You Can't Get There From Here - Erisa Preemption Of State Laws Mandating Employer Healthcare Contributions
by Michael H. Bernstein & John T. Seybert, Sedgwick, Detert, Moran & Arnold LLP, New York, NY
In Retail Industry Leaders Ass'n v. Fielder, the United States Court of Appeals for the Fourth Circuit affirmed a Maryland District Court's decision holding that the Maryland "Fair Share Health Care Fund Act" (the "Act") is preempted by the Employee Retirement Income Security Act of 1974, 29 U.S.C. §1001, et seq. ("ERISA") and therefore unenforceable. The Act (popularly known as the "Wal-Mart law") is one of the first, recently enacted, state laws of its kind to be challenged by an employer group on ERISA preemption grounds. The Act required large for-profit employers to devote eight percent of total wages paid to employees in the state to health insurance costs for its employees or pay the difference between what is spent on employee health insurance and the minimum percentage of wages to the state. In turn, any money paid to the state pursuant to this law would be earmarked exclusively for state Medicaid or children's healthcare purposes.
A number of other states and municipalities have enacted or have sought to enact similar laws. These laws may soon be facing similar ERISA preemption challenges, and may very well suffer the same fate.
A. Maryland Act Is Preempted By ERISA.
The United States District Court for the District of Maryland held that the Act is preempted by ERISA because it has a "connection with" an ERISA plan. On appeal, appellant, Maryland's Secretary of Labor, Licensing & Regulation (the "Secretary"), argued for a more narrow interpretation of the preemption clause under 29 U.S.C. §1144. The Secretary argued that the United States Supreme Court's holdings in the "trilogy" of decisions between 1995 to 1997 significantly limited the scope of ERISA preemption. The Secretary also argued that the purpose of the Act was to require "private sector employers who spend significantly less on healthcare to bear or reduce Medicaid costs." The Secretary asserted that "the Act neither binds administrators to a choice nor interferes with uniform administration of a plan," and thus is not preempted. He argued that the law did not relate to the administration of ERISA plans because it gave employers affected by the law the option to either pay the state the additional amount of money required or to increase health insurance spending on non-ERISA type plans (such as HSA contributions or on-site medical clinics).
Seizing upon a core tenet of ERISA, respondent Retail Industry Leaders Association ("RILA") argued that state laws that "'impose employee health or welfare mandates on employers are invalid under ERISA.'" The United States Supreme Court has regularly found ERISA preemption in such cases. Indeed, one of the main purposes of ERISA is to encourage employers to provide benefit plans without setting minimum levels of benefits. RILA argued that while the Act purported to provide employers with a choice to either contribute toward state Medicaid costs or provide greater benefits to its employees, it was really nothing more than "a substantive mandate," because no employer would chose to pay money to the state instead of increasing the level of benefits it offers to its own employees.
The Fourth Circuit affirmed in a 2-1 decision, agreeing that the Act is preempted by ERISA because it mandates the structure of health benefit plans by requiring employers to fund their plans in accordance with a predetermined formula and to meet a minimum spending threshold. The Fourth Circuit recognized that not all state healthcare regulations are preempted by ERISA. But in this case, the state law interfered with ERISA's goal of encouraging employers to offer welfare benefits by mandating plan funding and structure rules. In this regard, the Circuit Court agreed with RILA's arguments that the option under the Act for employers to pay money to the State to fund non-ERISA healthcare options was not a real alternative because no reasonable employer would pay money to the state if it could spend it on benefits for its own employees. In effect, the practical result of the law would require large employers in the state to provide a mandated level of employee health benefit funding, in violation of ERISA rules that do not require any employer to provide such benefits or mandate the level of benefits when they are provided.
