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Franchise Tax Board of California v. Construction Laborers Vacation Trust

California Court of Appeal · Civil Procedure

Civil ProcedureERISA preemptionState tax levyGarnishmentERISApreemptionemployee welfare benefit planvacation trust

Facts

The Construction Laborers Vacation Trust administered an ERISA-covered employee welfare benefit plan that provided annual vacation benefits funded by employer contributions. The Franchise Tax Board served notices to withhold under California Revenue and Taxation Code section 18817 on the trust to collect unpaid state income taxes owed by three identified beneficiaries, but the trust refused to honor them based on a Department of Labor advisory opinion asserting ERISA preemption. The trust agreement contained spendthrift and anti-alienation provisions designed to prevent dissipation of funds before distribution. The Board sought damages for the unpaid levies and a declaration that the trust had to honor future levies.

Issue

Does ERISA preempt California's authority to levy on a delinquent taxpayer's account in an ERISA-covered vacation trust fund that is an employee welfare benefit plan? More specifically, may the state use its generally applicable tax levy mechanism to reach welfare plan benefits notwithstanding anti-alienation language in the trust agreement?

Rule

ERISA section 514 preempts state laws that specifically refer to or single out ERISA plans, but it does not preempt generally applicable state-law garnishment or levy procedures used to collect debts from benefits payable under ERISA welfare benefit plans. ERISA's anti-alienation provision applies only to pension plans, not welfare plans, and a welfare plan's own anti-alienation clause does not create preemption against such state-law collection mechanisms.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

The Oregon Revenue Office served a notice of levy on Cascadia Trades Leave Fund, an ERISA-covered plan that pays annual vacation benefits to union drywall workers in Portland. The levy relied on an Oregon statute that authorizes the state to require any person holding a taxpayer’s property to withhold and remit funds for unpaid state income taxes.

If the fund refuses to comply on the ground that ERISA preempts the levy, how should a court rule?

Explanation. The majority held that ERISA does not preempt a generally applicable state garnishment, attachment, or levy procedure when applied to an ERISA welfare benefit plan. A vacation benefit plan is a welfare plan, not a pension plan, and ERISA contains no statutory anti-alienation bar for welfare benefits. The absence of a prior judgment does not change the preemption analysis under the majority’s reasoning.