DOL ‘Friends’ CalSavers Challenge

June 30, 2020

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Source: National Association of Plan Advisors, by Nevin E. Adams, JD

The CalSavers Retirement Savings Program is being challenged in court—and now the Labor Department has weighed in.

It’s not the first time the Administration has weighed in on the legality of the program, specifically its preemption under the Employee Retirement Income Security Act,[i] or that it has expressed issues with the design. In fact, the arguments put forth in its most recent friend of the court brief on behalf of the Howard Jarvis Taxpayers Association largely echo those it made last fall in support of that organization’s earlier challenge.

The latter is appealing a decision in March which held that that the Golden State’s auto-IRA program for private sector workers is neither an employee benefit plan nor does it relate to an ERISA plan, and therefore was not preempted by ERISA. The original suit, filed in the U.S. District Court for the Eastern District of California in 2018, 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 had asserted that CalSavers is “ultra vires” (beyond the powers), and seek a declaration that CalSavers is “void.”

That suit had been dismissed with a leave to amend—amended and refiled, the plaintiffs’ argument that ERISA preempted CalSavers was supported by the Department of Justice, but when the district court reconsidered the refiled arguments that it had already heard—well, nothing changed.

Current Case

In a “friend of the court” brief, the Labor Department noted that the Secretary of Labor has an interest in “whether state laws are preempted, properly interpreting the extent of preemption to delineate the roles of federal and state authority over the establishment or maintenance of employment-based retirement plans, and maintaining uniform national standards for plan administration”—and interest the brief described as “heightened” in this case “because the Act is among the first of several similar state laws.” Moreover, the brief notes that the legislation that created CalSavers permits employer contributions if doing so “would not cause the program to be treated” as an ERISA-covered plan, and the Act also specifically provides that the CalSavers Board shall not implement the program “if it is determined that the program is an employee benefit plan under [ERISA].”

In that brief, the Labor Department states that the California Secure Choice Act is preempted under ERISA’s “reference to” doctrine because the existence of an ERISA-covered plan is essential to its operation. More specifically, they note that in order to comply with the Act, employers either must have an ERISA-covered retirement plan, or must use the CalSavers withholding arrangement. “If they use the withholding arrangements mandated by the Act, they establish or maintain plans, funds, or programs of benefits for their employees which therefore are themselves ERISA-covered plans. The fact that the withholding arrangements are compelled by state law does not alter the ERISA preemption analysis,” they write.

The brief also states that the California Secure Choice Act Is also preempted under the “connection with” doctrine “because it both governs a central matter of plan administration and interferes with nationally uniform plan administration,” specifically by “subjecting multi-state employers to a patchwork of state laws that directly regulate how employers must structure their program or plan in providing retirement benefits.”

While the Labor Department disagreed with the conclusion of the district court, it aligned itself with one aspect: that “the arrangements required by the Act do not satisfy the DOL’s regulation, 29 C.F.R. § 2510.3-2(d), which provides that certain individual retirement accounts do not constitute ERISA plans”—and thus, the Labor Department states, “that regulation cannot save the Act from preemption.”

Preempt ‘Shuns’

Stating that “ERISA supersedes any state laws that “relate to any employee benefit plan,” the Labor Department cites “two threads of ERISA preemption” established by the U.S. Supreme Court: “reference to” and “connection with” preemption. Citing precedent, they note that a state law inappropriately makes “reference to” a plan if the law “specifically refers” to ERISA-covered plans, if it acts “immediately and exclusively” upon ERISA plans, or if the existence of ERISA plans is “essential to the law’s operation.”

Drawing emphasis to the second preemption thread, they write that “a state law has an impermissible ‘connection with’ ERISA plans if it governs a central matter of plan administration,” thereby “interfer[ing] with nationally uniform plan administration,” but that under either thread the preemption provision “displace[s] all state laws that fall within its sphere, even including state laws that are consistent with ERISA’s substantive requirements”—and, they conclude that “the Secure Choice Act is preempted under both preemption doctrines.”

“The Secure Choice Act is essentially a state mandate for employers to provide a retirement plan for their employees,” the brief argues, a mandate that “…can only be satisfied with an ERISA-covered plan, so ERISA preempts the Act under ‘reference to’ preemption.” The brief argues that an employer under Cal. Gov’t Code § 100032(g)(1) must either establish a plan that would, by definition, be ERISA-covered or establish a state-mandated plan, and that an employer which chooses to satisfy the mandate by participating in the CalSavers withholding arrangement maintains a plan. “Because the state-mandated plan is ‘established or maintained’ by an employer, it is covered by ERISA,” and thus the brief concludes that “the Act has an impermissible ‘reference to’ ERISA plans.”

The brief notes that the arrangements would be ERISA-covered plans if the employers had voluntarily set up identical IRA arrangements for their employees and hired CalSavers to manage those investments. The Supreme Court has held that a plan otherwise covered by ERISA does not escape preemption purely because state law mandated its existence. Thus, the identical state-mandated plan is treated as equivalent to plans established by employers and subject to ERISA.

Extending that analogy, the brief notes that “just as a typical ERISA retirement savings account would operate, CalSavers sets-up IRAs for retirement savings for employees, and the contributions to those IRAs are invested by a fiduciary. Whether the employees invest the money with a state-managed vehicle or private entities does not change the simple fact that CalSavers mandates employers to provide an employment-based pension plan, which, aside from the state’s involvement, would be indistinguishable from other ERISA-covered plans.”