B. New York Municipalities' Laws Mandating Employer Contributions Are Likely Preempted By ERISA.
The Fourth Circuit also held that the Act, and similar laws in other jurisdictions, interfere with ERISA's goal of uniform national plan administration because they can expose large national employers to differing state and local laws concerning plan funding. In this regard, the Fourth Circuit identified two such laws enacted by two different municipalities in New York: New York City and Suffolk County. New York City's Health Care Security Act requires that grocery employers make minimum healthcare expenditures as set by the administrating agency. The term "grocery employer" is broadly defined to include entities primarily selling food for off-site consumption with 50 or more employees and those warehouse clubs and other entities which have 12,500 square feet of active retail space for the sale of food, with certain exceptions for pharmacies. The New York City act is complex and includes a reference to a variety of factors in order to determine the minimum benefits to be provided to employees. It also requires annual filings. It exempts managerial, supervisory and confidential employees from its scope without defining those terms, and also requires employers to calculate the number of hours worked for each covered employee between the July 1 to June 30 fiscal year, calculate the amount expended in healthcare benefits during that time and determine whether the minimum level is met, based upon a "prevailing healthcare expenditure" calculated yearly. Unlike Maryland's Fair Share Act, the New York City act does not provide any alternative funding options to meet the minimum standard of healthcare benefits, and an employer found in violation of this rule is subject to a fine.
Based on the Fourth Circuit's rationale, the New York City act is vulnerable to an ERISA preemption challenge because it also purports to legislate funding and plan structure requirements in violation of ERISA's prohibition on such state or local mandates. In fact the New York City act, and a substantively similar law passed in nearby Suffolk County, Long Island, have the same infirmities with respect to ERISA preemption as the Maryland Act. As the Fourth Circuit noted with respect to these two local regulations,: "[t]his is precisely the regulatory balkanization that Congress sought to avoid by enacting ERISA's preemption provision."
C. ERISA Preemption Challenge Launched Against San Francisco Ordinance Mandating Employer Contributions.
On the other coast, a recently enacted San Francisco municipal ordinance similar to the New York City act, and set to take effect July 1, 2007, is the subject of a lawsuit brought by the Golden Gate Restaurant Association in the United States District Court for the Northern District of California. The scope of the San Francisco Health Care Security Ordinance is broader than the New York City act because it is not limited to grocery employers, but rather, applies to any employer of 50 or more persons on average, who is required to obtain a business registration certificate from the San Francisco Tax Collector's office. The San Francisco ordinance, like the New York City act, however, requires employers to pay a minimum contribution set by the "healthcare expenditure rate." It also requires similar reporting and calculations as the New York City act. Almost anticipating an ERISA preemption challenge, the San Francisco ordinance states, "[n]othing in this Chapter shall be interpreted or applied so as to create any power, duty or obligation in conflict with, or preempted by, any Federal or State law." The case is still pending, but based on the Fourth Circuit's reasoning, San Francisco's ordinance would also be preempted by ERISA.
D. Various State Efforts To Mandate Minimum Employer Healthcare Contributions Will Likely Be Found Preempted By ERISA.
The State of California has previously attempted to pass laws requiring employers in the state to provide minimum benefits for their employees. For example, California sought, by referendum legislation coined "pay-or-play," to require employers of 50 or more employees to fund health insurance for their employees. The referendum was defeated in November 2004. In 2006, California was in the process of developing an act similar to Maryland's Fair Share Act. Governor Schwarzenegger vetoed that legislative plan, but recently has proposed his own version, which would require employers of 10 or more people to contribute four percent of their total payroll wages to health insurance contributions.
Other states have also sought to enact similar legislation, all of which seek to set different levels of minimum employer contribution. In fact, many states have attempted to track the minimum benefit levels in Maryland's Fair Share Act, including Iowa, Kansas, Minnesota and New Jersey. Some states have attempted to set the minimum levels higher than Maryland, including Florida, which sought to increase the minimum contribution to nine percent along with Georgia and Kentucky, which sought a minimum contribution level at ten percent. Connecticut proposed a completely different scale, obligating covered employers to contribute $2.50 per hour per employee. Most of these acts were not passed, but the varying funding levels proposed by each state illustrate the concerns expressed by the Fourth Circuit in RILA -- that ERISA plans would not be able to function on a national level if required to comply with a variety of different minimum funding rules. In the end, large national employers will be required to spend increasing amounts of time and money attempting to comply with such a Byzantine system in which the rules vary not only from state to state, but from municipality to municipality. This is exactly the type of patchwork system that ERISA preemption was designed to avoid.
