ERISA

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Employers in California should be ready for a big change in the retirement law to take effect over the next three years. This change comes in the form of a new California program called CalSavers (formerly known as Secure Choice). CalSavers is a state-sponsored individual retirement account (“IRA”) program similar to existing programs in Oregon and Illinois.

CalSavers applies to any employer in California with at least five employees. The law requires California employers to either offer their employees a “qualified” retirement plan or facilitate their employees’ enrollment in a state-sponsored payroll-deduction plan. Qualified plans are those governed by the Employee Retirement Income Security Act (“ERISA”), the federal law designed to protect private-sector pensions. These plans can range from 401(k) plans to automatic payroll-deduction IRAs.

Employers who do not provide a qualified plan for their employees must facilitate their employees’ enrollment in the state-sponsored plan. This plan differs from a traditional 401(k) based on the level of employer involvement it allows. For example, employers do not have the option of matching an employee’s contributions under the state-sponsored plan. An employee’s enrollment in the state-sponsored plan will come at no cost to employers beyond the time invested in facilitating enrollment.  An employer must also enable employees to make a direct payroll contribution to their CalSavers account and transmit the contribution to a third party, known as an administrator, or designate their payroll services provider to facilitate on their behalf. Beyond that, the employer’s responsibilities under the state-sponsored plan consist primarily of providing information about the program to their employees.

Notably, CalSavers also has a number of safeguards in place to limit employers’ liabilities and responsibilities. For example, employers will not have any liability for an employee’s decision to participate in or opt-out of the CalSavers program. Furthermore, employers will not be fiduciaries of the program or have any liability for the investment decisions of participating employees. Finally, employers will not be responsible for the administration, investment performance, or payment of benefits earned by participating employees.

California employers should prepare to comply with CalSavers. Employers without a qualified retirement plan who do not facilitate the payroll-deduction could be fined as much as $500 per eligible employee. CalSavers will be open to all eligible employers starting July 1, 2019. After that, the employer mandate to comply will take effect on a rolling basis based on the size of the employer.

Size of employer Deadline
Over 100 employees June 30, 2020
Over 50 employees June 30, 2021
Five or more employees June 30, 2022

Hogan Lovells is prepared to help California employers comply with CalSavers. For more information or for any other employment matter impacting your business, please contact the authors of this article or the attorney you regularly work with at Hogan Lovells.

 

Specialists have long touted certain significant advantages to employers that come along with maintaining ERISA severance plans, and a recent district court case highlights some of these advantages.

On November 9, 2017, in the unpublished opinion of Huddleston v. Scottsdale Healthcare Hospitals Inc, 2017 U.S. Dist. LEXIS 185985 (Nov. 9, 2017), an Arizona district court concluded that because a severance plan unambiguously stated it was a severance plan under ERISA, a former employee’s state-law claims for severance benefits were preempted by ERISA and the resulting claim for benefits under the employer’s severance plan were dismissed based on the employee’s failure to exhaust his administrative remedies under the plan.

The plaintiff had accepted an offer of employment with the defendant, and the offer letter stated that upon receipt of an executed non-compete agreement, the plaintiff would receive a nine-month severance package in the event of an involuntary termination of employment. The plaintiff signed the non-compete agreement. The offer letter included a copy of the applicable severance plan, which explicitly stated that it was intended to be a severance pay plan within the meaning of ERISA § 3(2)(B)(i). The plan also contained a claims procedure, which required a beneficiary to file any claim for severance pay with the Plan Administrator under Department of Labor regulations and using specified procedures.

Approximately one year later, the defendant sent the plaintiff a notice that (i) it had amended its severance plan, which superseded the severance plan that existed at the time of the offer of employment, (ii) the plaintiff’s level of employment was no longer eligible to participate in the severance plan and, (iii) as a result, the non-compete agreement signed by the plaintiff when he accepted the job was null and void. A few months later, the plaintiff was terminated without cause, and the defendant refused to pay severance to the plaintiff.

The plaintiff filed suit, alleging various state law causes action, including breach of contract, breach of an implied covenant of good faith and fair dealing, promissory estoppel, treble wages and declaratory judgment. The defendant moved to dismiss all of the plaintiff’s claims on the grounds that they were preempted by ERISA and the plaintiff failed to exhaust his administrative remedies under the plan. The court agreed with the defendant, dismissing the case in its entirety. The court held that the defendant’s severance plan was clearly and unambiguously an ERISA severance plan and, accordingly, (i) the plaintiff’s state law claims were preempted by ERISA and (ii) in order to bring an action arising from the ERISA severance plan, the plaintiff was required to first exhaust the administrative remedies under the severance plan before filing suit.

This decision illustrates some of the significant advantages of ERISA severance plans, which may be well-worth the inconvenience of the documentary and reporting requirements that come along with maintaining an ERISA plan.