You asked for information on ERISA, its preemptive affect on state laws, and what type of health care reform would be permissible under ERISA, since Maryland's “fair share” (pay or play-type) requirement was invalidated by the courts.

SUMMARY

Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 to reform and streamline employee benefit packages.   Through ERISA, Congress intended to create uniform federal standards by eliminating competing state laws and protecting employee benefits from fraud and mismanagement. The law addresses pension plans in detail but also impacts other employee benefits, like health care.   It applies to all employee welfare benefit plans offered by private sector employers or unions, except churches, whether offered through insurance or a self-funded arrangement.

ERISA's “preemption clause” has become a complication for state lawmakers looking to reform the health care system. The preemption clause states that ERISA “shall supersede any and all State laws insofar as they relate to any employee benefit plan. ” Thus, state reforms often come into conflict with ERISA because they relate, directly or indirectly, to employee benefit plans. States cannot mandate that employers pay for health insurance, dictate the terms of an ERISA plan, directly tax benefit plans, impose significant costs on plans, or require plan sponsors to report information about the plans offered.  

ERISA does not preempt state laws that regulate “the business of insurance. ” Courts have defined this to mean that states can pass laws aimed at insurers and insurance practices and that substantially affect risk pooling arrangements between insurers and insureds. States can impose mandated benefit requirements on insured health benefit plans that employers purchase, but such mandates do not apply to self-funded plans since ERISA states that self-funded plans are not insurance for the law's purposes.

Maryland recently enacted a “fair share” law requiring organizations with more than 10,000 employees to spend at least 8% of their payroll on health benefits or put the money directly into the state's health program for the poor. In practice, the law only applied to Wal-Mart. The Retail Industry Leaders Association (RILA) sued, arguing the requirement violated ERISA. The U. S. Court of Appeals for the Fourth Circuit has upheld the ruling of a Federal judge who last year found that ERISA preempts the law, which is therefore unenforceable, because it impacted plan administration.

Maryland's fair share law is the first pay or play-type state health care reform initiative to be fully adjudicated by the courts. Other states' laws with similar requirements have not yet been challenged in court to our knowledge, though many may be expected to (e. g. , Massachusetts, Vermont). As a result, we do not know for sure what state actions will survive an ERISA challenge.

Based on the Maryland experience and analysis of years of developing ERISA case law, Patricia A. Butler, JD, DrPH, discusses ERISA and its implications for state health care reforms in a paper prepared for Academy Health and the National Academy for State Health Policy (copy enclosed and may be viewed at http: //www. statecoverage. net/SCINASHP. pdf). She outlines initiatives that may survive an ERISA preemption challenge, including a broad-based state tax or other assessment to fund a public coverage program (e. g. , single-payer) or premium subsidies for lower wage employees with allowable credits for any health care spending. A tax on ERISA plans would be preempted, but a tax on employers, insurers, or providers may be permissible, so long as it is done under the state's general taxing powers and not directly tied to ERISA plans.

ERISA LAW

ERISA was enacted in 1974 as a federal regulatory scheme for employee benefit plans, including health care plans. It sets forth requirements for benefit plan participation, funding, and vesting of benefits. It also establishes uniform standards for plan reporting, disclosure, and fiduciary duties, generally freeing multi-state employers from inconsistent state regulation in these areas. ERISA applies to employee welfare plans, including health care plans, but does not apply to governmental plans; church plans; plans maintained solely for the purpose of complying with workers' compensation, unemployment compensation, or disability insurance laws; foreign plans; and unfunded excess benefit plans (29 U. S. C. § 1003).

For health plans, ERISA's substantive provisions relate to: (1) a plan administrators' fiduciary standards (to administer the plan in the best interest of beneficiaries) and requirements for plan descriptions for enrollees, (2) reporting to the federal government, and (3) certain minimum standards and benefits (e. g. , continuation of health coverage; group plan guaranteed issue and renewability; pre-existing condition exclusion requirements; nondiscrimination in premiums and eligibility; maternity hospital length-of-stay standards; post-mastectomy reconstructive surgery; and mental health parity).

ERISA does not require employers to provide or maintain a minimum level of health benefits or to set aside funds to pay expected claims. As a result, a state cannot require employers to offer benefits or set the amount an employer must contribute to any coverage offered. If an employer does offer benefits, the U. S. Supreme Court has found that Congress intended for ERISA to be the dominant regulatory authority over the plan. The Court has also found that Congress also intended to preserve the states' regulatory power over the “business of insurance” through a specific three-part provision in the act.