E. The Massachusetts Legislation Is Probably Preempted Too.
In April 2006, the Massachusetts Legislature passed sweeping health insurance reform that requires state residents to obtain insurance if they meet certain economic levels. Starting in July 2007, individuals may lose their personal exemption under the Commonwealth's income tax if they fail to obtain health insurance. The new legislation, which took effect October 1, 2006, also obligates employers of more than 10 full-time workers to provide and make a "fair and reasonable" contribution to an employee's health insurance premiums. The employers' obligation of "fair and reasonable" contribution is capped at $295.00 per calendar year. This legislation appears to be the model that California's Governor Schwarzenegger seeks to emulate. Although this legislation was passed as part of "insurance reform," the portion of the law obligating employers to contribute minimum benefits does not fit within the "savings clause" exception to ERISA preemption for laws regulating insurance. Based upon the Fourth Circuit's analysis in RILA, this legislation also seems to be preempted by ERISA and not likely to withstand judicial scrutiny to the extent that it mandates employer contributions to health insurance.
F. Hawaii Is The Only State With A Statutory Exemption From ERISA Preemption That Permits Employer Funding Mandates.
It is surprising that any state has attempted to pass legislation obligating employers to follow mandated funding and structure obligations in light of the significant hurdle presented by ERISA. Since ERISA's enactment in 1974, only Hawaii has been able to pass a law obligating employers to fund health insurance for employees in the State. This, however, was achieved because the United States Congress made an express and limited exception from ERISA preemption for Hawaii's Prepaid Health Care Act of 1974 ("PHCA"). The reason for Congressional action was primarily due to the United States Supreme Court's affirmance in 1981 of the Ninth Circuit's holding in Standard Oil Co. v. Agsalud. In that action, Standard Oil Co. challenged an amendment to Hawaii's PHCA, which required employers to provide employees with certain minimum health insurance benefits, including drug and alcohol treatment benefits. Standard Oil already provided health insurance benefits to its employees under its group plan, which did not include drug and alcohol treatment. There was little dispute that the PHCA was preempted by ERISA; the United States District Court for Northern California originally granted summary judgment to Standard Oil and found that the PHCA was unenforceable. The opinion was affirmed by both the Ninth Circuit and United States Supreme Court with no dissents.
Following significant lobbying efforts by the Hawaiian Congressional delegation, in 1983 Congress passed a specific amendment to ERISA's conflict preemption statute for Hawaii. However, Congress was careful to strike a balance, and Hawaii is not permitted to make any substantive amendments to the PHCA in order to retain its exemption from ERISA preemption. According to United States Congressman John Erlenborn, a former representative from Illinois and one of the authors of the original ERISA law, this was because Hawaii's PHCA was enacted in its original form just prior to ERISA being signed into law.
Notably, Congress did not allow for any other state to enact similar legislation. Also, according to Congressman Erlenborn, the exemption for Hawaii was not to "be considered a precedent with respect to extending similar treatment to any other State law." Given the Hawaiian experience, it would seem that recent attempts by the various states to mandate minimum funding for employer-based healthcare benefit plans are all preempted by ERISA, and not subject to any exemption.
G. State Or Municipal Legislation Obligating Employers To Fund Healthcare Contributions Is Not The Answer.
While all of these states and municipalities pursue the laudable goal of providing all of their residents with health insurance coverage, compelling employers to make minimum contributions to their employer-based health plans is not the answer. The federal government has already established a mechanism to encourage employers to provide benefits to its employees through ERISA. When it enacted ERISA, the federal government did not compel private employers to provide any health benefits to employees. The states cannot now alter this federal mandate and compel employers to fund minimum levels of benefits for their employees. Not only will such rules fly in the face of ERISA's goal of encouraging the nationally uniform administration of employer-based benefit plans, it will also have a chilling effect on commerce as certain employers may not be willing to operate in a state or municipality where minimum contributions are required. In fact, it is likely that many employers will simply hire less people in order to avoid being subject to such state regulations. Moreover, the varying minimum levels of benefits and compliance requirements will cause large employers to spend significant amounts of money on administrative costs instead of devoting that money to their employees' healthcare. While many states are wrestling with the question of how best to provide health insurance coverage to the growing ranks of the uninsured, requiring employers to solve the problem through increased funding of employer-based health coverage is not the solution. As the Fourth Circuit correctly noted in its RILA decision, such mandates are preempted by ERISA.