The California Chamber of Commerce is fighting to protect employers from liability for a state-run retirement savings plan for private employees.
As originally established, the California Secure Choice Retirement Savings Investment Program calls for automatic enrollment of private sector employees with an opt-out provision. Historically, automatic enrollment programs are subject to the requirements and protections of the federal Employee Retirement Income Security Act (ERISA).
The goal of Secure Choice supporters was to provide a retirement plan for an estimated 6.3 million California workers whose employers do not currently offer an eligible retirement savings program.
Private employers with five or more employees will be required to automatically enroll their employees into and make deductions for those employees’ Secure Choice retirement savings accounts, unless the employee opts out of the program.
Secure Choice originally anticipated enrollment to begin no sooner than 2019; however, it now is anticipating beginning enrollment in 2018.
Safe Harbor Nixed
Regulations adopted by the U.S. Department of Labor (DOL) last year offered California employers a safe harbor, exempting the Secure Choice program and others like it from the complex requirements of ERISA, the 1974 law that set standards to protect individuals in private pension plans.
The CalChamber and other business organizations insisted that the Secure Choice program not be subject to ERISA and, as such, that the program comply with the 2016 safe harbor and its criteria, along with other provisions to protect employers from liability, minimize administrative burdens and reduce the risk of employer liability if the program were to be preempted by ERISA if challenged.
Earlier this month, however, Congress passed and the President signed legislation to roll back the DOL rule, leaving employers extremely concerned about the applicability of ERISA to the Secure Choice program.
Budget Trailer Language
In response to the federal actions, Secure Choice supporters have proposed adding language to a budget trailer bill that allows the Secure Choice Investment Board to self-certify that the program is not subject to ERISA. As Alert went to print, that bill language was not yet in print.
The proposal relies on legal advice paid for by the board so that the board self-certifies that the program is exempt from ERISA and structures the program so it is not subject to ERISA. The legal opinion cited by Secure Choice supporters maintains that meeting the safe harbor requirements in a 1975 law established for individual retirement accounts (IRAs) will suffice.
Moving forward with the mandatory Secure Choice program without the federal ERISA exemptions could expose businesses to ERISA requirements and litigation in federal courts, no matter what the state legislation provides.
U.S. Department of Labor
In the background to the now-repealed rule, DOL agreed that current law (the 1975 safe harbor) does not allow automatic enrollment into a retirement plan without being subject to ERISA.
Even while issuing its 2016 safe harbor regulation, however, DOL said only the courts would have the final say and even the new regulation would not guarantee that the state-run programs would be outside of current ERISA laws governing employee benefits.
Clarifying Language
In opposing the proposed budget trailer language, the CalChamber called for state lawmakers to consider carefully language from the repealed DOL rule that underscores employer concerns:
“Due to the broad scope of ERISA coverage, some stakeholders have expressed concern that state payroll deduction savings programs, such as those enacted in California, Connecticut, Illinois, Maryland, and Oregon may cause covered employers to inadvertently establish ERISA-covered plans, despite the express intent of the states to avoid such a result.
“With regard to the 1975 IRA Payroll Deduction Safe Harbor’s condition requiring that an employee’s participation be ‘completely voluntary,’ the Department intended this term to mean that the employee’s enrollment in the program must be self-initiated. In other words, under the safe harbor, the decision to enroll in the program must be made by the employee, not the employer. If the employer automatically enrolls employees in a benefit program, the employees’ participation would not be ‘completely voluntary’ and the employer’s actions would constitute the ‘establishment’ of a pension plan, within the meaning of ERISA section 3(2). This is true even if the employee can affirmatively opt out of the program. Thus, arrangements that allow employers to automatically enroll employees—as do all existing state payroll deduction savings programs—do not satisfy the condition in the safe harbor that the employees’ participation be ‘completely voluntary,’ even if the employees are permitted to ‘opt out’ of the program. Consequently, such programs would fall outside the 1975 safe harbor and could be subject to ERISA.”
High Stakes
The CalChamber notes that the stakes are high for employers if the state gets it wrong. The state of California cannot dictate the enforcement priorities or interpretations of the federal Department of Labor. Therefore, the state alone cannot protect California employers from federal pre-emption.
“Moving the program forward under the very real threat of ERISA pre-emption clearly places employers at risk,” the CalChamber wrote in its letter opposing the Secure Choice bill language in the budget trailer bill. “We urge the legislature to consider the consequences and the legal issues surrounding the program design under the new federal circumstances and vote no on the trailer bill language.”
More Information
More background information on the Secure Choice program is available in the Business Issues Guide article at www.calchamber.com/businessissues.