“Employers subject to the Act’s withholding mandate thus ‘establish’ ERISA-covered plans by complying with the Act’s requirements and mandate to provide a CalSavers plan, an ERISA-plan equivalent, for its employees.” Moreover, the brief claims that California “…singles out employers who decline to sponsor ERISA plans, forcing them to establish and enroll their workers in plans that function just like the plans they have chosen not to offer. Indeed, the plain language of the Act demonstrates that the state does not itself establish a plan, but rather imposes a duty on employers to establish a plan.”

Ongoing Administration

And while some have described the employers’ role in these programs as relatively passive, merely passing money along to the state’s program, the Labor Department’s brief saw it differently, stating that the legislation “…undisputedly establishes an ongoing administrative program,” going on to note that “regulations require that employers continually update their payroll deductions to reflect changes to their workforce of eligible employees, their employer eligibility, and the fluctuating contribution rate for each employee.”

Said another way, the Labor Department claims that “by requiring employers to deduct contributions from eligible employees’ wages on an ongoing basis, and to forward the contributions for deposit into IRAs established for each enrolled employee, the Secure Choice Act requires the employers to maintain an employer-based program providing retirement income to employees” or resulting “in a deferral of income by employees for periods extending to the termination of covered employment or beyond.” Indeed, they argue that “employers subject to the Act must make ongoing determinations regarding their own eligibility, the eligibility of employees, and the associated contribution rate,” whether any benefits provided qualify as a “tax-qualified retirement plan” under California regulations such that the employer becomes exempt from coverage, among other things.[ii]

Those determinations, the Labor Department points out, must also be made for all new hires, and then on an ongoing basis for all existing employees, including even short-term employees or owners. “These determinations may not be straightforward, particularly given that they are subject to government investigation and audit and any subsequent penalties,” they write.

“In sum,” they write, “each private employer that participates in the CalSavers program establishes or maintains an employee pension benefit plan covered by ERISA, regardless of the role of the state mandate in creating the withholding arrangements.”

‘Safe’ Harbors

Another area of agreement—this with the district court—which found that because employees are automatically enrolled in the program, the arrangements were not “completely voluntary” as required by an established safe harbor regulation that allows that ERISA does not cover a payroll-deduction IRA arrangement otherwise covered by ERISA “so long as certain conditions are met, including: (1) the employer makes no contributions; (2) employee participation is ‘completely voluntary’; (3) the employer does not endorse the program and acts as a mere facilitator of a relationship between the IRA vendor and employees; and (4) the employer receives no consideration except for its own expenses.” The Labor Department continues, “Because CalSavers’ automatic-enrollment IRAs are not ‘completely voluntary,’ they do not satisfy the safe harbor’s requirements. Thus, they are ERISA-covered plans.”

To further ERISA’s protections of participant choice, the safe harbor requires a “completely voluntary” rather than a merely “voluntary” choice, and this “heightened protection bars opt-out regimes, like CalSavers, from the Department’s safe harbor regulation,” the brief states.

While not central to its arguments, the brief also cautions that “a decision by this Court that the Secure Choice Act is not preempted would permit the creation of a patchwork of different state laws regulating retirement plan administration. This danger is exacerbated because the Act applies to employers to the extent they do business in California regardless of where the company is headquartered or specific employees are located.” This of course means that “…a multi-state employer would not only have to keep track of employees’ payroll deductions, rates, and eligibility for CalSavers, but also for other states’ similar programs.”

What’s Next

It’s not the first time these arguments have been made, nor is it the first time that the Labor Department has expressed its opinion that these programs are preempted by ERISA. Of course, it’s not the first time that courts have heard and disregarded those arguments. Will this time be different? We’ll see.

[i]In July 2015, President Obama directed Secretary of Labor Thomas Perez to publish by the end of the year a proposed rule to “provide a clear path forward for the states to create retirement savings programs.” His directive to DOL: Clarify how states can move forward with various retirement plan coverage initiatives, including requirements to automatically enroll employees and for employers to offer coverage. However, in May 2017, President Trump signed legislation that overturned the Obama administration’s ERISA safe harbor rule for state-run auto-IRA programs for private sector workers.

Immediately thereafter, California State Treasurer John Chiang and Senate President Pro Tempore Kevin de León said that California’s Secure Choice program remains on track and that “current law should not impede the Board if it chooses to consider Program designs using an ‘opt out’ negative election approach.” The CalSavers program launched on July 1, 2019.

[ii]The brief also notes that employers must also determine on an ongoing basis:

  • * whether any employee has elected to change his or her contribution rate;
  • * whether the CalSavers Board has changed the default contribution rate;
  • * whether any particular employee is or becomes exempt by virtue of the fact that he or she is “engaged in interstate commerce”;
  • * whether the employee is or becomes exempt because contributions are required on that employee’s behalf to a multiemployer plan pursuant to a collective bargaining agreement;
  • * whether an employee is or becomes exempt due to coverage under the Railway Labor Act; and
  • * whether the employer’s average total employees for the quarter ending December 31 and the previous three quarters of available data has fallen below the Act’s current coverage minimum.


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