A judge has granted the state pension system’s request for a temporary restraining order to stall the implementation of a new law that offers special retirement benefits to certain state hospital workers.

The Employees’ Retirement System sued the Hawaii Health Systems Corporation and the state in general on Aug. 9 to hold off on moving forward with a law that 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.

The ERS has said the law is 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.

Pension system officials have said losing that tax status would cause employees to pay 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.

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.

Judge Jeannette Castagnetti of the 1st Circuit Court determined that the ERS would likely prevail in its argument that the law is unconstitutional, an ERS news release said Tuesday.

“Further, Judge Castagnetti ruled that the balance of harm supported the granting of the TRO as the results of such a disqualification could cause irreparable harm to the almost 120,000 members of the ERS as all State and county employees would lose the benefit of tax deferral that is fundamental to the ERS plan, as well as other benefits associated with a qualified plan,” the release says.

The judge ruled that the public interest supported the issuance of a TRO as it is in the public interest to maintain the ERS’s tax-qualified status.

The judge temporarily stayed implementation of the law so the ERS can seek guidance from the IRS as to the potential impact of the law.

The TRO does not have any impact on the ongoing transfer of Maui Memorial Medical Center, Kula Hospital & Clinic and Lanai Community Hospital hospitals from HHSC to Kaiser, the release says.