No ERISA Entanglements With California’s State-Run Auto-Enrollment IRA, Says Ninth Circuit

On May 6, 2021, the Ninth Circuit resolved “a novel and important question in the law governing retirement benefits,” upholding California’s state-run auto-enrollment IRA program against an ERISA challenge. Howard Jarvis Taxpayers Ass’n v. Cal. Secure Choice Ret. Sav. Prog., No. 20-15591, 2021 WL 1805758 (9th Cir. May 6, 2021). California’s program, called CalSavers, is similar to programs being offered in several other states, and a public-interest taxpayers organization (Howard Jarvis Taxpayers Association, or “HJTA”) sued to challenge California’s program as preempted by ERISA. Citing the Supreme Court’s recent Rutledge decision rejecting preemption of a state law concerning pharmacy benefits, the Ninth Circuit affirmed dismissal of the California lawsuit. According to the court, CalSavers was designed to encourage personal retirement savings plans while avoiding classification as an ERISA benefits plan, and HJTA’s ERISA challenge failed because the CalSavers program is not established or maintained by employers, does not require that employers operate ERISA plans, and does not have an impermissible reference to or connection with ERISA plans. As state-run IRA programs proliferate throughout the country, however, these disputes are likely to recur.

CalSavers Excludes Employers Offering ERISA Plans and Prohibits Employer Involvement in the IRA Program

CalSavers applies to employers with five or more California employees and was designed to keep the program from being classified under ERISA. The program imposes some basic duties on employers, including registering employees and arranging automatic employee IRA contributions, but it specifically excludes employers that sponsor a retirement plan qualifying for favorable income tax treatment. CalSavers also prohibits employers from encouraging employee participation, advising employees on contribution rates, or exercising any authority over the program. And it further specifies that the employer “shall not be a fiduciary, or considered to be a fiduciary over the trust or the program” and “shall not bear responsibility for the administration, investment, or investment performance of the program.”

HJTA and two of its employees filed suit alleging that ERISA preempts CalSavers and that the program should be enjoined under state law as a waste of taxpayer funds. The district court dismissed, concluding that ERISA does not preempt CalSavers and declining to exercise supplemental jurisdiction over HJTA’s state law claim.

CalSavers Avoided Creating an ERISA Plan by Stepping in Only When an Employer’s Existing Plans Are Not “Desirable” and Limiting Employers to an “Essentially Mechanical” Role

In the Ninth Circuit, the court acknowledged that the issue “seems close” due to ERISA’s expansive preemptive scope and because CalSavers “concerns benefits in a general sense.” But closer inspection of the applicable precedents and design of the program established for the Ninth Circuit that the ERISA challenge failed.¹

The Ninth Circuit observed that ERISA does not preclude a state law “just because it has something to do with ‘benefits’ in a loose sense.” Instead, “ERISA applies to plans, rather than simply to benefits,” and according to the court, this “demarcation forms the basis for the Supreme Court’s cases distinguishing state laws that fall within ERISA’s preemptive reach from those that are beyond it.” Under this rubric, CalSavers did not fit either of the two categories of state laws recognized by the Supreme Court as ERISA-preempted: it did not have a “reference to” ERISA plans, and it did not have an impermissible “connection with” ERISA plans.

First, if CalSavers created an ERISA plan, the court agreed that CalSavers almost certainly made an impermissible reference to an ERISA plan. HJTA argued that CalSavers created such a plan pursuant to the four-factor test in Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982). But the Ninth Circuit pointed out that the Donovan criteria only applied after a threshold finding, which became the central question of the appeal: Whether CalSavers was “established or maintained by an employer.”

Only the State or the employers could potentially satisfy Donovan’s threshold requirement, but neither did. As to the State, it was “quite clear,” for the Ninth Circuit, that the State did not establish CalSavers in the capacity of an “employer.” Rather, CalSavers merely steps in where employers have not provided “desirable retirement savings options.”

As to whether the employers satisfied the threshold requirement, the Ninth Circuit found “scant case law” directly on point. However, using the closest precedent it could find, the court observed that “[w]hen 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 does not ‘establish or maintain’ an ERISA ‘plan’ because the employer is not engaging in the type of conduct that ERISA seeks to regulate.”²  CalSavers makes the employer’s role “essentially mechanical,” such that even though employers “may find CalSavers irritating or even burdensome, that does not make their involvement in CalSavers tantamount to establishing or maintaining an ERISA plan.”

The Ninth Circuit Distinguished CalSavers From Preempted State Laws That Sought To Exclude ERISA Plans

Turning to the second category of preempted state laws that “relate to” ERISA plans, CalSavers’s exemption of employers providing an ERISA-governed benefit plan was determinative. Relying on the Supreme Court’s recent Rutledge decision, the Ninth Circuit found that any indirect economic influence on ERISA plans does not run afoul of ERISA: “It may be that CalSavers will incentivize employers to cancel their existing ERISA plans, lead them to create ERISA plans to compete with CalSavers, or otherwise influence the benefits employers offer. But these forms of ‘indirect economic influence’ d[o] not create an impermissible connection between’ CalSavers and ERISA because CalSavers ‘d[oes] not bind plan administrators to any particular choice.’” (quoting Rutledge and N.Y. State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995)).

Despite an “effective ERISA reference” in CalSavers’s exemption of employers with ERISA plans, the Ninth Circuit distinguished it from other preempted state laws that sought to exclude ERISA plans: CalSavers was not specifically designed to affect employee benefit plans; it only operates where employers do not offer retirement plans; and it ensures that employers with ERISA plans are not subject to additional requirements. That multi-state employers could face different pension-plan requirements in different states was likewise unavailing because employers’ ministerial obligations under CalSavers do not resemble the establishment of an ERISA plan, and “retirement plans remain subject to one uniform law: ERISA.”

Ultimately, the Ninth Circuit recognized that, “[t]here is, to be sure, an important policy debate here.” Indeed, similar government-run auto-enrollment IRA programs are proliferating throughout the country, and it is unlikely that the Ninth Circuit’s affirmation of CalSavers will be the last word on the topic. Also, more generally, other parties and courts may seek to invoke the Ninth Circuit’s application of Rutledge in assessing state laws that seek to exclude ERISA plans while potentially infringing on or otherwise influencing nationally uniform plan design.

¹ Initially, the Ninth Circuit explained that CalSavers was not exempt from an ERISA preemption analysis, disagreeing with HJTA that Congress’s repeal of a Department of Labor safe harbor for programs like CalSavers was determinative.

² Citing Golden Gate Restaurant Association v. City & County of San Francisco, 546 F.3d 639 (9th Cir. 2008).