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CalSavers Clears ERISA Preemption – For Now

Technical Resources

While noting 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,” a federal judge has ruled – for the moment – that California’s state-run auto IRA retirement savings plan is not preempted by ERISA.

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

The suit also made 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.”

The suit was brought by 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.

Safe Hows?

In considering the matter, Judge U.S. District Judge Morrison C. England Jr. noted as “undisputed” that the 2016 Safe Harbor passed during the Obama administration “would have exempted CalSavers from ERISA’s provisions.” Of course, that was repealed in 2017

With regard to the standing of the plaintiffs to bring suit, Judge England determined that the HJTA employees lacked standing to bring suit since “”they are not yet participating in an ERISA plan, and their potential injuries, if any, are too remote to confer standing.” Similarly, he ruled that “the issues presented in this case are not germane to HJTA’s purpose such that it would be able to assert standing on behalf of its members.” That said, he determined that HJTA did have standing as an “Eligible Employer” under the program though he noted that “If CalSavers does not create an ERISA plan, HJTA lacks ERISA standing—however, if the Program does create an ERISA plan, HJTA has both Article III and statutory standing as a potential plan fiduciary.”

Preempt ‘Shun’?

However, on for the issue of ERISA preemption, Judge England noted that if the CalSavers program met the requirements of 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,” ERISA would not preempt the program. That safe harbor outlined 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. Judge England explained that only the “completely voluntary” factor was at issue here.

The issue then is whether automatic enrollment – albeit one where the employees may opt out – is “completely voluntary.” 

Ironically, the Labor Department’s 2016 Safe Harbor interpretation that “completely voluntary” under the 1975 Safe Harbor required that the employee initiate participation played a role in the decision. That determination was, in fact, according to Judge England, what the plaintiffs relied upon exclusively in asserting their claim regarding ERISA preemption. 

And, sure enough, Judge England noted that “an agency’s interpretation of its own regulation is given significant deference.” That said, he went on to note that, “in repealing the 2016 Safe Harbor pursuant to the Congressional Review Act, Congress repealed the DOL’s interpretation of the matters at issue here, making determining congressional intent more difficult.” And then he turned to a review “under traditional federal preemption principles.”

Govern ‘Meant’

The analysis here was remarkably succinct, noting that the Ninth Circuit has recently held that “under the modern approach a state law is not preempted merely because it has a literal ‘connection with’ an ERISA plan... Instead, the law must actually ‘govern[ ] . . . a central matter of plan administration’ or ‘interfere[ ] with nationally uniform plan administration.’”

And since the CalSavers program “only applies to employers without existing retirement plans, no ERISA plans are ‘governed’ or ‘interfered’ with because of the statute,” he wrote, going on to explain that, “CalSavers does not govern a central matter of an ERISA plan’s administration, nor does it interfere with nationally uniform plan administration.”

He 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.” 

One More Thing…

That said, it’s not quite over yet. While dismissing the claims, and granting the defendants’ motion to dismiss the claims, Judge England provided the plaintiffs with “one final leave to amend.” He concluded his decision by noting that he was “…very aware of the importance of this case and considered granting this motion without leave to amend. However, notwithstanding the Court’s concern, allowing one final opportunity to amend may be in the parties’ best interest.” He granted plaintiffs 20 days to file an amended complaint, noting that “if no amended complaint is filed within said time period, this case will be dismissed without leave to amend with no further notice to the parties.”

The case is Howard Jarvis Taxpayers Association et al. v. CA Secure Choice Retirement Savings Program, case number 2:18-cv-01584, in the U.S. District Court for the Eastern District of California.

CalSavers is slated to launch in full in July after a pilot run that began in November.

What This Means

For now, the CalSavers program is sure to keep moving ahead with its current rollout schedule. That said, arguably there was a reason that the Obama administration saw fit to set out some clearer boundaries for these state-run IRA programs – if only to remove the potential ambiguity around the meaning of “completely voluntary” as it relates to a mandated action that can be revoked. 

This decision seems to gloss over that distinction, relying instead on Ninth Circuit precedent and the notion that since an employer that isn’t currently offering an ERISA plan, there’s no conflict posed by the CalSavers mandate to be resolved. Will it hold up? Will the plaintiffs take another shot at it? 

Stay tuned.