ERISA (1) preempts state laws that “relate to” employee benefit plans, (2) saves from preemption those state laws that regulate insurance, and (3) “deems” employee benefit plans to be neither insurers nor engaged in the business of insurance for purposes of state regulation (ERISA § 514, 29 U. S. C. § 1144). (The preemption provision is typically referenced in terms of its preemption, savings, and deemer clauses. ) To regulate the “business of insurance" means that states can pass laws aimed at insurers and insurance practices and laws that “substantially affect risk pooling arrangements” between insurers and insureds (Kentucky Health Plan Assoc. v. Miller, 538 U. S. 329 (2003)).

The Court has held that ERISA does not preempt state laws that have “only a tenuous, remote, or peripheral connection with covered plans, as is the case with many laws of general application” (District of Columbia v. Greater Washington Board of Trade, 506 U. S. 125, 129 n. 1 (1992)). However, when the state law in question regards plan administration (e. g. , claim processing, eligibility determination), the Court has held that ERISA preempts it, in line with Congress' goals to minimize plan administration burdens and encourage employers to offer employee benefit plans.

The Court has also held that Congress intended for ERISA's civil remedies to be exclusive (Pilot Life Ins. Co. v. Dedeaux, 481 U. S. 41 (1987)). Under ERISA, a plaintiff is only allowed to (1) recover benefits due under the terms of a plan (e. g. , have a claim denial reversed and coverage provided), (2) enforce rights under a plan, and (3) receive a clarification of rights to future benefits under a plan (ERISA § 502(a), 29 U. S. C. § 1132(a)).

ERISA is administered by the Department of Labor, but Congress is the only body that can grant an ERISA waiver, for example, to a state implementing broad health care reform. They have never granted such a waiver.

MARYLAND FAIR SHARE LAW PREEMPTED BY ERISA

In January 2007, the U. S. Court of Appeals for the Fourth Circuit upheld the ruling of a Federal judge who last year nullified the Maryland Fair Share Health Care law, holding that ERISA preempts it (Retail Industry Leaders Assoc. v. Fielder, --- F. 3d ---, 2007 WL 102157
C. A. 4 (Md. ), 2007) (copy enclosed). The court found that because Maryland's law “effectively requires employers…to restructure their employee health insurance plans, it conflicts with ERISA's goal of permitting uniform nationwide administration of these plans. ” The court also found that the law was intended as a penalty for not providing a certain level of benefits, not a tax to raise revenue. “The Act thus falls squarely under [ERISA's] prohibition of state mandates on how employers structure their ERISA plans. ”

Maryland Background

This background information is taken from the NCSL website.

Maryland's governor vetoed the Fair Share Health Care Fund Act (SB 790) in 2005. (Fair share had previously been referred to as “pay or play. ”) In January 2006, the legislature overturned the veto, making the bill state law. The law requires organizations with more than 10,000 employees to spend at least 8% of their payroll on health benefits or put the money directly into the state's health program for the poor.  

Maryland's legislation was dubbed the “Wal-Mart Bill” because the 8% threshold would affect only the retailer, though three other companies in the state count over 10,000 employees.   Johns Hopkins University only needed to meet a 6% threshold, as it is classified as a non-profit organization.   The other two companies, Northrop Grumman and Giant Food, are large enough to be subjected to the law, but spend enough on health care to be exempt.  

The Retail Industry Leaders Association (RILA) filed suit in Maryland to block the law, saying that it is illegal under ERISA and that it violates the equal protection clause of the 14th Amendment because it affects only Wal-Mart.   RILA says that the suit is also meant to advise caution to the many other states considering similar legislation.  

PERMISSIBLE ACTIONS UNDER ERISA

Butler believes that the following design features of a state pay or play-type law should help a state defend such a law against an ERISA preemption challenge:

1. Do not require employers to offer health coverage to their employees.

2. Establish a universal coverage program funded in part with employer taxes. A publicly-funded health coverage program should be funded partially with taxes on all types of employers. The law and its sponsors should not refer to objectives such as assuring that employers provide coverage for their employees.

3. Do not refer to ERISA (e. g. , private-sector employer-sponsored) health plans. Taxes should be imposed on employers, not employer-sponsored plans.

4. Remain neutral regarding whether employers offer health coverage or pay the tax. The justification for a tax credit is to permit employers to cover workers, but the law and its sponsors should not express a preference.

5. Impose no conditions on employers' health plans for employers to qualify for a tax credit (e. g. , do not condition the credit on plan design features, benefit package adequacy, cost sharing requirements, or employer premium contributions). A tax credit should apply to any health care spending on behalf of employees.

6. An employer's payment of a tax cannot be a prerequisite to its employees qualifying for coverage under the public program.

7. Minimize administrative impacts on ERISA plans. Designing a pay or play program like other general taxes can help overcome arguments that it interferes with an interstate employer benefits plan design and administration because employers are already subject to varying state tax systems.

Thus, imposing a tax on all employers to help finance a public coverage program and allowing a tax credit to employers offering employee health coverage should survive an ERISA preemption challenge, according to Butler.

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