Guest Article

(From the April 23, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Maryland Will Not Seek Supreme Court Review of Health Benefits "Play or Pay" Law

The state of Maryland will not ask the Supreme Court to review a lower court decision invalidating its Fair Share Health Care Fund Act ("Fair Share Act"), one of several health benefits "play or pay" laws enacted last year. The Fourth Circuit Court of Appeals earlier this year ruled ERISA preempts the Fair Share Act. Retail Industry Leaders Association v. Fielder, 475 F.3d 180 (4th Cir. 2007). Maryland Attorney General Douglas F. Gansler on April 16, 2007 announced the state would not appeal to the Supreme Court because "seeking further review would not be successful."

Background

The case at issue was filed by the Retail Industry Leaders Association (RILA) after the Maryland legislature on January 12, 2006, enacted, over then-Governor Robert Ehrlich's veto, the Fair Share Act. In general, the Fair Share Act would require 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"). Specifically, those employers would have to 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 would have to pay the difference to the Fund. The Fund would be used to support Maryland's Medicaid program. A $250,000 civil penalty would be imposed against any employer that failed to make a required payment to the Fund. The Fair Share Act, which would not apply to the federal government or to any state or local government employers, was scheduled to become effective on January 1, 2007.

Two other states enacted "play or pay" mandates in 2006. 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," as 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.

Fourth Circuit Court of Appeals' 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 Fourth Circuit Court of Appeals noted a State law "relates to" an ERISA plan if it has either a "reference to" or "connection with" such a plan. The court of appeals determined the Fair Share Act has a "connection with" ERISA plans because it "effectively mandates that employers structure their employee healthcare plans to provide a certain level of benefits." In response to Maryland's arguments that employers can choose to make a Fair Share Contribution instead of changing their ERISA plans, the court of appeals argued no reasonable employer would choose to pay money to the state instead of providing benefits to its employees. Thus, the court of appeals ruled ERISA preempts the Fair Share Act.

As of now, the Fourth Circuit Court of Appeals is the highest court to rule on this issue.

What Happens Next?

Even though Maryland has decided not to pursue this case any further, additional litigation of the ERISA preemption issue is possible. As noted, Massachusetts and Vermont also enacted "play or pay" mandates last year, and similar proposals are pending in other states. Neither Massachusetts nor Vermont is within the Fourth Circuit's jurisdiction.

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, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.