California Employers Face Pension Plan Mandate

Two bills passed by the California legislature and signed by the governor set the stage for the first state-sponsored retirement program for employees of private employers. If the program moves forward, companies that have five or more employees and do not offer their own retirement plan would be required to deduct 3% of participating employees' wages and deposit the funds into government-run investment accounts. Employees would be automatically enrolled in the program, unless they opt out of participating.

It is far from clear that the program described in the bills would meet tax qualification requirements and other standards set under ERISA. A governing board established under the legislation plans to ask the Internal Revenue Service and the Labor Department whether the program would qualify for federal pre-tax treatment and ERISA preemption.

If the program survives these legal challenges, it will certainly increase access to employer-sponsored retirement plans for Californians. But it also will add to administrative burdens on employers by compelling companies to institute new payroll deductions. On the other hand, the program would transfer the burden of running a retirement savings plan to the state. What will be the net effect on employers?

--Vanessa Walts

Tax Law Editor (Compensation Planning)