Guest Article

(From the July 24, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

ERISA Preempts Maryland "Play or Pay" Health Mandate Law, District Court Rules

A federal district court on July 19, 2006 ruled Maryland's Fair Share Health Care Fund Act ("Fair Share Act") is preempted by ERISA. Retail Industry Leaders Association v. Fielder, Civil No. JFM-06-316 (D. Md. July 19, 2006). The court's decision is a major victory for employers, and a significant setback for proponents of the Fair Share Act and similar health benefit "play or pay" proposals pending in at least 13 other states.

Of course, the district court's decision is only the first step. Maryland is appealing the district court's ruling to the Fourth Circuit Court of Appeals, and from there the case could end up in the U.S. Supreme Court. But for now at least employers' faith in the courts to uphold Congress' intent "to avoid a multiplicity of regulation in order to permit the nationally uniform administration of employee benefit plans" has been rewarded.

Background

The Retail Industry Leaders Association (RILA) filed the case after the Maryland legislature on January 12, 2006, enacted, over Governor Robert Ehrlich's veto, the Fair Share Act. In general, the Fair Share Act requires private employers with at least 10,000 employees (full or part-time) in Maryland to provide a certain level of health benefits to those employees or make a contribution to the Maryland Fair Share Health Care Fund ("Fund"). Those employers must spend at least eight percent of wages (six percent in the case of nonprofit organizations) paid to their Maryland employees on health benefits for such employees.

Any private employer with 10,000 or more Maryland employees that does not meet the eight percent (or six percent, if applicable) threshold will have to pay the difference to the Fund. The Fund will be used to support Maryland's Medicaid program. A $250,000 civil penalty will be imposed against any employer that fails to make a required payment to the Fund. The Fair Share Act, which does not apply to the federal government or to any state or local government employers, is scheduled to become effective on January 1, 2007.

Two other states have enacted "play or pay" mandates this year. The Massachusetts Health Care Access and Affordability Act requires employers with at least 11 full-time employees to make a "Fair Share Contribution" unless they offer health insurance for their employees and make a "fair and reasonable premium contribution," which will be defined by regulation. The Fair Share Contribution will be based on the state's cost for "free care" provided to uninsured workers, but will not exceed $295 per full time employee per year. In addition, the Massachusetts Act imposes a Free Rider surcharge on employers who do not provide health insurance. Vermont also has enacted a "play or pay" mandate that will apply to employers with more than four employees.

In 2003, then-California Governor Gray Davis signed into law a comprehensive "play or pay" mandate that would have applied to employers with 50 or more California-based employees. That law was rejected by voter referendum in 2004.

District Court's Decision

ERISA preempts "any and all State laws insofar as they ... relate to any employee benefit plan" covered by ERISA. ERISA ? 514(a). Citing Supreme Court precedent, the district court noted a State law "relates to" an ERISA plan if it has either a "reference to" or "connection with" such a plan. The district court determined the Fair Share Act has a "connection with" ERISA plans because it establishes health care spending requirements that do not apply in other jurisdictions and because it requires employers to provide a specific level of health benefits through ERISA plans. The district court also noted its decision is consistent with "long established Supreme Court law that state laws which impose employee health or welfare mandates on employers are invalid under ERISA."

The district court took particular exception to one of Maryland's arguments in opposition to the ERISA preemption claim. Specifically, Maryland argued the Fair Share Act does not require employers to increase health benefits to meet the eight percent (or six percent) threshold. Instead, Maryland claims an alternative available to employers would be to spend up to the threshold amount on first aid facilities, which are not ERISA plans. The district court rejected this claim as demeaning "... the seriousness of purpose of the Maryland General Assembly to suggest that it would address health care delivery and cost issues by enacting legislation that could result in a major employer providing health benefits to its employees by constructing first aid facilities to minister to minor injuries they have suffered."

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, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2006, Deloitte.