DOL Files Brief in Case Over ERISA Preemption of CalSavers

In an ongoing legislative battle over the legality of the California Secure Choice Act, which led to the establishment of a state-run automatic individual retirement account (IRA) program, attorneys for the U.S. Department of Labor (DOL) have filed a brief explaining how it believes a federal district court got it wrong.

The complaint was originally filed in 2018 by the Howard Jarvis Taxpayers Association and alleged the act that created the California Secure Choice program, now known as CalSavers, “violates the Supremacy Clause of the United States Constitution because it is expressly pre-empted by the Employee Retirement Income Security Act [ERISA] of 1974.” The case was dismissed in March with the court finding no impermissible reference to or connection with ERISA plans in the statute.

In its brief filed with the 9th U.S. Circuit Court of Appeals, the DOL notes that the act establishes a trust with IRAs for employees and a governing board that invests the trust’s assets. It requires certain employers that do not otherwise offer a retirement plan or automatic enrollment IRA to “have a payroll deposit retirement savings arrangement” for employees to participate in CalSavers. The arrangement must have automatic enrollment, though employees may opt out.

To comply with the act, employers either must have an ERISA-covered retirement plan or must use the CalSavers withholding arrangement. The DOL argues that if employers 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 pre-emption analysis,” the brief states.

The DOL argues that the law establishing CalSavers is pre-empted under the legal doctrine that state law relates to an ERISA plan if it has a connection with or reference to such plans. The agency says this is because it both governs a central matter of plan administration and interferes with nationally uniform plan administration—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.

According to the DOL’s brief, the arrangements mandated by the act meet the test set forth in Donovan v. Dillingham to determine whether a plan, fund or program exists. These include:

• 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.

Once it is determined that the act’s mandated withholding arrangements are plans, funds or programs of benefits, the DOL says, it is necessary to determine next whether they are established or maintained by employers. Citing Advocate Health Care Network v. Stapleton and Donovan, the brief states, “Establishment of a plan … is a one-time, historical event,” that results in “a reasonable person [being able to] ascertain the intended benefits, a class of beneficiaries, the source of financing and procedures for receiving benefits.” The agency points out 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 pre-emption 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,” it says.

The DOL further argues that the act’s mandated withholding arrangements are ERISA-covered plans because the covered employers “maintain” them in a manner sufficient for ERISA coverage. The statute and its regulations define the employer’s administrative responsibilities—requiring 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.

The DOL says courts recognize that when a state law requires such ongoing eligibility determinations in combination with an ongoing administrative scheme, then the employer’s required activities will be sufficient to establish or maintain an ERISA-covered plan. “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 brief states.

The DOL says the district court was correct in rejecting the argument that CalSavers can avoid pre-emption because the withholding arrangements avoid ERISA coverage under the DOL’s safe harbor regulation. The district court found that because employees are automatically enrolled in the program, the arrangements are not “completely voluntary” as required by the safe harbor.

The safe harbor regulation provides that ERISA does not cover a payroll-deduction IRA arrangement otherwise covered by ERISA so long as certain conditions are met, including:

• the employer makes no contributions;
• employee participation is “completely voluntary”;
• the employer does not endorse the program and acts as a mere facilitator of a relationship between the IRA vendor and employees; and
• the employer receives no consideration except for its own expenses.

The brief notes that prior courts have held that opt-out arrangements are not “completely voluntary.” “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.