CalSavers upheld in US Court of Appeals case

California on Thursday won an ongoing legal challenge to the state’s auto-IRA program, CalSavers.

A three-judge panel in the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of the case. The savings system is not a plan under the Employee Retirement Income Security Act and is therefore not preempted by the law, the panel wrote the opinion published yesterday.

The case is the first to challenge a state-sponsored retirement program for private sector workers. The decision is welcome news for numerous states and a handful of municipalities that have built their own auto-IRA systems or are planning to.

“The panel concluded that CalSavers is not an ERISA plan because it is established and maintained by the state, not employers; it does not require employers to operate their own ERISA plans; and it does not have an impermissible reference to or connection with ERISA. Nor does CalSavers interfere with ERISA’s core purposes,” the panel wrote. “Accordingly, ERISA does not preempt the California law.”

The plaintiff, the Howard Jarvis Taxpayers Association, could ask the U.S. Supreme Court to review the decision. The group stated in an email that it is considering its options.

“CalSavers is a simple solution to level the playing field for workers who for too long haven’t had access to workplace-based retirement plans,” California State Treasurer Fiona Ma said in an announcement about the court’s decision. “There is no reason to deny millions of hardworking Californians access to this savings program when the alternative is to see them work until they are physically unable to, or suffer the hardships that come with little to no savings.”  

The state passed the program in 2017, and it launched in 2019. So far, about 10,000 employers have registered, with 340,000 workers enrolled and 140,000 accounts being funded. The program represents about $68 million in assets.

California has been implementing the program in waves, with businesses with more than 50 employees being required to register by June 30. By June 30, 2022, the state will require businesses with at least five workers to participate, unless they already offer a retirement plan. Workers are automatically enrolled, but they can opt out.

Other states, including Oregon and Illinois, also have active programs. The auto-IRA initiatives faced a setback in 2016, when Congress repealed a Department of Labor rule that provided a safe harbor for the programs. The development did not resolve the issue of whether state-run plans for private-sector workers could be preempted by ERISA, the appeals court noted.

"CalSavers imposes burdens and risks on private employers since participation is mandatory for most employers who do not offer a company retirement program," said Laura Dougherty, staff attorney at the Howard Jarvis Taxpayers Association, in an email. "CalSavers imposes risks on employees since it doesn't follow federal standards for retirement programs and authorizes commingling with California's already troubled public pension plans."

The association brought its case in 2018. The district court dismissed the claims the following year, though the plaintiffs were allowed to amend their complaint. The court again dismissed the case in March 2020.

“This decision represents the third dismissal of this case,” said Angela Antonelli, executive director of Georgetown University’s Center for Retirement Initiatives, in an email. “States leaders have and will continue to confidently move forward adopting new auto-IRA programs, as we have seen most recently this year with New York City and the Commonwealth of Virginia, providing millions of workers with the opportunity to save for their future.”

There will be a total of 13 enacted state programs and two city systems following New York City’s approval, she noted. Ten of the programs are auto-IRA design, like CalSavers, she said.

Last year, the Department of Labor filed a brief with the court, siding with the taxpayers association. But with the change in administration, the regulator this year withdrew its support for the plaintiff.