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SCOTUS Pressed to Review CalSavers Legality

Litigation

It’s said that if at first you don’t succeed, try, try again—and that’s just what one plaintiff is doing in its attempt to do away with the CalSavers program.

Actually, it’s multiple plaintiffs—the Howard Jarvis Taxpayers Association, Jonathan M. Coupal, and Debra A. Desrosiers—who have petitioned the U.S. Supreme Court to “review the judgment of the United States Court of Appeals for the Ninth Circuit.” 

In what it acknowledged was a “case of first impression,” the Howard Jarvis Taxpayers Association (HJTA) brought this action “…to stop California from arrogantly proceeding with a state-run private retirement system that Congress disapproved when it vetoed the only Safe Harbor that would have allowed such programs.”

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.”

Case History

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 in June 2020, 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.” That was followed in a decision earlier this year by the Ninth Circuit that CalSavers was not preempted by ERISA—leaving the plaintiffs to seek review by the nation’s highest court. 

The “trick,” of course, is to persuade the Supreme Court of the need to intervene in the decision of the lower court. The question the plaintiff/petitioners put to them for consideration was, I think it’s fair to say, “provocative”: “Considering California’s infamous record of mismanagement, corruption, and the cavernous underfunding of its public employee retirement systems, is California permitted under federal law (ERISA) to now require private employers to automatically debit employee paychecks and surrender those earnings to the State to manage as ‘retirement savings,’ despite the State expressly disclaiming any fiduciary accountability, and despite Congress having exercised its authority under the Congressional Review Act[i] to veto a Department of Labor regulation that briefly carved out an ERISA Safe Harbor for such state-run automatic retirement savings plans?”

Participant Concerns

The petitioners here outlined a number of concerns on behalf of individual participant-savers, that: 

  • Once in State hands, the employee’s money will not have the security that Congress, through the Employee Retirement Income Security Act (ERISA) intended.
  • It will not be segregated in a separate account for safekeeping but will be commingled with other funds. 
  • It will not be invested at the employee’s direction, but will be subject to California’s maze of divestment rules focusing more on political correctness than return on investment. 
  • It will not be protected by any fiduciary duty or contractual liability, but will be at risk under a statute that expressly disclaims any responsibility for loss.

They also cited the impact(s) to employers, notably that “Employers too will be stripped of ERISA’s protections,” specifically that “…hundreds of thousands of small businesses whose staff fluctuates above and below five employees based on things like summer tourism, holiday shopping, and contractual demands” would “…be thrown in and out of CalSavers’ mandate, repeatedly exposing them to potential liability to the State and to their own employees.” Moreover, the petitioners argue that “if individual states are allowed to intrude into this field of private retirement regulation that Congress expressly preempted through ERISA, then multi-state employers will face a labyrinth of different rules, contrary to the nationwide uniformity that ERISA was designed to guarantee.”

Or perhaps most succinctly, “Here, California is inserting itself into this federally preempted field and imposing its own mandates and rules that conflict with ERISA’s structure. This strips both employers and employees of their rights under federal law.” 

“Unless this Court grants certiorari and reverses the Ninth Circuit, the precedent will be set and, before long, there will be a smorgasbord containing each state’s version of CalSavers, throwing into confusion whether employees’ earned wages will ever get returned if, for example, they move from one state to another, or if they temporarily work in a state but are not domiciled there, or if their employer filled out the wrong paperwork for that state 20 years ago, or if they never retire, or if the state’s program becomes insolvent, etc.,” they write.

Will the Supreme Court “bite?” We’ll see.


[i] You may recall that the Obama administration had, in August 2016, published a final rule outlining the circumstances in which state retirement savings programs would not be treated as creating ERISA-covered pension plans. That rule was overturned in 2017 by Congress under the Congressional Review Act, and signed into law by President Trump in May 2017

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