Franchise Tax Board v. California Laborers Vacation Trust

California Court of Appeal · Federal Courts

Federal CourtsERISA preemptionERISApreemptionemployee welfare benefit planvacation truststate tax levygarnishment

Facts

CLVT administers an ERISA-covered employee welfare benefit plan that pays annual vacation benefits funded by employer contributions for covered laborers. The Trust agreement contains spendthrift and anti-alienation provisions intended to prevent dissipation of the funds before annual payout. The Franchise Tax Board issued notices to withhold under California Revenue and Taxation Code section 18817 to levy on the accounts of three delinquent taxpayers whose funds were held by CLVT, but CLVT refused to comply based on a Department of Labor advisory opinion that ERISA preempted such state levy process. The Board sought damages for the unpaid levies and a declaration requiring CLVT to honor future levies.

Issue

Does ERISA preempt California's authority to levy on a delinquent taxpayer's account held in an ERISA-covered employee vacation trust fund under a generally applicable state tax withholding statute?

Rule

ERISA section 514 preempts state laws that expressly refer to or single out ERISA plans, but it does not preempt generally applicable state-law mechanisms for garnishment, attachment, or levy against benefits held in ERISA welfare benefit plans. ERISA's anti-alienation provision applies only to pension plans, not welfare plans.

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The Colorado Department of Revenue serves a notice of levy on Front Range Trades Vacation Fund in Denver, seeking money credited to Luis Moreno's account to satisfy delinquent state income taxes. The fund is an ERISA-covered vacation benefit plan and its trust agreement says benefits may not be assigned, alienated, or reached by creditors before the annual payout.

Is ERISA likely to preempt Colorado's levy as applied to Luis's vacation-benefit funds?

Explanation. The majority treated an ERISA vacation fund as a welfare plan and held that ERISA section 514 does not preempt generally applicable state garnishment, attachment, or levy procedures applied to welfare-plan benefits. It also rejected the argument that a trust's own spendthrift or anti-alienation language can create immunity from such process. The opinion further stated that the absence of a prior judgment does not alter the preemption analysis.