US DOJ Challenges California’s Requirement of Small Employers

Small business owner establishing a retirement program

A number of states enacted laws either encouraging or requiring small employers to participate in a state retirement program if they do not sponsor one. California, Oregon and Illinois have such programs in place and are enrolling workers. New York, Maryland and Connecticut legislatures appear close to enacting such programs.

The concern is that, because many small employers do not offer a retirement plan, about 40 percent of the U.S. work force is not covered. Reducing this figure is in the public interest as it this would reduce the number of retirees relying on public services.

Congress has attempted to address this problem under federal law by creating simple alternatives to the standard retirement plan that are relatively inexpensive such as Self- Employed 401Ks and SEP IRAs. These have met with modest success.

The California program (CalSavers) is typical of state programs - mandatory for employers that do not sponsor a retirement plan, funded entirely with payroll deducted employee contributions and employee ability to opt-out.

The Justice Department has joined a law suit brought by a trade association representing small employers in California that is challenging the constitutionality of California’s program. The Department’s argument relies on a longstanding legal concept known as “preemption.” Under this concept, where there is a conflict between federal and state laws, federal law prevails. Both California’s and other programs are potentially in conflict with ERISA as they do not comply with many of its requirements.  Allowing these state programs to stand may result in patchwork of regulations, something ERISA intended to prevent by having uniform national standards. However, the Ninth Circuit has ruled that CalSavers governs employers not offering ERISA qualified plans, and doesn’t seek to govern ERISA plans, thus negating the preemption argument. This will continue to be ongoing battle among the states adopting similar programs that will be impactful to employers in those states, as well as ones conducting business across multiple states.

ACR#332268 11/19