A U.S. appeals court on Thursday said California’s state-run individual retirement account program for workers is not governed or preempted by the federal law on employee benefits, even if its mandatory contributions are “irritating or even burdensome” to some employers.
A unanimous three-judge panel of the 9th U.S. Circuit Court of Appeals said the CalSavers program created in 2017 is not an “employee benefit plan” under the Employee Retirement Income Security Act of 1974 because it is maintained by the state and does not require private employers to establish their own retirement plans.
The ruling, which rejected a challenge to the program by advocacy group the Howard Jarvis Taxpayers Association, marked the first time a federal appeals court has weighed in on whether state-run IRAs are preempted by ERISA. Several states have followed California’s lead by adopting similar programs.
“Nothing in law supports HJTA’s effort to recast ERISA’s preemption provision as a sword that would allow employers who do not offer their own retirement plans to thereby deprive their employees of the ability to participate in a state-run IRA savings program,” Circuit Judge Daniel Bress wrote.
Laura Dougherty, a staff lawyer at HJTA, which advocates for tax cuts in California, said the group is considering its options. The California State Treasurer’s Office, which administers CalSavers, did not immediately respond to a request for comment.
Workers in California whose employers do not offer retirement savings plans are automatically enrolled in CalSavers, though they may opt out. The program requires private employers to remit payroll deductions to CalSavers worth up to 5% of an employee’s pay.
As of October, more than 4,300 employers had registered for the program and nearly 90,000 workers had been enrolled, according to filings in the 9th Circuit case. More than one-third of eligible employees have opted out of enrollment.
HJTA and two of its employees in a 2018 lawsuit in Sacramento federal court claimed that CalSavers qualified as an employee benefit plan under ERISA, which preempts any state law that “relates to” a benefit plan.
U.S. District Judge Morrison England last year disagreed and dismissed the case. The hallmark of an ERISA-governed benefits plan is that it is established and maintained by an employer, which was plainly not the case for the state-run CalSavers program, the judge said.
HJTA appealed and the 9th Circuit on Thursday affirmed. ERISA preemption is broad, the court said, but does not extend so far that states are precluded from adopting any law dealing with employee benefits, even if it places requirements on businesses.
“When employers merely perform mandatory administrative functions in a government benefits scheme that do not require the employer to exercise more than a modicum of discretion, the employer … is not engaging in the type of conduct that ERISA seeks to regulate,” Bress wrote.
The panel included Circuit Judge Andrew Hurwitz and U.S. District Judge Clifton Corker of the Eastern District of Tennessee, who sat by designation.
The case is Howard Jarvis Taxpayers Association v. California Secure Choice Retirement Savings Program, 9th U.S. Circuit Court of Appeals, No. 20-15591.