On September 29, 2016, California Governor Brown approved significant amendments to the 2012 California Secure Choice Retirement Savings Trust Act (“Secure Choice”).
Secure Choice is intended to provide Roth IRAs and traditional IRAs maintained by the State of California for the California employees of private, non-governmental employers who do not maintain qualified retirement plans. Coverage of eligible employees would be automatic through payroll deductions by their employers, although employees could opt out of the program.
The 2012 legislation required a feasibility study to determine if the Secure Choice program would be financially viable without the ongoing use of taxpayer funds and if there would be sufficient interest in such a program, and a determination by the federal Department of Labor that the Secure Choice IRAs would not be considered employer pension plans subject to ERISA. These determinations all have occurred in the intervening four years. The amended Secure Choice law expresses legislative approval of the program, effective January 1, 2017, and includes detailed rules relating to the administration of the program and the investment of the assets in the Secure Choice IRAs.
In informal discussions with senior officials in charge of Secure Choice, we understand it is likely the program in fact will not commence operation for some time, perhaps for another two to four years (i.e., not until 2019 to 2021), due to the significant administrative systems that need to be established to get the program up and running. Of particular importance is selecting a private, third party record keeper to establish systems to deal with the hundreds of thousands of private employers and the millions of employees who will be subject to the Secure Choice program.
The same senior officials have confirmed that, under the amended 2016 law, the Secure Choice mandate will not apply to any private employer that maintains a tax-qualified retirement plan, even with respect to employees not covered by the employer’s plan. For example, if an employer maintains a 401(k) plan with a one year of service waiting period to participate, employees who have not yet satisfied the waiting period are not required to be in Secure Choice. Similarly, other groups of employees excluded from the employer’s plan (e.g., employees at a particular office or factory location) are not required to be in Secure Choice. This is different from the 2012 law, which generally required all employees not covered by an employer’s qualified retirement plan to be enrolled in the Secure Choice program. We understand that the author of the 2012 and 2016 legislation (California Senator de Leon) recognizes that there is a gap in Secure Choice coverage for the employees not covered by their employer’s plan, but that they decided they wanted an objective rule that could be easily administered by Secure Choice and by employers. An employer either maintains or does not maintain a tax-qualified retirement plan. And the requirement of tax qualification provides some assurance that the particular employer plan generally will cover a broad cross-section of employees.