Ninth Circuit Holds That CalSavers Program is Not Preempted by ERISA

Practical Law Legal Update w-030-9167 (Approx. 5 pages)

Ninth Circuit Holds That CalSavers Program is Not Preempted by ERISA

by Practical Law Employee Benefits & Executive Compensation

Background

The CalSavers program (formerly known as California Secure Choice), which was established in 2017 by the CalSavers Retirement Savings Trust Act (Cal. Gov't Code § 100000, et seq.), applies to eligible employees of certain private sector employers in California that:

Have five or more employees.
Do not provide their employees with a tax-qualified retirement savings plan, including an employer-sponsored retirement plan or an automatic enrollment payroll deduction IRA (eligible employers).

CalSavers was created to help provide more private sector employees with retirement plan coverage in order to boost their retirement savings. Under this program:

Eligible employees are automatically enrolled in CalSavers, but may opt out of the program.
If eligible employees do not opt out of CalSavers, their employer must remit certain payroll deductions to the program, which are allocated to the employees' IRAs.
California manages and administers the IRAs and acts as the program's fiduciary.
Exempt employers, which provide their employees with a tax-qualified retirement savings plan, may, but are not required to, inform the CalSavers Administrator of their exemption.
If eligible employers later become ineligible for the program, such as by sponsoring an ERISA retirement plan, they must inform the CalSavers Administrator within 30 days of their change in status.

Eligible employers may not exercise any authority or control over the program, and they are not considered fiduciaries or plan sponsors. Eligible employers have three duties under the program:

They must register for CalSavers by providing their basic identification and contact information.
Within thirty days of registration, they must provide CalSavers with certain contact and identifying information for their eligible employees.
They must set up a payroll deposit retirement savings arrangement to remit employees' contributions to the CalSavers Trust.

As of October 2020, approximately 4,300 employers had registered for CalSavers and nearly 90,000 California workers had enrolled in the program, with approximately 36% of eligible employees opting out of participation.

The Howard Jarvis Taxpayers Association and two of its employees (collectively, HJTA) sued the CalSavers program and the Chairman of the CalSavers Board in his official capacity (collectively, California), alleging that ERISA preempts CalSavers and that CalSavers should be enjoined under a state law. HJTA is a public interest organization that seeks to promote taxpayer rights. It sued in its capacity as a California employer, alleging that it meets the definition of an eligible employer under the program.

The US District Court for the Eastern District of California granted California's motion to dismiss on the grounds that ERISA does not preempt the CalSavers program. The district court declined to exercise supplemental jurisdiction over HJTA's state law claim. HJTA appealed to the Ninth Circuit.

Outcome

Reviewing the district court's ruling on ERISA preemption de novo, the Ninth Circuit affirmed the district court's holding.

DOL Exemptions

The Ninth Circuit first addressed issues relating to the DOL's:

1975 rule exempting certain IRA payroll deduction programs from ERISA under a safe harbor.
2016 rule exempting state-run IRA programs (like CalSavers) from ERISA under a safe harbor.

The DOL's 1975 safe harbor exempts certain IRA payroll deduction programs from ERISA if participation is completely voluntary for employees, among other factors. In 2016, the DOL concluded that state-run IRA programs, which require automatic participant enrollment with opt-out rights, are not completely voluntary and do not fall within the 1975 safe harbor. The DOL then issued that same year a new safe harbor exemption to ensure that state-managed IRA programs are not preempted by ERISA (81 Fed. Reg. 59464). In 2017, however, Congress repealed it by joint resolution under the Congressional Review Act.

Based on these developments, the Ninth Circuit held that:

The repeal of the 2016 safe harbor only signifies that state-managed IRA programs are not automatically exempt from an ERISA preemption analysis. However, the repeal does not speak to whether ERISA preempts a program like CalSavers.
Even if a state-managed IRA program fails to meet the 1975 safe harbor, it will not automatically be considered an ERISA plan that ERISA preempts. Rather, the conventional ERISA preemption tests would still have to be applied to determine if the program is preempted. In this case, however, the Ninth Circuit held that CalSavers is not an ERISA plan, anyway, and therefore it did not decide whether the 1975 safe harbor would exempt CalSavers from ERISA.

