Pension & Benefits News California’s state-mandated retirement savings program not preempted by ERISA
Friday, July 12, 2019

California’s state-mandated retirement savings program not preempted by ERISA

By Pension and Benefits Editorial Staff

ERISA does not preempt CalSavers, an auto-enrollment retirement savings program mandated for most employers by the state of California, because the program does not create an “employee benefit plan” as defined by ERISA, a U.S. district court in California has ruled.

In 2012, California enacted the California Secure Choice Retirement Savings Trust Act (CalSavers) (Cal. Gov’t Code §§100000—100050), creating a state-sponsored retirement savings plan for California employees who do not have access to an employer-provided plan. Eligible employers (generally employers with five or more employees) that do not offer a retirement savings plan must automatically enroll their employees and remit contributions to CalSavers via payroll deduction. Employees may elect to “opt out” of the program.

The Howard Jarvis Taxpayers Association (HJTA) filed suit seeking a declaratory judgment that ERISA preempts the CalSavers program and an injunction permanently enjoining spending of taxpayers’ funds on the program.

The court first determined that HJTA had standing as an eligible employer under the CalSavers Program. The court then concluded that ERISA does not preempt the CalSavers Program.

HJTA asserted that because CalSavers does not meet the requirements of a 1975 regulatory safe harbor for ERISA exclusion of employer payroll deduction IRAs, CalSavers establishes an ERISA plan and is thus preempted. The 1975 Safe Harbor (ERISA Reg. Sec. §2510.3-2(d)) sets forth four requirements for ERISA exclusion of employer payroll deduction IRAs: (1) no employer contributions are allowed; (2) employee participation must be “completely voluntary”; (3) the employer cannot endorse the program; and (4) the employer cannot receive compensation from the program.

The automatic enrollment feature of CalSavers prevented the program from being “completely voluntary”, HJTA argued. The association buttressed its argument by citing a Labor Department 2016 interpretation of the phrase “completely voluntary” in the 1975 Safe Harbor to mean that the employee must initiate participation in order for it to be “completely voluntary”. Indeed, the DOL in 2016 issued a new safe harbor because of its concern that state-mandated IRAs with auto-enrollment features would fall outside the provisions of the 1975 Safe Harbor.

That court essentially agreed with HJTA’s argument, declining to hold that CalSavers falls within the 1975 Safe Harbor. (That said, it rejected the association’s reliance on the DOL’s 2016 Safe Harbor issuance. President Trump and the Republican-controlled Congress in 2017 repealed the 2016 safe harbor pursuant to the Congressional Review Act, thus repealing “the DOL’s interpretation of the matters at issue here.”)

Although CalSavers does not fall within the 1975 Safe Harbor, the court still determined that based on traditional preemption principles, ERISA does not preempt the program. The court noted that the Ninth Circuit has held that a state law “must actually ‘govern…a central matter of plan administration or interfere with nationally uniform plan administration” before preemption concerns may arise. Here, because CalSavers applies to employers without existing retirement plans, no ERISA plans are “governed” or “interfered” with because of the statute. State mandates concerning employee benefits are not preempted if the law does not force employers to create or alter ERISA plans.

SOURCE:  Howard Jarvis Taxpayers Association v. The California Secure Choice Retirement Savings Program (DC CA.

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