The state Employees’ Retirement System filed a lawsuit Tuesday against the state of Hawaii and the Hawaii Health Systems Corporation to stop the implementation of a law that offers special retirement benefits to certain state employees.

The law, called Act 1, gives cash severance payments or early retirement benefits to unionized public workers at three hospitals in Maui County that are being privatized by Kaiser Permanente.

“As the steward of all the State and county employees’ retirement, the ERS must do everything it can to protect its beneficiaries and the fund,” ERS Executive Director Thomas Williams said in a release. “All we want is to make sure this statute does not have the unintended consequence of jeopardizing the ERS plan.”

The ERS news release describes the law as unconstitutional because it impairs the retirement benefits of all state and county employees and retirees. The Internal Revenue Code does not allow the ERS plan to offer employees the choice prescribed in the law, which could result in the ERS losing its status as a tax-qualified defined benefit pension plan, the release says.

Losing this status would be “catastrophic” to all state and county employees, the release says, because the employees would no longer be able to defer the payment of taxes on employee retirement contributions.

“The contributions would be included in the employees’ income and taxed as normal wages when contributed,” the release says. “Further, the employees would be subject to federal income taxes on the portion of their benefits funded by the employer at the time that the benefits vest, instead of when they actually receive the benefits. Additionally, the employees would lose their right to the tax deferred rollover of their retirement contributions to other retirement vehicles, such as IRAs.”

This is one of the biggest reasons that Gov. David Ige vetoed the bill in July. But the Legislature came back in special session later last month to override the veto.

Ige has said his administration’s concerns over the bill remain unchanged: it jeopardizes the ERS’s tax-exempt status, does not appropriate funds for lump-sum cash payments for affected employees and adds an additional unfunded liability of about $17.2 million to the ERS and $18.4 million to the Employer-Union Health Benefits Trust Fund, which puts the state’s long-term financial position, along with its bond ratings in jeopardy. Bond ratings determine what the state pays in interest on borrowed funds.

The issue has pitted public-worker unions against the governor while pressuring lawmakers — most of whom are up for re-election — to act.

United Public Workers sued the state to stop the privatization, arguing that the union members’ contracts were still in effect until next June. The 9th Circuit Court of Appeals ordered the state to temporarily stop its transition activities in May, but later allowed them to continue as negotiations were moving forward toward a settlement.

The Hawaii Government Employees Association had threatened to sue as well, but backed off after the Legislature overrode the veto.

The ERS has taken no position on the privatization of Maui Memorial Medical Center, Kula Hospital & Clinic and Lanai Community Hospital, and the lawsuit does not seek to stop the transfer of the three HHSC hospitals to Kaiser.

The lawsuit is asking a state court to temporarily stay the effect of Act 1 so the ERS can seek guidance from the IRS, the release says, adding that if the IRS determines any portion of the law would disqualify the ERS plan then the court should declare those provisions unconstitutional.