District Judge Says ERISA Doesn’t Pre-Empt CalSavers Retirement Plan

 

Jathan Janove, J.D. By Jathan Janove, J.D. April 22, 2019
LIKE SAVE

​California can require employers to deduct pay from employees' paychecks for a state-sponsored retirement savings plan without running afoul of federal law, a federal judge in California ruled March 29.

The judge rejected a taxpayer group's argument that the federal Employee Retirement Income Security Act (ERISA) doesn't allow the state to impose its own requirements on private employers.

The state-run retirement plan, known as CalSavers, will require most employers that don't already offer a retirement plan to register for the program in phases according to employer size. Businesses with at least 100 employees must enroll them in the program or start offering an employee retirement plan by June 30, 2020. Companies with 50 to 99 employees have an additional year to comply, and smaller covered businesses have one more year after that. The requirement applies to employers with at least five workers.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Five percent of the employee's earnings will automatically be deducted and transferred into a retirement account unless the employee opts out of the program. The employee's contribution will automatically increase by 1 percent of his or her earnings each year until it reaches a maximum rate of 8 percent, unless the worker chooses a different contribution rate.

CalSavers retirement plans are portable, so employees will have access to them even if they change jobs.

Legal Challenge

The Howard Jarvis Taxpayers Organization sought to block the law, arguing that ERISA does not allow a state to impose its own retirement savings requirements on private employers.

However, U.S. District Judge Morrison C. England Jr. said that "finding that ERISA pre-empts CalSavers would be out of step with the underlying purposes of the act," which are to enhance employee retirement security.

"CalSavers does not govern a central matter of an ERISA plan's administration, nor does it interfere with nationally uniform plan administration," Morrison held. "On this basis, the court finds that CalSavers is not pre-empted by ERISA."

If appealed, the case will go before the 9th U.S. Circuit Court of Appeals and potentially the U.S. Supreme Court.

Given the current makeup of the Supreme Court, the decision on ERISA pre-emption could go either way, said Lorne Dauenhauer, an attorney with Ogletree Deakins.

Employer Role

Tom Kramer, an employee benefits attorney in Portland, Ore., thinks this is a good time for California employers to think about their employees' retirement savings. If employers don't offer adequate retirement savings plans, they may find it hard to attract and retain workers.

Employers may need to do more to recruit top talent. Programs like CalSavers don't permit employer contributions, Kramer noted. And even if employees supplement such programs through personal retirement accounts, they may not have adequate savings.

"Adopting an appropriate retirement plan for the employer may be beneficial for the business owner, the key employees, and the rank and file, too, in addition to avoiding the CalSavers requirements," he added.

Employers that do participate in CalSavers need to be careful, Dauenhauer said. Participating employers have certain obligations, such as providing an employee roster so the state can enroll workers in CalSavers, and submitting employee contributions to the program. But since it is not an employer-sponsored program, companies can't appear to support or encourage participation.

"If the employer is seen as promoting, endorsing or supporting the California retirement savings program, it could become subject to ERISA's detailed regulatory requirements and liability provisions," Dauenhauer explained.

He recommends that employers provide workers with clear notice that the employer isn't sponsoring or endorsing the state plan. Instead, he suggested, point out that the employer is simply obeying a state law that requires it to deduct employee pay and transmit the money to the state unless employees opt out.

LIKE SAVE

Job Finder

Find an HR Job Near You
Search Jobs
Post a Job

SPONSOR OFFERS

Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 10,000 companies

Search & Connect
temp_image