Taxpayer Advocacy Group Challenges CalSavers

California taxpayer advocates have challenged the Golden State’s nascent state-run retirement plan for private sector workers.

The suit, filed in the U.S. District Court for the Eastern District of California, claims 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 assert that CalSavers is “ultra vires” (beyond the powers), and seek a declaration that CalSavers is “void.”

The plaintiffs are the Howard Jarvis Taxpayers Association, Jonathan Coupal, and Debra Desrosiers (“as non-governmental employees and California taxpayers,” though Coupal is president of the association, and Desrosiers is an Executive Assistant there). The late Howard Jarvis, founder of HJTA, was the force behind the adoption of Proposition 13 in 1978.

As for standing to bring the suit, the plaintiffs note that “HJTA members are participants or putative participants in CalSavers; employers subject to mandatory participation in CalSavers and thus putative fiduciaries; and California taxpayers.” Moreover, the suit explains that HJTA is itself an employer of five to eight employees without a private retirement plan – and is thus a putative fiduciary.

Image of CalSavers logo

California taxpayer advocates have challenged the Golden State’s nascent state-run retirement plan (Calsavers) for private sector workers.

(Not so) Safe Harbor?

The suit invokes statements from a 2015 Labor Department fact sheet detailing “circumstances under which a state-required payroll deduction savings IRA program would not give rise to an employee pension benefit plan under ERISA and, therefore, should not be preempted by ERISA,” going on to note that the same fact sheet stated that, “The state must be responsible for the security of payroll deductions and employee savings,” and that a simultaneous EBSA news release stated that the “new safe harbor… would adopt a standard stating that the state-sponsored payroll deduction IRA programs must be ‘voluntary’ for workers, rather than ‘completely voluntary’ as defined in a 1975 rule.” Moreover, that it noted that “the employees and states would retain control of the program and IRA accounts.”

The suit proceeds to quote the legislation that created CalSavers as saying that the board “…shall not implement the program if the IRA arrangements offered fail to qualify for the favorable federal income tax treatment ordinarily accorded to IRAs under the Internal Revenue Code, or if it is determined that the program is an employee benefit plan under the federal Employee Retirement Income Security Act.” And, it states that as a result the Budget Change Proposal for fiscal year 2017-2018 (which requested a $170,000,000.00 loan to implement CalSavers) stated: that “before the Program can open for enrollment, SB1234 requires the Board to report to the Governor and Legislature” that the Labor Department has finalized a regulation setting forth a safe harbor for savings arrangements established by states for nongovernmental employees for the purposes of the federal Employee Retirement Income Security Act (ERISA),and that the board “has defined in regulation the roles and responsibilities of employers pursuant to criteria outlined in the DOL regulation.”

Not mentioned in the suit is that in May 2017, President Trump signed legislation that overturned the Obama administration’s ERISA safe harbor rule for state-run auto-IRA programs for private sector workers. Immediately thereafter, California State Treasurer John Chiang and Senate President Pro Tempore Kevin de León said that California’s Secure Choice program remains on track and that “current law should not impede the Board if it chooses to consider Program designs using an ‘opt out’ negative election approach.”

Involuntary Fiduciaries?

After restating its position that a program such as CalSavers is preempted by ERISA, the suit notes that because CalSavers applies to employers of five or more employees, the program “…subjects small businesses to administrative and legal turmoil should they have five or more employees initially, but later only four or fewer employees” – and that “such employers automatically become ERISA plan administrators with all attendant administrative and legal liabilities.” The suit goes on to argue that, “As small business owners, both HJTA members and HJTA itself have putative fiduciary standing to sue for preemption because they are at risk of involuntarily becoming ERISA plan administrators under the Program.”

The first claim for relief concludes that, “because the U.S. Congress has expressly disavowed savings arrangements established by States for non-governmental employees in Public Law 115-35, there is no potentially valid DOL regulation permitting this state-run retirement arrangement,” and that the “nationally uniform application of ERISA requires that this Court declare CalSavers void.”

The suit also makes a second claim for relief as California taxpayers, that “CalSavers’ Waste of Taxpayer Funds Is Subject to Injunction Under California Code of Civil Procedure 526a,” explaining that “as of September 25, 2017, $450,000.00 was spent from a general fund loan, and $20,000,000.00 more was requested from the Department of Finance. The Legislature approved a loan of $16,900,000.00. As of March 31, 2018, expenditures since the Program’s inception totaled $1,549,629.00.”

Other States

A half dozen states either have one of these state-run programs for private sector workers in development, or on the drawing board. Oregon became the first to go live last summer, but was also challenged on a more limited ERISA preemption challenge. Specifically, the ERISA Industry Committee (ERIC) had filed a lawsuit last October against the Oregon Retirement Savings Board, saying that ERISA preempted the OregonSaves reporting requirements imposed on employers that already provide an ERISA retirement plan to their employees in Oregon. Ultimately ERIC dropped that suit in exchange for an agreement that ERIC members need only inform the State of Oregon, if it asks, that they are ERIC members, with the state agreeing to verify their membership with ERIC to confirm their exemption from OregonSaves.

Add Your Comments

One Comment

  1. Paul
    Posted June 4, 2018 at 10:40 am | Permalink

    If a state maintains a plan for private employers, does that mean California politicians will become fiduciaries and have to start acting in the best interests of their constituents? If so, it would be worthwhile for that major change feature alone.

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