Guest Article

(From the September 18, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Massachusetts Issues Guidance on Employer Health Coverage "Play or Pay" Assessment

The Massachusetts Division of Health Care Finance and Policy (DHCFP) has established a formula for determining whether employers are making "fair and reasonable" contributions to their employees' health insurance plans, and thus exempt from a $295 per full-time employee assessment. The Massachusetts legislature enacted this "play or pay" mandate -- which is effective October 1, 2006 -- over Governor Mitt Romney's line-item veto earlier this year as part of the Health Care Access and Affordability Act. A federal district court recently ruled ERISA preempts a similar "play or pay" mandate in Maryland.

Overview

In general, the Massachusetts Health Care Access and Affordability Act ("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 contribution" to that coverage, as defined by regulation. The Fair Share Contribution is $295 per full-time equivalent (FTE) employee per year, and will be used to pay for subsidized health insurance and Medicaid rate increases.

According to a September 8, 2006 press release issued by the Massachusetts Executive Office of Health and Human Services, an employer satisfies the "fair and reasonable" test if at least 25 percent of its FTE employees are enrolled in the employer's group health plan and the employer is making a contribution toward it. As an alternative, an employer satisfies the test if it offers to pay at least 33 percent of an individual's health insurance premium. Presumably the test will be applied only with respect to an employer's Massachusetts-based employees, but the press release does not make that distinction. In any event, most employers of any size should have no problem meeting either threshold.

The press release indicates the DHCFP has postponed adopting regulations relating to the Act's "Free Rider Surcharge." This surcharge will apply only to employers who do not contribute to or arrange for their employees to have access to health insurance through an IRC § 125 cafeteria plan, and only when such employers' employees and dependents receive health care services through Massachusetts' uncompensated care pool. The DHCFP is holding these regulations pending the legislature's decision to change the effective date of this provision.

ERISA Preemption

Even as Massachusetts moves forward with implementing the Fair Share Contribution and Free Rider Surcharge mandates, there is reason to believe they would not survive an ERISA preemption challenge. A federal district court recently concluded that ERISA preempts Maryland's Fair Share Health Care Fund Act, which requires private employers with at least 10,000 employees 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. The district court cited "long established Supreme Court law that state laws which impose employee health or welfare mandates on employers are invalid under ERISA" to support its decision. Maryland is appealing the district court's ruling to the Fourth Circuit Court of Appeals.

Although the Massachusetts and Maryland mandates are different, both essentially require employers to provide a minimum level of health benefits to employees. Whether either or both survive ERISA's broad preemptive reach will be for the federal courts to decide.

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.