A lawsuit challenging California’s auto-IRA program for private sector workers just got the backing of the federal government.
Last month the Department of Justice asked a federal court to hold off ruling on a suit challenging California’s auto-IRA program for private sector workers.
The Case at Hand
The suit in question was a challenge by the Howard Jarvis Taxpayers Association, claiming that the California Secure Choice Retirement Savings Trust Act – which establishes the CalSavers auto-IRA program for private sector workers “violates the Supremacy Clause of the United States Constitution because it is expressly preempted by the Employee Retirement Income Security Act of 1974….” The suit was originally filed in June 2018 in the U.S. District Court for the Eastern District of California.
In April 2019, Judge U.S. District Judge Morrison C. England Jr. acknowledged that the case “presents novel legal questions concerning state-mandated retirement savings accounts” and “implicates a significant body of judicial and regulatory interpretations of ERISA,” but concluded that “finding that ERISA preempts CalSavers would be out-of-step with the underlying purposes of the Act. CalSavers does not govern a central matter of an ERISA plan’s administration, nor does it interfere with nationally uniform plan administration. On this basis, the Court finds that CalSavers is not preempted by ERISA.” He did, however, give the plaintiffs “one final leave to amend,” noting the “importance of this case” – an opening of which they recently took advantage.
Federal ‘Case’
In the Sept. 13 filing (Howard Jarvis Taxpayers Assoc. v. Cal. Secure Choice Retirement Savings Program, E.D. Cal., No. 2:18-cv-01584-MCE-KJN, statement of interest of the United States 9/13/19), the DOJ notes that “the United States has a heightened interest in finding the Secure Choice Act preempted because the Act is among the first of a number of similar state auto-individual retirement account (IRA) laws to be challenged.”
The government’s filing states that the California Secure Choice Retirement Savings Trust Act “…takes away the freedom of choice that lies at the core of ERISA by forcing employers either to establish their own ERISA plan or to maintain an equivalent plan under the Act,” and that “in taking away this choice, the Secure Choice Act disregards Congress’s careful determination that employers should not be required to maintain employee pension benefit plans. Because the Secure Choice Act disregards and runs afoul of ERISA’s statutory scheme by effectively requiring employers to maintain such plans, it is preempted by ERISA’s broad, express preemption provision that disallows any state laws that relate to any employee benefit plan.”
Moreover, the DOJ characterized the fact that the Act “forces California employers who do not offer the State’s preferred types of ERISA plans (certain tax-favored employer-sponsored retirement programs and automatic enrollment IRAs) to adopt equivalent automatic-enrollment IRAs through CalSavers” as a “heads-I-win-tails-you-lose” state regulation that “cannot survive under the Court’s ‘reference to’ jurisprudence.”
The DOJ called out the Golden State for “singling out” employers who decline to sponsor the state’s preferred ERISA plans, forcing them to enroll their workers in plans that function just like the plans they have chosen not to offer. “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.
Going on to note that “If the identical functions of the CalSavers Board were instead performed by a third party administrator and investment manager voluntarily hired by an employer plan sponsor, this arrangement clearly would fall within the scope of ERISA,” the filing goes on to explain that “by requiring employers to deduct contributions from eligible employees’ wages on an ongoing basis, and to forward the contributions for deposit into IRAs established for each enrolled employee, the Secure Choice Act requires the employers to maintain an employer-based program providing “retirement income to employees” or resulting “in a deferral of income by employees for periods extending to the termination of covered employment or beyond.” And that, they note means that it “requires the covered employers to maintain 'ongoing administrative programs' to pay employee benefits.”
‘Ministerial’ Matters
The DOJ pushed back on the notion that the role of employers in the CalSavers program is “purely ministerial” since, as one example, they “must still make ongoing determinations as to which employees are 'eligible employees,'” and that these initial eligibility determinations would necessarily be made by the employer. “The fact that employers do not voluntarily create these ERISA plans does not alter the conclusion that they are still ‘employers’ as defined by ERISA who ‘maintain’ the plan, notwithstanding any attempt by state law to redefine the role of employers,” the DOJ observes.
As for the notion that the CalSavers program met the requirements of a 2015 Labor Department fact sheet, the DOJ stated that that safe harbor regulation “provides that ERISA does not cover a payroll-deduction IRA arrangement otherwise covered by ERISA so long as four conditions are met: (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 that since, in its assessment “CalSavers’ automatic-enrollment IRAs are not 'completely voluntary,' they are not exempt from ERISA within the 1975 IRA Safe Harbor.”
Ultimately, the DOJ concludes that since California’s Secure Choice Act requires employers who do not have ERISA plans to maintain ERISA-covered plans, it “also controls the benefits, design, and administration of the mandated plan,” and in so doing, “interferes with nationally uniform plan administration by potentially subjecting multi-state employers to numerous disparate retirement plan laws.”
‘Patchwork’ Position
And then – echoing the concern that has been raised by others amidst the emergence of state (and municipal) programs across the nation, the DOJ notes 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 writes, is “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.” The DOJ notes that this result is “exactly the kind of disuniformity that ERISA § 514(a) was designed to avoid.”
Referencing CalSavers attempt to dismiss the Jarvis plaintiffs’ amended filing, the DOJ ends noting, “Because the CalSavers Act is preempted by ERISA, this Court should deny Defendant’s motion to dismiss Plaintiff’s First Amended Complaint,” the filing concludes.
What This Means
Technically, this response only speaks to the issue as to whether the plaintiffs’ argument that the law that gave life to the CalSavers program is preempted by ERISA will continue to trial – and one might well expect the court to accord the federal government deference on this issue.
Then again…
Stay tuned.
