U.S. Argues for CalSavers ERISA Preemption in Court Filing

California’s has joined other states in actually launching an automatic IRA program, but before the program was launched, a lawsuit was filed saying the program is preempted by the Employee Retirement Income Security Act (ERISA).

U.S. Attorneys have filed a Statement of Interest of the United States in the case, offering evidence that the state-run auto-IRA program is preempted.

The document notes that the Employee Retirement Income Security Act (ERISA) is a “comprehensive and reticulated statute” reflecting Congress’s careful policy choices. Among those choices is Congress’s intentional decision to give employers the freedom to choose whether to establish a retirement plan.

“Nothing in ERISA,” the Supreme Court has observed, “requires employers to establish employee benefits plans. Nor does ERISA mandate what kind of benefits employers must provide if they choose to have such a plan,” the statement says, citing Lockheed Corp. v. Spink. “Congress enacted ERISA to ensure that employees would receive the benefits they had earned, but Congress did not require employers to establish benefit plans in the first place,” it says, citing Conkright v. Frommert.

The attorneys argue that the California Secure Choice Retirement Savings Trust Act takes away the freedom of choice that lies at the core of ERISA by forcing employers either to establish their own ERISA plan or to maintain an equivalent plan under the Act. “In taking away this choice, the Secure Choice Act disregards Congress’s careful determination that employers should not be required to maintain employee pension benefit plans. Because the Secure Choice Act disregards and runs afoul of ERISA’s statutory scheme by effectively requiring employers to maintain such plans, it is preempted by ERISA’s broad, express preemption provision that disallows any state laws that ‘relate to any employee benefit plan,’” the attorneys say.

Employers are exempt from participating in the state auto-IRA program if they offer an “employer-sponsored retirement plan” or an “automatic enrollment payroll deduction IRA” that qualifies for “favorable income tax treatment under the federal Internal Revenue Code.” The Secure Choice Act specifically provides that the CalSavers Board shall not implement the program “if it is determined that the program is an employee benefit plan under the federal Employee Retirement Income Security Act.”

The U.S. Attorneys argue that this runs afoul of ERISA Section 514(a), which provides that ERISA supersedes any state laws that “relate to any employee benefit plan.” They note that the Supreme Court has identified two separate threads of ERISA preemption—“reference to” preemption and “connection with” preemption.

Under the “reference to” inquiry, the Supreme Court has held preempted a law that “impos[ed] requirements by reference to [ERISA] covered programs.” The attorneys say CalSavers falls squarely in the category of cases holding state laws preempted because of their improper reference to ERISA plans.  They note that ERISA plans are essential to the operation of the Secure Choice Act’s regulatory framework—the Act forces California employers who do not offer the State’s preferred types of ERISA plans (certain tax-favored employer-sponsored retirement programs and automatic enrollment IRAs) to adopt equivalent automatic-enrollment IRAs through CalSavers. Under the Secure Choice Act, California singles-out employers who decline to sponsor the state’s preferred ERISA plans, forcing them to enroll their workers in plans that function just like the plans they have chosen not to offer.

“A state law may not reference ERISA plans in order to trigger ERISA-equivalent coverage. Because the Secure Choice Act does exactly that, this Court should determine that the law is preempted on that basis,” the statement says.

The attorneys argue that the Secure Choice Act is alternatively preempted because an employer’s ongoing maintenance of CalSavers Plans makes them ERISA-covered plans.

They note that ERISA defines a “pension benefit plan” as “any plan, fund, or program . . . established or maintained by an employer. . . to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program—(i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.”  The attorneys’ statement points out that the “intended benefits” are the retirement income from tax-deferred contributions provided by the IRAs required by the Act, the “beneficiaries” are the employees whose wages are withheld, the “source of financing” is the automatic payroll deductions, and the “procedures for receiving benefits” are those provided through the IRA product. “If the identical functions of the CalSavers Board were instead performed by a third party administrator (TPA) and investment manager voluntarily hired by an employer plan sponsor, this arrangement clearly would fall within the scope of ERISA,” the statement says.

The attorneys content 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.” The defendants in the suit, however, argue that these are just ministerial duties.

But, the U.S. Attorneys point to case precedent which found that an employer’s need to make eligibility determinations can be sufficient to establish or maintain an ERISA-covered plan.  They note that employers subject to the Act must make ongoing determinations regarding their eligibility, the eligibility of employees, and the associated contribution rate.  For example, employers must monitor whether any particular employee is or becomes exempt by virtue of the fact that he or she is “engaged in interstate commerce” or 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.

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

The attorneys note that the U.S. District Court for the Eastern District of California previously ruled that “CalSavers does not govern a central matter of an ERISA plan’s administration, nor does it interfere with nationally uniform plan administration.” But they argue that the Act interferes with nationally uniform plan administration by potentially subjecting multi-state employers to numerous disparate retirement plan laws. “In that regard, a decision by this Court to allow the Secure Choice Act to survive would allow for the creation of a patchwork of different state laws regulating the provision of retirement benefits to employees. 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. A multi-state employer would not only have to keep track of payroll deductions, rates, and eligibility for CalSavers, but also for myriad other states’ automatic-enrollment IRA programs,” the statement says. “This is exactly the kind of disuniformity that ERISA Section 514(a) was designed to avoid.”