ERISA Does Not Preempt CalSavers

Rejecting HJTA's argument that ERISA preempts CalSavers, the Ninth Circuit held that:

CalSavers is not an ERISA plan because it:
- is established and maintained by the State of California, not employers;
- does not require employers to operate their own ERISA plans; and
- does not have an impermissible reference to or connection with ERISA.
CalSavers does not interfere with ERISA's core purposes.

Established and Maintained by California, Not Private Employers

The central issue addressed by the Ninth Circuit is whether a program like CalSavers can be considered "established or maintained by an employer." The Ninth Circuit held that the State of California, not private employers, established and maintain CalSavers, because California:

Created CalSavers.
Determines eligibility for both employers and employees.
Enrolls eligible employees.
Allows individuals to elect to participate in CalSavers outside of the employment relationship.
Acts as the sole fiduciary over the trust and program and is responsible for (or delegates to private managers) the program's investment decisions.
Can change the kind and level of benefits.

California does not act directly as an employer through CalSavers or the CalSavers Trust because it does not employ CalSavers participants, and it does not act indirectly in the interest of an employer through the program.

CalSavers Does Not Require Employers to Operate Their Own ERISA Plans

HJTA argued that CalSavers effectively requires eligible employers to establish or maintain ERISA retirement plans by forcing them to participate in CalSavers and imposing certain obligations on them. The Ninth Circuit rejected this argument because employers do not establish or maintain ERISA plans when they merely perform mandatory administrative functions requiring minimal discretion in a government benefits program.

The Ninth Circuit wrote that ERISA preemption would apply if:

California required private employers to provide retirement benefits to their employees.
Employers made discretionary judgments within a state-mandated benefits scheme.

But neither of these two situations apply to this case. California does not require private employers to establish ERISA retirement plans.

CalSavers Does Not Have an Impermissible Reference to or Connection with ERISA

The Ninth Circuit held that CalSavers is not preempted by ERISA because it does not have an impermissible reference to or connection with ERISA. CalSavers specifically exempts employers that provide a tax-qualified retirement plan or automatic enrollment payroll deduction IRA.

Rejecting additional arguments made by HJTA, the Ninth Circuit noted that it does not matter that:

Some employers may find CalSavers irritating or even burdensome.
CalSavers might compete with ERISA plans, which could frustrate the formation of ERISA plans.

The Ninth Circuit also rejected HJTA's argument that ERISA preempts CalSavers because it is "ERISA-regarding," in that eligibility for CalSavers is based on whether an employer offers an ERISA plan. The logic of that argument, however, would allow ERISA to preempt all state-based retirement programs.

Finally, multi-state employers' retirement plans remain subject to ERISA. CalSavers does not create a different set of private sector retirement plan requirements for California. Rather, the ministerial obligations CalSavers imposes on eligible employers do not resemble the establishment or maintenance of an ERISA plan.

Practical Implications

The Ninth Circuit's decision in Jarvis is significant because no other appellate court has addressed whether ERISA preempts a state-administered IRA program like CalSavers, and these programs are becoming more prevalent throughout the US. After California created the CalSavers program, other states established similar state-managed IRA programs, including Colorado, Connecticut, Illinois, Maryland, New Jersey, and Oregon, as well as the city of Seattle, Washington. Practitioners should follow whether the plaintiffs in Jarvis seek a writ of certiorari from the Supreme Court, and whether state-administered IRAs in other states are challenged in court. Practical Law will continue to monitor these developments.

Ninth Circuit Holds That CalSavers Program is Not Preempted by ERISA | Practical Law