Ninth Circuit Finds California’s State-Managed Individual Retirement Account Program Is Not Preempted by ERISA

With the growing number of government-run auto-enrollment retirement savings programs, the Ninth Circuit decided “a novel and important question:” whether ERISA preempts the California law which creates CalSavers, a state-managed individual retirement account (IRA) program that applies to certain private employers who do not provide their employees with a tax-qualified retirement savings plan. See Cal. Gov’t Code § 100000, et seq. In Howard Jarvis Taxpayers Ass’n v. California Secure Choice Ret. Sav. Program, No. 20-15591, __F.3d__, 2021 WL 1805758 (9th Cir. May 6, 2021), the Ninth Circuit affirmed the district court’s judgment finding that ERISA does not preempt the California law.

CalSavers applies to employees who are at least eighteen years old and work for a non-governmental employer with five or more employees in California. Employers are exempt if they provide an employer-sponsored retirement plan or an automatic enrollment payroll deduction IRA. CalSavers is a state-administered program and employers do not have any responsibility for the administration, investment, or investment performance of the program. Employers must only register for CalSavers by providing basic information, provide contact information for their eligible employees, and set up a payroll deposit retirement savings arrangement to remit employees’ contributions to CalSavers. Thereafter, CalSavers handles the employees’ enrollment and employees may opt out at any time.

Howard Jarvis Taxpayers Association and two of its employees (collectively, “HJTA”) filed the present action claiming that ERISA preempts CalSavers and that the program should be enjoined under California Code of Civil Procedure Section 526a as a waste of taxpayer funds. The court found that HJTA has standing to bring this action since it plausibly alleges that it will soon be subject to CalSavers in its capacity as a California employer. “The HJTA employees also have standing as future participants in what they claim is an ERISA plan.”

In holding that the preemption challenge fails, the Ninth Circuit first found that Congress did not already resolve this issue when it rejected a 2016 Department of Labor rule that sought to exempt CalSavers from ERISA under a safe harbor. Congress’s repeal of the 2016 regulation simply left the question of preemption to the courts to resolve. Further, just because CalSavers does not fall within the 1975 Safe Harbor, it does not mean that it is covered by ERISA. It must still qualify as an ERISA program. The Ninth Circuit found that CalSavers is not an ERISA plan because it is established and maintained by the State, not employers. The employers’ non-discretionary administrative involvement is not enough to mean that they “established or maintained” an ERISA plan. The program does not require employers to operate their own ERISA plans; it applies only when an employer does not have an ERISA plan. The California law is also not preempted because it does not have an impermissible reference to or connection with ERISA. CalSavers does not interfere with ERISA’s core purposes. “ERISA thus does not preclude California’s endeavor to encourage personal retirement savings by requiring employers who do not offer retirement plans to participate in CalSavers.”