California May Implement Mandatory Retirement Plans

In 2012, the California legislature enacted SB 1234 that set the stage for the creation of Secure Choice Savings Plans, a state-sponsored retirement program for private employers. The legislation created an Investment Board that now has issued its 500-page blueprint for the program (pdf). The stated goal is to create a portable IRA-like plan for the over 50% of employees in California whose employers currently do not offer any kind of retirement plan.

Any employer with five or more employees would be required to enroll them in the new plan unless the employees affirmatively opt out. The automatic default contribution rate would be 5% of pay, with a maximum of $5,500 per year. The money comes directly out of the employee’s pay. There is no separate employer contribution, matching or otherwise.

The plans would operate like a Roth IRA – no tax deduction for contributions, but the money grows tax free and is not taxed when it is withdrawn upon retirement. There is also a provision for withdrawals because of “hardship”.  The mandatory investment vehicle would be a “diversified portfolio” in a fund created by the state. The U.S. Department of Labor has issued a proposed rule exempting such state-sponsored retirement plans from the requirements of the federal ERISA law.

Hearings on the details of the state plan will be held in various locations next month. Additional legislation will be required for final implementation. If the plan becomes final, millions of California employees may be surprised to find that their after-tax income has been automatically reduced by 5%.

Source: Fox Rothchild LLP.  |  2016 © Copyright Payroll Masters

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