A modified version of the California Secure Choice Retirement Savings Trust Act has passed out of both chambers of the California state legislature and is expected to be signed into law by Gov. Jerry Brown.
The action comes in light of a resolution of disapproval signed into law by President Trump in May, which nullified a Labor Department safe harbor for state-administered auto-IRA programs issued under the Obama administration.
California was one of five states to pass legislation requiring employers that don’t offer workplace savings plans to auto-enroll workers in a state-administered IRA. The states crafted legislation to comport with the safe harbor, which was finalized in September of 2016.
Under the safe harbor, states could require automatic enrollment in the plans without subjecting employers to fiduciary requirements under the Employee Retirement Income Security Act.
At issue for the state initiatives is language in an existing safe harbor for workplace IRA plans under ERISA, incorporated in the original law in 1975.
Under the 1975 safe harbor, employers can offer IRAs without being subject to ERISA, but only if employee enrollment in the IRAs is “completely voluntary.”
In modifying its Secure Choice Act, California removed language requiring the program to comply with the updated, Obama-era safe harbor, a move likely to be emulated by other states that have vowed to move forward with auto-IRA initiatives.
Lawmakers in California are relying on an interpretive letter from David Morse, a partner and ERISA specialist at K&L Gates who has advised California’s and other states’ auto-IRA initiatives.
Morse says IRAs under California’s Secure Choice plan “should not be considered ERISA plans” in potential legal challenges.
In effect, his letter reasons that the Secure Choice plans can comply with the original 1975 safe harbor for workplace IRAs.
Because employers would be required to participate under California’s law, “employer volition,” which is fundamental to defining an ERISA plan, would be absent.
While auto-enrollment is required, California’s law, and other states’ laws, also require an opt-out provision. Moreover, employees will not be enrolled unless they acknowledge they have read and understand the program’s disclosures.
Employers will not be allowed to contribute to the IRAs, and their involvement in plan administration will be limited to basic ministerial acts under the Secure Choice Act, provisions that Morse thinks should make the Secure Choice plans qualify for the 1975 safe harbor.
While Morse says language in the 1975 safe harbor and existing case law provides “firm grounds” for California’s Secure Choice to hold up under potential legal challenges, the letter does issue a poignant caveat.
“The final authority to determine whether the program as it is ultimately designed is not an ERISA employee benefit plan rests with the courts and it is possible that a court could take a different view than expressed in the 1975 Safe Harbor or in my analysis,” wrote Morse.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
