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Taxpayer Rights Group Reengages CalSavers Challenge

Technical Resources

A court challenge to California’s CalSavers program has reemerged, claiming the state-run mandatory auto IRA program for private sector workers poses a significant financial risk to taxpayers.

The filing (titled somewhat unwieldly, “Plaintiffs’ opposition to Defendants’ motion to dismiss first amended complaint”) is a second shot by the Howard Jarvis Taxpayers Association, Jonathan Coupal and Debra Desrosiers to have a federal judge terminate the program. The suit, originally filed in June 2018 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…”

In April 2019, Judge U.S. District Judge Morrison C. England Jr. acknowledged 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,” but 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.” 

Judge England did, however, leave the door open – giving the plaintiffs here “one final leave to amend,” noting the “importance of this case.” The plaintiffs have taken advantage of that opening.

Second ‘Story’

The plaintiffs lost no time in stating their arguments, noting that “the defendants’ motion rests on one main assumption: that when a state sets up an IRA payroll deduction program and mandates participation by private employers, no ERISA plan is established even if that program fails to satisfy the conditions for exemption of payroll deduction IRAs in 29 C.F.R. §§ 2510.3-2; 2509.99-1, including Internal Revenue Code § 408(a). This assumption is false.”

The plaintiffs here claim that the “risk of this liability has been foreseen since its inception. The California State Legislature requested a $170,000,000.00 general fund loan to establish CalSavers, placing risk on the taxpayers of California,” and note that “credit extended is not always repaid and credit extended for an illegal program adds significantly to that risk.”

The plaintiffs go on to invoke the comments of California’s Department of Finance, which was “…opposed to this bill because it could create pressure on the General Fund to pay for start-up and administrative costs for the Program should outside funding fail to materialize,” and that the Golden State’s General Fund is unable to support new programs at this time. The plaintiffs quote from the 2012 document of the Department of Finance, which expressed concern that, “Despite the bill's stated intent to shield the state from financial liability, the state ultimately could be responsible for benefit payments under federal law, putting the state at serious risk of billions of dollars in unfunded liabilities if investment performance falters under the Program. … Additionally, this bill could create a multibillion dollar liability for the state if investment returns fail to reach cover [sic] the guaranteed rate of return and administrative overhead.” However, based on those provisions, the plaintiffs also argue that, “A reasonable person will notice that CalSavers is a private-sector, defined-benefit plan, and expect ERISA standards and protections to apply.”

The plaintiffs also note that the bill “establishes a new board at a time when the Administration is focusing on reducing the size of government.” 

Standing, Still

Having laid out their concerns about the risk to taxpayers of the program, the plaintiffs move on to the issue of standing, noting that “standing in this case is based on injury to the taxpayers who are private employers and employees because ERISA made private pensions exclusively a federal concern.” The plaintiffs go on to explain that the California Legislature’s $170 million general fund loan request was “made on the condition that the U.S. Department of Labor finalizes a regulation exempting CalSavers from ERISA,” and that while the DOL finalized a regulation in 2016 doing so, “Congress repealed it,” referring to actions taken under the Congressional Review Act in May 2017.

The plaintiffs note that while “this court appears to view CalSavers as an IRA payroll deduction program, but not one expressly exempted from ERISA,” but argue that the court hadn’t found preemption “because it sees neither a reference nor connection to ERISA nor interference with ERISA plans, and accepts CalSavers generally as a state government mandate on employers.” However, the plaintiffs counter that, “CalSavers is exactly the type of employee benefit plan that Congress regulates through ERISA and keeps in the federal domain. Because CalSavers creates an ERISA plan or plans, refers to ERISA, connects with ERISA, conflicts with ERISA, and is not under the 1975 safe harbor, it is preempted.”

They go on to argue that CalSavers is a Non-Exempt ERISA plan because the “existence of a plan is a question of fact to be determined by a reasonable person standard,” and that – at least in their assessment, “Any reasonable person reviewing CalSavers’ documents such as the CalSavers investment policy statements, for example, would conclude that CalSavers is an ERISA plan because investment policy statements are typical documents of an ERISA plan.” 

‘Safe’ Cracked?

The plaintiffs here raise an argument that has been raised previously regarding the automatic aspect of these state-run IRA programs (and one that the Obama administration’s 2016 safe harbor was ostensibly, at least in part, designed to clarify before being tossed by Congress in 2017) – that the program is not “completely voluntary” (under 29 C.F.R. § 2510.3-2(d)), and that “Defendants’ optout form does not change the analysis.” They go on to explain that, “the DOL has declared that where there is a duty to opt-out, the program is not “completely voluntary,” and that “when an employer automatically enrolls employees, an ERISA plan is established, “trigger[ing] ERISA’s protections for the employees whose money is deposited into an IRA.” 

The plaintiffs go on to note that “the point of contention here is whether CalSavers is ‘established or maintained by an employer or by an employee organization’ because CalSavers is undisputedly a program for workplace retirement income savings as required by subsections (A)(i-ii),” going on to state that, “If the plan is ‘established or maintained by an employer or by an employee organization,’ it is an ERISA plan,” before going on to note that, “the CalSavers Trust is acting indirectly in the interest of California employers by narrowing and mandating that choice, and then directing the process if an employer chooses CalSavers. Doing this is indirectly acting for the employer’s interests with respect to pension planning…”

‘Shoe’ Horn?

By way of buttressing that argument, they cite CalSavers’ own promotional videos that, “show that CalSavers is designed to act indirectly in the interests of employers,” and note that “the professed goal of the CalSavers Trust is to address the employer’s ‘lack of access’ to workplace retirement plans, to give employers something to ‘offer,’ to help employers remain competitive and able to retain their employees.” 

“Thus, CalSavers is established by an ERISA employer – the CalSavers Trust – acting indirectly in the interests of employers for the purpose of workplace retirement planning.

“This is clearly acting indirectly in the interests of employers with respect to pension plans, by attempting to enhance and direct what they offer their employees,” they write, concluding that, “The very purpose of the CalSavers Trust is to step into the shoes of employers with respect to workplace retirement plans.”

Will the court be persuaded? Stay tuned.