This country is suffering from a retirement crisis, unlike any other in its history. According to the Economic Policy Institute, nearly half of all American families have no retirement savings. For those that do, the savings are minimal. In 2016, the median retirement account balance for working-aged families was $7,800, while the median account balance was just $1,000 for families headed by individuals in their mid-30’s and $21,000 for families headed by individuals approaching retirement.
It was for this reason that the State of Illinois launched the Illinois Secure Choice Retirement Savings Program (“Illinois Secure Choice”) in 2018. Illinois Secure Choice is a retirement savings program sponsored by the State for employees of companies that do not already offer a retirement plan to their employees. Employees are automatically enrolled in the program, but participation is entirely voluntary, and employees can opt-in and out at any time. Employees’ retirement savings are held in Roth Individual Retirement Accounts (‘1RA”), which are wholly funded by their own earnings through payroll deductions without any financial contributions by the employers.
Before the State launched Illinois Secure Choice, in 2012, the State of California established the California Secure Choice Retirement Savings Program (“CalSavers”). CalSavers is virtually identical to the Illinois program in all of its key features. Not long after the establishment of CalSavers, the Howard Jarvis Taxpayers Association (“HJTA”) filed suit in the United States District Court for the Eastern District of California . The HJTA challenged CalSavers as being pre-empted by the Employee Retirement Income Security Act of 1974 (“ERISA”), and sought a permanent injunction enjoining the use of taxpayers funds on the program.3 The district court initially dismissed the lawsuit after finding ERISA did not preempt it, but granted the HJTA leave to amend. After the HJTA filed its amended complaint, the State of California filed a second motion to dismiss, and the United States filed its Statement of Interest in support of the HJTA’s position and in opposition to the State’s motion.
In its ruling on the State’s second motion to dismiss, the central question addressed by the District Court was whether “CalSavers, a state-mandated auto-enrollment retirement savings program, create[s] an ’employee benefit plan; such that it is preempted by ERISA?”‘ In addressing that question,the district court first cited the express preemption provisions of the ERISA statute, which provide it shall “supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.. .” 29 U.S.C. § l 144(a) (emphasis added).
The district court then divided its analysis into two parts before ultimately holding that ERISA does not preempt CalSavers. The court began by explaining that CalSavers is not an employee benefit plan under ERISA because neither the board that runs the program nor the trust where the retirement funds are held are “employers” as the statute defines that term. 29 U.S.C. § I002(5). The court further reasoned that employers neither establish nor maintain the program , as required by the statute’s definition of “employee pension plan’.’ 29 U.S.C. § 1002(2) (A).’ As the court explained, “(t]he role of actual employers in CalSavers is limited to providing a roster of eligible employees, providing contact information of eligible employees, making payroll deductions, and remitting such deductions…Such ministerial duties do not rise to the level of an employee benefit plan established or maintained by actual employers.”6
The court next determined that CalSavers also does not relate to an ERISA plan because it “applies only when actual employers do not have an existing ERISA or employer sponsored retirement plan:” The court similarly concluded that the program did not have an impressible “reference to” ERISA plans because it did not impose additional reporting requirements on existing ERISA plans•. In fact, reporting is required under CalSavers only when an ERISA plan or other employer-sponsored retirement plan did not exist 9 Accordingly, the district court once again dismissed the suit, but without leave to amend because it deemed amendment futile.10
Shortly after the dismissal, the HJTA filed a Notice of Appeal, and the matter is now pending in the United States Court of Appeals for the Ninth Circuit Although there is still more to come, this decision should provide helpful guidance to the State of Illinois and others that have launched programs similar to CalSavers while this novel preemption issue continues to work its way through the courts.
Marie Casciari is a shareholder at DeBofsky Law.
This article was originally published in The ISBA Newsletter on May 26, 2020.
- Monique Morrisse, Economic Policy Institute, The State of American Retirement Savings: How the Shift to 401 (k}s Has Increased Gaps in Retirement Preparedness Based on Income, Race, Ethnicity. Education, and Marital Status, at 8 (Dec. 10, 2019)
- Id. at 11.
- Howard Jarvis Taxpayers Ass’n v. Cal. Secure Choice Retirement Savings Program, o. 18-cv-01584, 2020 WL 11 579 24 , 2020 U.S. Dist. LEXIS 41588, at ‘ 1-2 (E.D. Cal. M= 10, 2020 ).
- /d. at *2.
- 5. at *11 -14.
- Id. at *13-14.
- Id. at *15.
- 8. Id. at *16.
- 9. / d . at *17.
- 10.Id.at• 17-18.