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SB 1234 Mandates State-Sponsored Payroll Deposit Retirement Savings Arrangement

In 2012, the California legislature enacted the California Secure Choice Retirement Savings Trust Act (the "Act"), which authorized consideration of a program that would require certain private sector employers with five or more employees not currently offering a retirement savings plan to provide a payroll deposit retirement savings arrangement so that employees could contribute a portion of their salary or wages to a retirement savings program account in the California Secure Choice Retirement Savings Program (the "Program"). Under the Act, the Program is to be administered by the California Secure Choice Retirement Savings Investment Board (the "Board"). Implementation of the Program was subject to the enactment of subsequent legislation. On September 29, 2016 that legislation, SB 1234, was signed by Governor Jerry Brown.

The Act, as amended by SB 1234, imposes its mandate on each "eligible employer", defined as "a person or entity engaged in a business, industry, profession, trade, or other enterprise in the state, whether for profit or not, . . . that has five or more employees." Governmental employers are exempt from the mandate. An "eligible employer" does not include an employer that provides an employer-sponsored retirement plan, such as a defined benefit plan, 401(k) plan, SEP or SIMPLE plan or that offers an automatic enrollment payroll deduction IRA.

Under the new law, eligible employers must provide a payroll deposit retirement savings arrangement, which allows eligible employees to make payroll deduction contributions to a retirement savings program, such as an IRA. An "eligible employee" includes any employee of an eligible employer except (a) an employee covered by the Railway Labor Act, (b) an employee over which the state does not have legislative authority, and (c) an employee for whom the employer makes contributions to a Taft-Hartley pension trust fund. SB 1234 provides for a phased implementation. Employers who have more than 100 eligible employees become subject to the mandate within 12 months after the Program is opened. The mandate is applicable for employers with more than 50 eligible employees within 24 months following the opening of the Program, and for all other employers, the mandate is imposed within 36 months after the Program's opening. It is anticipated that the Program will not be opened for several months as it will take time for the Board to make sure that all implementation requirements are in place.

The law requires automatic enrollment of all eligible employees, subject to an employee's right to opt out of the Program by submitting an opt-out form. The default employee contribution amount is 3% of an employee's annual salary or wages. However, the Board may adjust the default percentage to between 2 and 5% and also may determine a different default percentage based on the time that the employee has contributed to the Program. Employees may terminate their participation in the Program at any time. The law also requires that at least once every two years, at a time established by the Board (the "open enrollment period"), there will be an auto enrollment sweep for all eligible employees who previously opted out. During the open enrollment period, employees must be provided with a disclosure regarding the Program and an opt-out form. The Board is also authorized to implement automatic escalation, but the maximum employee contribution would not exceed 8% of salary and the annual increase may not exceed 1% of salary. An employee may opt out of auto escalation by affirmatively electing the percentage of salary desired by the employee.

The Board will establish the start date for the Program; however, before opening the Program, the Board must issue a report to the Governor and the Legislature that will establish that certain requirements are satisfied. Perhaps the most important of these is the requirement that the Program will comply with the Department of Labor's recently finalized regulations that provide for a safe harbor for savings arrangements established by states for non-governmental employees. The Board will be responsible for structuring the Program in a way that satisfies the safe harbor within these regulations allowing employers who are subject to the Act's mandate to avoid having to comply with the Employee Retirement Income Security Act (ERISA) with respect to the payroll deduction IRAs that they are required to provide under the Act.

© Boutwell Fay LLP 2016, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of October 31, 2016.

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