9th Circuit rightly upholds California’s retirement backstop

It is no secret that most Americans are woefully unprepared to meet their financial needs in retirement. Generous and reliable pension payments are a relic of history (to the extent that they existed at all), and there are very few private-sector employers that offer any kind of pension plan. Instead, workers bear personal responsibility for their retirement planning, and while many employers do offer 401k plans, many do not. (A 401k plan is the most common type of employer-sponsored retirement benefit plan, but it is just one species of "defined contribution plan," in the parlance of the governing statute.)

Some state governments, including California, have stepped in to fill the gap left by employers who choose not to offer employer-sponsored retirement plans. The 9th U.S. Circuit Court of Appeals' recent decision in Howard Jarvis Taxpayers Association v. California Secure Choice Retirement Savings Program, 2021 DJDAR 4459 (May 6, 2021), was a sensible recognition of state authority to establish government-sponsored retirement savings programs.

According to The Pew Charitable Trusts, "half of U.S. states are looking at setting up individual retirement accounts with automatic enrollment -- known as auto-IRAs or Secure Choice programs -- for private sector workers whose employers don't offer workplace retirement savings plans." California enacted exactly such a program, known as CalSavers. As the 9th Circuit noted, the program creates individual retirement accounts for employees working for private sector employers that have at least five California employees and do not offer "an 'employer-sponsored retirement plan' or an 'automatic enrollment payroll deduction IRA' that 'qualifies for favorable federal income tax treatment.'" (Quoting and citing Cal. Gov't Code Section 100032(g)(1).) Employees are automatically enrolled in the program, and their IRAs are funded by an automatic 5% payroll deduction.

CalSavers is entirely voluntary for employees -- they may avoid being enrolled in the first place and they are free to opt out at any time after enrollment. They are also allowed to adjust the amount of their payroll deduction. Employers' participation, on the other hand, is mandatory. Employers must register with the program, identify their eligible employees, and establish a system of automatic payroll deductions deposited in employees' IRAs. Beyond that, they can't do much. The law bars employers from either endorsing or discouraging participation in CalSavers, or even advising employees on contribution rates or investment decisions. The minimal steps that employers must take to make employee participation possible account for the employer's entire involvement in the program.

An employer and two employees challenged CalSavers in federal court on the grounds that it is preempted by the Employee Retirement Income Security Act of 1974 and violates state law.

The district court granted CalSavers' motion to dismiss the preemption challenge and declined to exercise jurisdiction over the state law challenge. The 9th Circuit affirmed, holding that ERISA does not preempt CalSavers. Both decisions were correct.

ERISA governs nearly all employee benefits, including employer-sponsored retirement benefits, and it gives rise to strong preemption. ERISA "supersede[s] any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." 29 U.S.C. 1144(a). Read literally, ERISA's preemption clause could have "limitless application," Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312, 320 (2016), but the Supreme Court has never said that ERISA preempts any state law that relates in any way to employee benefits. See, e.g., Rutledge v. Pharm. Care Mgmt. Ass'n, 141 S. Ct. 474 (2020); Cal. Div. of Labor Standards Enforcement v. Dillingham Const., N.A., Inc., 519 U.S. 316 (1997); N.Y. State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995). Nonetheless, as the 9th Circuit seemed to recognize, it can be tempting to think that state laws that "concern[] benefits in a general sense" won't escape ERISA's preemptive reach. But as the 9th Circuit also said, an accurate understanding of "the governing precedents" makes clear that ERISA does not prohibit states from setting up government-sponsored auto-IRAs.

Before analyzing ERISA's express preemption clause, the 9th Circuit had to consider whether Congress' repeal of a 2016 Department of Labor regulation was dispositive on the question of ERISA preemption. The 9th Circuit held that it was not. The court also decided that it didn't need to resolve the question of whether CalSavers fell within a regulatory safe harbor created by the Department of Labor in 1975. (The Department of Labor had taken the position in the district court and 9th Circuit that CalSavers does not satisfy the safe harbor, and also that ERISA preempts CalSavers, but on Feb. 5, 2021, it withdrew its amicus participation and informed the 9th Circuit that it does not support either side.)

The court began its preemption analysis with the foundational principle that a state law will "relate to any employee benefit plan" and hence be preempted by 29 U.S.C. 1144(a) if it has a "reference to or connection with" an ERISA plan.

"A state law impermissibly 'refers to' ERISA if it acts immediately and exclusively upon ERISA plans or where the existence of ERISA plans is essential to the law's operation. A state law has an impermissible 'connection with' ERISA if it governs a central matter of plan administration or interferes with nationally uniform plan administration, such as by requiring payment of specific benefits or by binding plan administrators to specific rules for determining beneficiary status." (Cleaned up.) (Citing and quoting Rutledge v. Pharm. Care Mgmt. Ass'n, 141 S. Ct. at 479, and Gobeille v. Liberty Mut. Ins. Co., 577 U.S. at 320.)

The bulk of the 9th Circuit's preemption analysis appropriately focused on the "reference to" prong of the preemption test, and its analysis was entirely consistent with the Supreme Court's many precedents. (The court has written approximately 25 opinions about ERISA preemption.)

The 9th Circuit first explained that "CalSavers is not an ERISA plan and does not require employers to establish or maintain one." While CalSavers may well "provide[] retirement income to employees" or "result[] in a deferral of income" within the meaning of ERISA, 1002(2)(A)(i) and (ii) (defining "employee pension benefit plan"), it cannot be an "employee benefit plan" unless it was "established or maintained by an employer or employee organization." 1002(2)(A); 1002(3) (defining "employee benefit plan"). The 9th Circuit held that CalSavers was "established or maintained" by California, not by the private employers who were required to comply with CalSavers' administrative requirements. And California was not "acting directly as an employer, or indirectly in the interest of an employer" when it created CalSavers.

Second, employers who offer ERISA-governed retirement plans are exempt from CalSavers, and CalSavers does not impose any obligations upon them. Thus, "CalSavers does not 'act on ERISA plans at all, let alone immediately and exclusively.'" (Quoting and citing Golden Gate Restaurant Association v. City & County of San Francisco, 546 F.3d 639, 657 (9th Cir. 2008).)

Third, the fact that CalSavers expressly exempts employers who offer ERISA plans does not somehow transform the statutory scheme into one that impermissibly "refers to" ERISA plans. "The Supreme Court has never found a statute to be preempted simply because its text included the word ERISA or explicitly mentioned ERISA plans." (Cleaned up.) So too here.

On the "connection with" prong of the preemption test, the 9th Circuit accepted that CalSavers may have an "indirect economic influence" on ERISA plans, because employers might choose to eliminate, create, or modify ERISA plans in response to the existence of CalSavers. But the court held that such indirect economic effects do not result in preemption.

According to Pew, "seven states -- California, Colorado, Connecticut, Illinois, Maryland, New Jersey, and Oregon -- are currently implementing" state auto-IRA programs. Oregon can take comfort from the 9th Circuit's decision, but the other states' programs are of course still open to challenge. We hope that other courts will reach the same conclusion as the 9th Circuit -- while ERISA has much to say about employer-sponsored retirement plans, it does not abrogate states' authority to create government-sponsored programs. 