Taxpayer group sues state over IRA plan
The Howard Jarvis Taxpayers Association has filed a lawsuit seeking to block the creation of CalSavers, a staterun retirement program for private-sector workers in California whose employers don’t offer one.
Starting in late 2019, employers with at least five workers in California that don’t offer a retirement plan would have to enroll them in a payroll-deduction IRA, although workers could opt out. On Monday, the board that oversees CalSavers authorized the staff to request proposals from companies to administer the plan and manage the IRA investments. The request went out Wednesday.
The suit, filed in federal court in Sacramento, said the plan violates the U.S. Constitution because retirement plans for private-sector employees are subject to the Employee Retirement Income Security Act of 1974. This federal law, known as ERISA, supersedes any state law relating to employee benefit plans, including retirement plans, for privatesector workers. The law established stringent administrative
requirements and legal protections for all such plans nationwide.
In 2012 and 2016, the state passed two laws that authorized the creation of CalSavers, originally called Secure Choice. Those laws said the program could not go forward if it was determined to be an employee benefit plan subject to ERISA. Other states were considering similar plans, but it was unclear whether they would be subject to the federal law.
In August 2016, the U.S. Department of Labor issued a ruling that said state-run auto-IRAs would be exempt from that act if they followed certain rules, including very limited involvement by employers and no matching contributions. But in May 2017, President Trump signed a resolution that overturned the Obama-era rule.
Nevertheless, California forged ahead with its plan after getting an opinion from law firm K&L Gates that said the program as envisioned would not be subject to the federal law.
The Jarvis group, which advocates limited taxes, is suing the program and state Treasurer John Chiang, who is also chairman of the California Secure Choice Retirement Savings Investment Board. It essentially says the state has no right to set up a plan and require employers to enroll employees unless they opt out, because the federal law supersedes state laws related to retirement plans, according to Laura Murray, the group’s legal affairs director. “This is expressly illegal under ERISA,” she said.
In a statement on the suit, Chiang said, “We remain confident that we are on strong legal ground.” He added, “We remain undaunted, undistracted, and unwavering in our commitment to successfully launch a bold, innovative program which is being heralded as the most significant expansion of retirement security since the enactment of Social Security.”
California would be the third state to create an auto-IRA. Oregon started one last year and Illinois will before the end of the year.
The program is not supposed to cost state taxpayers anything; administrative costs would be paid by participants when it’s running. But the state is advancing funds to get it started. The lawsuit notes that as of Sept. 25, $450,000 “was spent from a general fund loan,” and $20 million more was requested from the Department of Finance. The Legislature approved loans of $16.9 million, the suit says. As of March 31, expenditures since the program’s inception totaled $1.5 million, it added.