Required employers with more than 100 employees will need to participate within 12 months.
- Required employers with more than 50 employees will need to participate within 24 months.
- Required employers with five or more employees will need to participate within 36 months.
- Employers with fewer than five employees will not be required to participate.
Automatic Enrollment. Under California’s Secure Choice Retirement Savings Program, employees will be automatically enrolled in the program through their employers unless they have already opted out, which employees are free to do before or at any time during enrollment. Initially, 3 percent of an employee’s salary will be automatically contributed from their payroll into a personal tax-deferred retirement savings account, and employees will have the option to change contribution levels at any time.
Automatic Escalation. Deductions will start at the default rate of 3 percent of total pay and automatically increase by 1 percent annually to a maximum of 8 percent. As with the automatic enrollment default, participants will have the ability to stop or change the rate of deductions at any time.
At this point, California has not specified what enforcement mechanisms it will use if eligible employers do not comply with the new laws as directed.
If employers do participate in the program and are acting pursuant to the Secure Choice Board’s regulations, employers have no civil liability, and no cause of action may be brought in connection with such activities, including:
- Employers are not liable as sponsors or fiduciaries of the Secure Choice Retirement Savings Program.
- Employers are not responsible for the administration, investment or investment performance of the program.
- Employers are not liable in connection with any employee’s investment decisions or decision to participate in or opt out of the program.
Looking to 2017
In the new year, we will await the Secure Choice Board’s implementation process to assess the current unknowns, mainly:
- When open enrollment will begin (starting the timeline for employer compliance).
- The enforcement mechanisms California will use to ensure employer compliance.