ERISA Preemption Challenge to CalSavers Comes Up Short

The first case challenging a state-run IRA program for private sector workers as preempted by ERISA has concluded that it… isn’t.

As acknowledged in the outset of the Ninth Circuit’s May 6 decision, “this case presents a novel and important question in the law governing retirement benefits: whether the federal Employee Retirement Income Security Act of 1974 (ERISA) preempts a California law that creates a state-managed individual retirement account (IRA) program.” 

The Bottom Line

CalSavers—a state-run IRA program for private sector workers—had been challenged as preempted by ERISA by an employer (the Howard Jarvis Taxpayers Association) which did not offer a retirement plan, and was thus deemed subject to the CalSavers mandate. The U.S. Court of Appeals for the Ninth Circuit upheld the decision of the lower court that ERISA preemption did not apply because the plan was established and maintained by the State, not employers; that it does not require employers to operate their own ERISA plans; and that it does not have an impermissible reference to or connection with ERISA. 

The Background

Now, for those who may have forgotten, CalSavers applies to eligible employees of certain private employers in California that do not provide their employees with a tax-qualified retirement savings plan. Eligible employees are automatically enrolled in the program, but may opt out. Those who don’t have a designated amount remitted to CalSavers, which funds the employees’ IRAs, and the State of California manages and administers the IRAs and acts as the program fiduciary. While a handful (and growing) are in existence around the country, and as Judge Daniel A. Bress, writing for the Ninth Circuit notes, “to our knowledge, this is the first case challenging such a program on ERISA preemption grounds.”

The original suit, filed in the U.S. District Court for the Eastern District of California in 2018 by the Howard Jarvis Taxpayers Association, claimed that the California Secure Choice Retirement Savings Trust Act “violates the Supremacy Clause of the United States Constitution because it is expressly preempted by the Employee Retirement Income Security Act of 1974…” Without this preemption, the suit claims that “…such non-governmental employees’ funds will have none of the ERISA protections intended for them by the federal government since 1974.” Consequently, the plaintiffs had asserted that CalSavers is “ultra vires” (beyond the powers), and seek a declaration that CalSavers is “void.”

That suit had been dismissed with a leave to amend—amended and refiled, the plaintiffs’ argument that ERISA preempted CalSavers was supported by the Department of Justice, but when the district court reconsidered the refiled arguments that it had already heard—well, nothing changed. So, the plaintiffs appealed to the U.S. Court of Appeals for the Ninth Circuit—and that appeal was joined with a “friend of the court” brief[i] by the Labor Department last June, with the agency—which stated, among other things, that it had an interest in “whether state laws are preempted, properly interpreting the extent of preemption to delineate the roles of federal and state authority over the establishment or maintenance of employment-based retirement plans, and maintaining uniform national standards for plan administration”—and interest the brief described as “heightened” in this case “because the Act is among the first of several similar state laws.” 

Or that was the Department’s stance until February of this year, when the Labor Department, citing the “change in administration,” said that the Acting Secretary of Labor had “reconsidered the matter and hereby notifies the Court that he no longer wishes to participate as amicus in this case and that he does not support either side.” 

The Appeal

Noting that “the statute creating CalSavers maintains that “the roles and responsibilities of employers” have been defined “in a manner to keep the program from being classified as an employee benefit plan subject to the federal Employee Retirement Income Security Act,” Judge Bress[ii] acknowledged (Howard Jarvis Taxpayers Ass’n v. Calif. Secure Choice Ret. Savings Program, 9th Cir., No. 20-15591, 5/6/21) that “the issue initially seems close because ERISA’s preemption provision is expansive, and CalSavers concerns benefits in a general sense. But closer inspection of the governing precedents and CalSavers’ design shows that HJTA’s broad ERISA preemption challenge to CalSavers cannot be sustained.”

While the plaintiffs had argued that the Labor Department’s safe harbor provision for these type programs in 2016 effectively acknowledged the conflict, Judge Bress saw that as merely a desire to “remove uncertainty” and to promote such programs, rather than a necessary legal barrier. Moreover, Congress’ subsequent repeal of that regulation in the early days of the Trump administration he viewed as merely rejecting “the notion that CalSavers should be automatically exempt from an ERISA preemption analysis.” He went on to conclude that “nothing about the repeal forecasts any answer, much less any definitive answer, on whether ERISA preempts programs like CalSavers. That issue was left to the courts to resolve.”

Acknowledging that in previous cases the court had said that “Unless all four of the [1975 Safe Harbor] requirements are met, the employer’s involvement in a group insurance plan is significant enough to constitute an ‘employee benefit plan’ subject to ERISA,” Judge Bress asked if those prior statements meant that if a plan fails to meet the 1975 Safe Harbor, would it then be an ERISA plan that ERISA preempts? But here he answered his own question—“no.”

Having set aside those considerations, he stated that ERISA applies to “plans, rather than simply to benefits,” and that “that demarcation forms the basis for the Supreme Court’s cases distinguishing state laws that fall within ERISA’s preemptive reach from those that are beyond it.” He then cited two categories of state laws that ERISA pre-empts: “whether a state law has a ‘reference to’ ERISA plans, or one “that has an impermissible ‘connection with’ ERISA plans, meaning a state law that ‘governs . . . a central matter of plan administration’ or ‘interferes with nationally uniform plan administration.’” On those points, he noted that “HJTA has not shown that either test is satisfied.”

‘Stating’ the Case

He noted that CalSavers doesn’t order anyone to create an ERISA employee benefit plan, and moreover that while the plaintiffs contend that CalSavers is an ERISA plan because it satisfies the four-factor test[iii] in Donovan v. Dillingham, that foundation was misplaced because that was predicated on the underlying condition that it was applied as a benchmark to a plan established by an employer. Rather, acknowledging that “had an employer set up an IRA program on its own, that program would be subject to ERISA,” Judge Bress noted that the central question in this appeal was whether a state-run IRA program like CalSavers is “established or maintained by an employer.” Once again, he wrote that “the answer to that question is ‘no.’” Instead, he concluded “in every relevant sense, it is the State[iv] that has established CalSavers and the State that maintains it—and not eligible employers.”

As for the argument that CalSavers forces employers to create ERISA plans because it is the employer’s initial decision not to offer a tax-qualified retirement savings program that then requires it to comply with CalSavers, Judge Bress said that being subject to CalSavers did not constitute establishing or maintaining and ERISA plan. “In no sense does an eligible employer ‘establish or maintain’ an ERISA plan through its decision not to establish such a plan, which is what triggers CalSavers’ application.”

Judge Bress also made short work of the argument that exempting employers that offered an ERISA plan constituted “referencing” ERISA. Nor was he persuaded by arguments that the existence of CalSavers might in some way influence the formation of ERISA plans (or their termination)—or by assertions that “every state may now enact its own version of CalSavers, subjecting multi-state employers to many sets of laws…,” commenting that that “circumstance is merely a function of our federal system, little different than the varying state laws in other areas to which employers are already subject.”

Judge Bress concludes: “There is, to be sure, an important policy debate here. California steadfastly maintains that CalSavers is needed to address a serious shortfall in retirement savings that, if not addressed, will impose significant costs on the State years down the line. HJTA seemingly believes that state-run IRA programs reflect too great a role for government in private decision-making, while imposing too many costs on employers.

“But these are issues for California’s lawmakers and those who elect them, or for Congress should it choose to take up this issue. The question for us is whether Congress has already outlawed CalSavers. For the reasons we have explained, HJTA’s ERISA preemption challenge fails.”