California’s auto-IRA program for private sector workers has prevailed against claims that it runs afoul of ERISA’s preemption.
The suit, filed in the U.S. District Court for the Eastern District of California in 2018 by the Howard Jarvis Taxpayers Association, Jonathan Coupal and Debra Desrosiers (“as non-governmental employees and California taxpayers), 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, and now—the district court reconsiders the refiled arguments that it had already heard.
Exempt ‘Shuns’
Now the Department of Justice had argued that “A state law may not reference ERISA plans in order to trigger ERISA-equivalent coverage. Because the Secure Choice Act does exactly that, this Court should determine that the law is preempted on that basis,” according to the filing. The traditional criteria for establishing where preemption would not apply were that: (1) the employer makes no contributions; (2) employee participation is “completely voluntary”; (3) the employer does not endorse the program and acts as a mere facilitator of a relationship between the IRA vendor and employees; and (4) the employer receives no consideration except for its own expenses”—but since, in the federal government’s assessment, “CalSavers’ automatic-enrollment IRAs are not ‘completely voluntary,’ they are not exempt from ERISA within the 1975 IRA Safe Harbor.”
Futile Resistance?
Suffice it to say that the court (U.S. District Judge Morrison C. England) didn’t find the arguments any more persuasive now that before. In his March 10 order, Judge England noted that “this matter again coalesces around the single narrow question addressed in the Prior Order: does CalSavers, a state-mandated auto-enrollment retirement savings program, create an ‘employee benefit plan,’ such that it is preempted by ERISA?” And in case there was any doubt as to how this review was going to go down, early on in this decision, he wrote that “while this Court granted the Prior Motion with one final leave to amend, it noted that amendment would inevitably be futile as CalSavers is not subject to preemption under ERISA.”
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After dealing with some procedural arguments, Judge England first turned his attention to the issue as to whether CalSavers is an employee benefit plan, then turned to an analysis of whether CalSavers relates to an ERISA plan.
Judge England made quick work of the argument that CalSavers was an employee benefit plan, noting that the Board and Trust which oversee the program did not do so as employers of the individuals involved, that the actual employers involved here “have no discretion in the administration of CalSavers and do not make any promises to employees: employers simply remit payroll deducted payments to the Program and otherwise have no discretion regarding the funds.”
‘Relate’ State
Having discarded that argument, Judge England then noted that “the only question that remains is whether CalSavers is preempted by ERISA because it ‘relates to’ an ERISA plan.” England began his analysis by noting that “a state law is preempted by ERISA if it ‘relates to’ an employee benefit plan,” and that “a law ‘relates to’ an ERISA plan if it has a connection with or reference to such a plan.”
The plaintiffs here had taken the position that CalSavers’ “reliance on the existence or non-existence of ERISA plans constitutes an impermissible reference”—remember that CalSavers applies only when actual employers do not have an existing ERISA or employer-sponsored retirement plan. But that, Judge England said, means that “the Program does not interfere with existing ERISA or retirement plans provided by actual employers.”
Impermissible Connections
As for the notion of an impermissible “connection with ERISA,” Judge England noted that “this Court” previously found that “because the Program only applies to employers without existing retirement plans, no ERISA plans are ‘governed’ or ‘interfered’ with because of the statute.” Now, the plaintiffs here (and the Department of Justice) wanted England to reconsider this position, but explained that “CalSavers does not impose additional reporting requirements on existing ERISA plans. The information provided by participating employers does not interfere with ERISA’s regulatory domain because reporting is only required where no ERISA or any other employer-sponsored retirement plan exists. There are no additional burdens or requirements imposed by CalSavers on existing ERISA or employer-sponsored retirement plans which interfere with ERISA’s regulatory domain or govern any central matter of plan administration.”
“In sum,” Judge England concluded, “the Court finds that CalSavers is neither an employee benefit plan nor does it relate to an ERISA plan. On these grounds, the Court concludes that CalSavers is not preempted by ERISA and accordingly, Defendants’ Present Motion is GRANTED.”
What This Means
Simply stated, for the moment anyway (an appeal is certainly possible, particularly in view of the federal government’s interest in the outcome), CalSavers can keep on keeping on. The program reports that more than 1,500 employers have registered with CalSavers since the program launched on July 1, 2019, and employers with more than 100 employees who do not already sponsor a retirement plan must register for CalSavers by June 30, 2020 (those with more than 50 employees have until June 30, 2021, and employers with at least five employees have until June 30, 2022 to register).
However, echoing the concern that has been raised by others amidst the emergence of state (and municipal) programs across the nation, in its brief the Department of Justice noted that “a decision by this Court to allow the Secure Choice Act to survive would allow for the creation of a patchwork of different state laws regulating the provision of retirement benefits to employees.” A danger, the DOJ wrote was “exacerbated because the Act applies to employers to the extent they do business in California regardless of where the company is headquartered or specific employees are located,” explaining that “a multi-state employer would not only have to keep track of payroll deductions, rates, and eligibility for CalSavers, but also for myriad other states’ automatic-enrollment IRA programs.”
And that, as the DOJ reminded the court (and us), is “exactly the kind of disuniformity that ERISA § 514(a) was designed to avoid.”
