Compliance News | May 28, 2021

CalSavers Retirement Savings Program Survives Lawsuit

On May 6, 2021, the Ninth Circuit Court of Appeals in San Francisco dismissed a legal challenge to the CalSavers Retirement Savings Program, which encourages private sector workers in California to save for retirement through automatic enrollment in an individual retirement account (IRA).

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The lawsuit and decision

The lawsuit was filed in 2018 by a taxpayers’ rights group claiming that the CalSavers program is an employer-sponsored retirement plan that is preempted by ERISA. However, the Court decided the program was not an ERISA plan because it was established by the State of California and not by the private employers whose employees participate in the program.

The Court also concluded that the state is not a sponsoring employer and the employers do not operate the program or have any discretionary authority over it.

This ruling supports the growing number of retirement savings plans like it (often called secure choice plans) and weakens opposition to state-run savings plans.

The CalSavers Retirement Savings Program

The CalSavers program has only just begun to accept contributions from its largest employers (those with 100 or more employees). Additional employer groups will begin contributing later this year and through 2022.

The CalSavers program estimates it will eventually enroll nearly seven million workers in a retirement savings account.

Other government-run retirement savings plans for private sector workers

Currently, 13 states and two cities have authorized programs that encourage private sector workers to save for retirement where their employer does not sponsor its own retirement plan, such as a 401(k) plan. The most common type of program is a Roth IRA. Private sector employees are automatically enrolled in the IRA at a default contribution rate, but can opt out of the plan or change their contribution amount.

The first three programs to begin accepting contributions to an auto-enrollment IRA, in California, Oregon and Illinois, have accumulated at least $225 million in assets in more than 330,000 accounts with contributions from more than 33,000 registered employers.

In April 2021, the State of Virginia legislature and the New York City Council enacted new automatic IRA programs for private sector workers who do not have access to an employer-sponsored retirement plan, making these the fourteenth and fifteenth programs enacted since 2015. Several other states are considering legislation that would create similar retirement savings programs for private sector workers.

Interested in learning more about state and city retirement savings programs for private sector workers?

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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