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Cali Comments on CalSavers ERISA Preemption Challenge

Government Affairs

In response to a federal court request, Golden State officials have elaborated on why CalSavers – the state’s state-run automatic IRA program for private sector workers – isn’t preempted by ERISA.

The comments came in a brief (Howard Jarvis Taxpayers Ass’n v. Calif. Secure Choice Ret. Savings Program, E.D. Cal., No. 2:18-cv-01584-MCE-KJN, defendants’ supplemental brief in support of motion to dismiss 11/15/18) in support of their request to dismiss a suit filed in the U.S. District Court for the Eastern District of California by the Howard Jarvis Taxpayers Association, Jonathan Coupal, and Debra Desrosiers (“as non-governmental employees and California taxpayers”). They allege 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.”

In making their case, the plaintiffs had invoked 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.”

Voluntary ‘State’

Indeed, California’s response was submitted because the court had requested a supplemental briefing on two issues in the plaintiffs’ suit: (1) interpretation of the “completely voluntary” requirement of the aforementioned Department of Labor 1975 safe harbor regulation, and how, if at all, this requirement applies to a state-mandated retirement savings plan such as CalSavers; and (2) how principles of conflict and field preemption apply, if at all, to CalSavers.

The response begins by citing a previous motion to dismiss where the defendants note that “CalSavers is not an ‘employee benefit plan’ as defined by ERISA,” meaning any “plan, fund, or program … established or maintained by an employer or by an employee organization” in that it was established by the state, which, while it is an employer, does not qualify as either an “employer” or an “employee organization” under ERISA, and therefore the express preemption provision does not apply. In a footnote, they go on to explain that in their assessment, the issue comes down to whether, in establishing and maintaining CalSavers, the State of California acts “indirectly in the interest of an employer.” Concluding, not surprisingly, that in their assessment, it does not.

‘Safe’ Spaces

While stating that, from their perspective, the matter should end there, the defendants go on to address the 1975 safe harbor, explaining that DOL issued the 1975 safe harbor to clarify what employers may and may not do in connection with IRA programs “without thereby establishing or maintaining an employee benefit plan,” going on to note that, “there is no basis for concluding that IRAs established pursuant to a state-mandated program such as CalSavers are employee benefit plans when programs voluntarily initiated by an employer are not. Indeed, the opposite is true.”

However, the defendants noted that here the Court requested briefing on one of the four elements of the 1975 safe harbor, specifically that ““[p]articipation [in the IRA program] is completely voluntary for employees or members,” while stating they were unaware of any case law interpreting the “completely voluntary” prong of the 1975 safe harbor relating to IRAs, nor was there any authority as to whether state-mandated retirement saving programs, or IRAs created pursuant to those programs, meet the “completely voluntary” prong of the 1975 safe harbor (“this is to be expected,” the brief explains, “since state-mandated retirement saving programs have only relatively recently been established, and by only a few states”).

Prong ‘Wrongs’?

That said, the defendants found a reference point for the voluntary prong with regard to group insurance plans, and after recounting a handful of situations found to be voluntary by the courts, they cited instances where programs were found to not be completely voluntary, they note that “the CalSavers program could not be more different from the programs at issue in this latter group of cases. Not only is participation not mandatory, but employers are not responsible for administering the plan.” Moreover, they explained that the information packet given to employees must by statute include an opt-out form and information about the employee’s ability to opt-out,1 and that therefore “no employee reasonably could believe that his employer intends CalSavers as a benefit of employment.”

Summing up this line of reasoning, the defendants state that, “ERISA does not apply at all to CalSavers, since CalSavers was not established by and will not be maintained by any employer, but rather by the State; therefore, it is not an ‘employee benefit plan’ within the meaning of ERISA. To the extent the 1975 Safe Harbor comes into play at all, CalSavers satisfies the ‘completely voluntary’ prong of the 1975 Safe Harbor,” since the “minimal burden of opting out of coverage does not make an employee’s decision to participate in the CalSavers program less than completely voluntary.”

As for how “principles of conflict and field preemption apply in this case,” the defendants start by noting that, “even if CalSavers could be said to give rise to an ‘employee benefit’ for employees that do not opt out, that would not infringe upon the field that ERISA regulates: employee benefit plans,” and that, as stated earlier, “CalSavers does not create or regulate in any way an employee benefit plan, because the State of California does not meet the definition of an ‘employer’ or an ‘employee organization’ under ERISA.”

Police Powers

Nor, they argue, does CalSavers impose fiduciary obligations upon employers and “thereby infringe on ERISA’s regulation of plan sponsors’ fiduciary relationships to their participants.” Rather, they note that the statute “expressly relieves employers from any fiduciary obligation to manage IRAs established under the program,” nor does the CalSavers program mandate any record-keeping relating to ERISA-governed plans. “Employers that are subject to CalSavers may have to account for payroll deductions of those employees that do not opt out of the program, but those employers are already obligated to account for deductions that are taken from their employees’ pay.” Rather, they argue, “CalSavers is merely an exercise of the State’s traditional power over the payment of wages…”.

The state wraps up its argument by not only emphasizing that the Secure Choice Act (which created CalSavers) is “an exercise of California’s historic police powers,” but that it was “enacted to protect the physical and economic health, welfare, and well-being of its residents” – and that “Inadequate retirement savings affects not only the quality of life and physical health of individuals, but also significantly increases the burden on the State’s retirement income support programs.”

CalSavers, the state-run retirement plan for private-sector employees whose employers do not offer a retirement plan, was set to launch a pilot on Nov. 19. The pilot is expected to start with about 20 diverse employers and grow to 50 or more. The first contributions to CalSavers are expected to start being made in January, according to an announcement on the Calpensions blog.

Footnote

1.Employees of employers that offer CalSavers may opt out of the program. For those who do not, the standard contribution will start at 5% of pay and increases 1% of pay each year until reaching 8%. Employees can change their contribution rates, pause contributions, and return later if they had opted out.