Appeals Court Affirms That CalSavers IRA Savings Program Is Not Preempted by ERISA

A federal appeals court has affirmed that the CalSavers Retirement Savings Program, a state-run IRA savings program for employees without access to employer-provided retirement benefits, is not preempted by ERISA. CalSavers generally requires eligible non-governmental employers with five or more California employees to automatically enroll their California employees and remit enrolled employees’ payroll deductions to state-administered IRAs. Employers are not subject to CalSavers, however, if they provide an employer-sponsored retirement plan (e.g., a 401(k) plan) or automatic payroll deduction IRAs, and their plan or IRAs qualify for favorable federal income tax treatment. In 2016, the DOL added a regulatory safe harbor to affirm that state-run programs like CalSavers are not subject to ERISA, but that safe harbor was invalidated by Congress, leaving only a 1975 safe harbor for “completely voluntary” IRA programs that the DOL had indicated would not protect arrangements with automatic enrollment. An eligible employer and some of its employees challenged the CalSavers program, claiming that CalSavers is preempted by ERISA because it fails the 1975 safe harbor, but the trial court dismissed that claim (see our Checkpoint article).

On appeal, the court explained that repeal of the 2016 safe harbor did not make CalSavers’ status under ERISA completely dependent on the 1975 safe harbor. Failure to satisfy that safe harbor does not mean that a program is automatically subject to ERISA, simply that it is subject to further evaluation. CalSavers only requires employers to register, evaluate employee eligibility according to non-discretionary criteria, provide the state with employee information, and process specified payroll deductions. Those functions are essentially mechanical and, much like other programs (e.g., Social Security), they do not create employer plans subject to ERISA or require employers to establish or maintain such plans. Citing an earlier case involving a government mandate (see our Checkpoint article), the court observed that employers do not establish or maintain an ERISA plan when they are merely required to perform administrative functions in a government benefits scheme that does not require employers to exercise “more than a modicum of discretion.” Having concluded that CalSavers does not create an ERISA-covered plan, the court then turned to whether ERISA preempts CalSavers due to a “reference to” or impermissible “connection with” ERISA plans (see, e.g., our Checkpoint article). CalSavers, the court observed, only applies to employers who do not provide their employees with an ERISA plan, so it does not act on ERISA plans at all. And, the court explained, CalSavers does not address how employers structure or operate any ERISA plan they choose to create. While CalSavers may have some indirect influence on employers’ decision to implement an ERISA plan, that influence is insufficient to create an impermissible connection to ERISA.

EBIA Comment: Multiple other states, and at least two major municipalities (Seattle and New York City), have now adopted similar government-run auto-enrollment IRA savings programs. This decision rejecting preemption of those programs puts them on more solid ground and could trigger the adoption of similar laws in other jurisdictions. Another option for states is to encourage the adoption of ERISA plans. A DOL interpretive bulletin regarding three ERISA-based approaches—state-administered prototype plans, marketplace programs, and state-administered multiple employer plans—remains in effect (see our Checkpoint article). For more information, see EBIA’s 401(k) Plans manual at Section II.B.4 (“Plans Sponsored or Facilitated by States”). See also EBIA’s ERISA Compliance manual at Sections VI.C (“Is the Plan, Fund, or Program Established or Maintained by an Employer?”) and XXXIX (“ERISA Preemption of State Laws”).

Contributing Editors: EBIA Staff.