Guest Article

(From the March 30, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

An Employer Group Moves Forward with Appeal to Supreme Court

After the 9th circuit rejected its request for rehearing, the Employer Group is finalizing plans to appeal to the Supreme Court the circuit's October 2008 ruling that upheld San Francisco's "play or pay" statute. The statute requires employers to spend a minimum amount on health benefits for its employees, or pay a fee to the city for its use in providing health benefits - a mandate that the Employer Group claims violates ERISA's preemption clause. The Employer Group is not alone - among others, the U. S. Department of Labor filed an amicus curiae brief in support of a rehearing. __________ v. City and County of San Francisco, No. 07-17370, D.C. No. CV-06-06997-JSW (March 9, 2009).

Snapshot History

The Ninth Circuit upheld the San Francisco ordinance as not running afoul of ERISA because it does not require the establishment or alteration of an ERISA plan. ERISA generally preempts and renders unenforceable "any and all State laws insofar as they ... relate to any employee benefit plan" covered by ERISA. The scope of ERISA's preemption is frequently litigated. The purpose behind the preemption is to promote uniformity of plan administration by not subjecting employers to a patchwork of differing state requirements.

Briefly, the San Francisco statute requires employers with at least 20 - but less than 100 - employees to have a per employee "health care expenditure rate" of at least $1.17 per hour, and for those with 100 or more employers to have a per employee rate of at least $1.76 per hour. An employer's health care expenditures include:

Alternatively, the employer can pay the applicable health expenditure rate to the city, which will use the amount to fund the city's Health Access Program for uninsured residents.

The Fourth Circuit struck down a similar Maryland law as preempted by ERISA. The Department of Labor argued in its amicus brief that the Ninth Circuit's decision is in clear conflict with the Fourth Circuit's decision in __________ v. Fielder, 475 F.3rd 180 (4th Cir. 2007) - and with the preemption principles applied by the Supreme Court.

Ninth Circuit's Reasoning

In rejecting the petition for rehearing, the Ninth Circuit stuck to the fundamental reasoning of its prior decision. The Fielder case, it explained, is distinguishable from Employer Group because the Maryland statute required employers with 10,000 or more employees to spend at least 8 percent of their payroll on health care, or pay that amount to the state - with nothing in return being given to the employer or the employees. In contrast, the San Francisco statute applies a tax on employers which is used to make health care benefits available to low- and moderate-income residents (including any who may be the employer's employees) - and the employer receives a dollar-for-dollar tax credit for any amounts it pays for health care for its employees. As in its prior decision, the court underscored that:

Observations

When couched as a tax to fund health benefits, for which the employer is provided a dollar-for-dollar tax credit for its health care expenditures, the Ninth Circuit's reasoning seems to have some resonance worth exploring from a legal standpoint. If upheld, however, the practical effect will be that employers will be subject to differing "minimum tax" rates that substitute for minimum required health benefits in differing jurisdictions.

This case will no doubt provide interesting legal argument before the U.S. Supreme Court, where it clearly appears to be headed.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2009, Deloitte.