Do California Retirement Plan Legal Battles Spell Trouble for Connecticut?

Lawsuits questioning California’s authority to create a state-run retirement plan could test the legality of a similar program Connecticut is implementing.

Connecticut lawmakers in 2016 narrowly approved a bill mandating that businesses with five or more employees automatically enroll any full- or part-time worker not eligible for an employer-sponsored retirement plan in a new state-sponsored plan.

Employers are required to deduct 3% of a worker’s salary each pay period and transmit it to the state for deposit. 

Workers not interested in the state-run plan—which will not offer all the tax benefits of private sector plans—must opt out each year, in writing.

The plan was supposed to be fully implemented by Jan. 1, 2018, but was delayed as a result of a reversal of a U.S. Department of Labor ruling.

Proponents of the program decided to move forward with the planning process despite legal challenges to similar plans in other states, including California.

Single Vendor

The plan advanced in January 2018 when the Connecticut Retirement Security Authority named West Hartford Town Council member Mary Fay as executive director.

Then lawmakers adopted a 2019 budget that revised the language to require multiple plans, but from only one vendor.

That flew in the face of then-Governor Malloy’s insistence in 2016 that the plan offer participants multiple options from multiple vendors to ensure competition among retirement plan providers.

By limiting the state-run plan to one vendor, politics will now determine which company wins and which ones lose.

A state-sponsored retirement plan gives the state an unfair advantage over private sector competitors by requiring anyone without a plan to automatically be enrolled in the state plan.

By limiting the plan to one vendor, politics will now determine which company wins and which ones lose.

In addition to the political gamesmanship occurring in its design, the Connecticut plan may soon be invalidated as a result of the lawsuits in California. 

California Suit

The Howard Jarvis Taxpayers Association filed a federal lawsuit against CalSavers, California’s version of a state-sponsored retirement plan.

California’s plan began enrollment this July, and currently has about 500 companies enrolled.

The Jarvis Taxpayers Association argued that since retirement plans are regulated by the federal Employee Retirement Income Security Act of 1974, states cannot impose a retirement plan requirement.

Those lawsuits and the DOJ’s position that state-run plans circumvent ERISA—which protects workers—demand a review of Connecticut’s plan.

The U.S. Department of Justice filed briefs Sept. 13 supporting the taxpayers association’s position and further arguing that state sponsored plans would create “a patchwork of different state laws” which is “exactly the kind of disuniformity that ERISA was designed to avoid.”

Some Connecticut lawmakers and constitutional officers continue to defend the legality of Connecticut’s state-plan, despite growing concerns and legal challenges in other states.

Those lawsuits and the Department of Justice’s position that state-run plans circumvent ERISA—which protects workers—demand renewed legal review by those responsible for Connecticut’s plan.

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For more information, contact CBIA’s Eric Gjede (860.480.1784) | @egjede