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April 29, 2012 The Tax Lawyer

O Preemption, Where Art Thou?: ERISA's Lost State and Local Tax Preemption

Vol. 64, No. 4 - Summer 2011

Mark F. Sommer, Mark A. Loyd, and Jennifer Y. Barber


    The Employee Retirement Income Security Act of 1974 (ERISA) is a comprehensive statute that provides exclusive federal oversight of employee benefit plans and promotes the interests of employees and their beneficiaries in such plans. As this Article discusses below, ERISA replaced and superseded piecemeal labor and wage-and-hour laws which were thought to ineffectively regulate employee benefit plans and led to mismanagement of plans and overly restrictive eligibility requirements.

    In addition to replacing previous federal laws, Congress adopted the theory that the federal government could better regulate employee benefit plans without undue interference by the states. Thus, section 514(a) of ERISA broadly preempts state and local law, declaring that ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” ERISA preempts state law as a general matter—state tax laws being no different—and carves out specific exceptions as needed.

    Congress’s goal in preempting state and local tax laws is twofold: (1) simplify the administration of employee benefit plans for multistate employers through the use of a single set of regulations; and (2) prevent states from using state legislation and regulations to undermine ERISA.

    The extent of ERISA’s preemptive scope turns on the meaning of the term “relate to” as used in ERISA’s preemption provision. The ambiguous nature of the term “relate to” prompted ongoing litigation concerning ERISA’s preemptive scope. Though some guidance exists, the precise meaning of “relate to” remains—more than 25 years later—an open question, particularly as to state taxes. Through the mid-1990s, the trend in the courts was to interpret ERISA preemption broadly. Since then, ERISA’s preemptive scope has been viewed more narrowly.

    This Article examines historical jurisprudence on the issue of ERISA’s state law preemption. Part II provides an overview of ERISA and its objectives. Part III reviews ERISA’s text and Congress’s intent in passing ERISA. Part IV focuses on ERISA preemption presented in the context of state and local taxation. Part V discusses a recent case which presented the U.S. Supreme Court with an opportunity to address and clarify open and unanswered questions about ERISA preemption, particularly in the state tax context. Part VI proposes a workable framework—which can be reconciled with jurisprudence thus far—to be used in ERISA preemption analysis involving state and local tax laws.

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