Massachusetts Cafeteria Plan -- ERISA preemption

[elmobob14]

As you probably know, there are compelling arguments to be made that the Mass cafeteria plan requirement is preempted by ERISA.

How are your clients reacting to this ambiguity? Are most taking a wait-and-see approach, hoping for preemption, or are they complying with the Mass requirements pending ERISA litigation?

[Guest WelfareBoy]

A cafeteria plan is not an ERISA plan, it's just a funding mechanism for the benefits. There should not be an argument for ERISA preemption. Mass is not telling employers how to run their group health plans, just penalizing them if they don't offer coverage and/or their employees use state funded services. Seems fair to me, if you're into that whole Communism thing (we love it in Mass). It's funny though - everyone is so concerned about each others' rights that we forgot about the right to be uninsured!

Perhaps more of a preemption argument could be made with regard to the minimum creditable coverage standards.

At any rate, my clients are all complying with MA Universal Health. It's really not that bad; most of them just need to expand their Section 125 plan and allow employees to purchase insurance through the employer, or another plan/agency (like the Commonwealth Health Insurance Connector).

[J Simmons]

Some, if not most, cafeteria plans are employee welfare plans subject to ERISA, and perhaps group health plans for HIPAA and COBRA purposes. One must thread the needle carefully to avoid the application of these federal laws other than just IRC section 125.

Include a flex account option, and you likely have an ERISA plan.

Make employer contributions available to cover part of the premium costs, you likely have an ERISA plan.

If as part of the cafeteria plan the employer selects the insurance policy or 'endorses' it, you likely have an ERISA plan.

If employees get a break on the premium costs, you likely have an ERISA plan.

[Guest WelfareBoy]

Absolutely true, but the MA cafeteria plan requirement does not require an FSA, employer contributions, or endorsement, though employer contributions are permitted. Also, the policies are individual policies.

I agree that the employer's actions could make the cafeteria plan an ERISA plan, but the way the MA regs are written, they take great pains to avoid employer endorsement or contribution as a requirement.

Also, I do not see how an employer contributing to the plan without endorsing it can make it an ERISA plan. Keep in mind that there are ~44 plans by 7 carriers through the Connector, so while the employer could make a percentage contribution, they are not necessarily endorsing any particular plan.

So in my opinion, the regulations do not require establishment of an ERISA plan (though it is very easy to end up establishing one "by accident").

But I understand that is up for debate, and am interested in alternate views that consider this an ERISA plan.

[Don Levit]

WelfareBoy:

An additional factor to consider is whether a plan needs to be established, whether ERISA or not.

A plan is a systematic way to pay for expenses, which the MA plan is.

Also, bear in mind that employers in states other than MA will have to comply with the MA law, so the uniform administration is violated.

As far as the law attempting to not endorse plans or require employer contributions, the question will come to what is the form and what is the substance?

Individual policies can be group plans, if 2 or more individuals are covered.

Paying premiums on a policy is a significant factor in whether the employer endorses the plan.

By the way, I just saw that Suffolk Co NY law was preempted.

One thing concerns me about MA, though.

Has there been any court filings to preempt the law?

If not, why not?

Don Levit

[J Simmons]

“[T]here is no authoritative checklist that can be consulted to determine conclusively if an employer’s obligations rise to the level of an ERISA plan”

* * *

“In this cloudy corner of the law, each case must be appraised on its own facts.”

Belanger v Wyman-Gordon Co, 71 F3d 451 (1st Cir 1995).

[Guest mjb]

W: why isn't the MA law penalizing employers who do not provide health ins to employees preempted by ERISA as was the MD law mandating health ins coverage by walmart? I dont of of any lawyer who believes that the CA law mandating health ins by employers is not preempted.

[Guest WelfareBoy]

Don -

Not sure why there haven't been any lawsuits yet. Perhaps because these requirements are ultimately not too burdensome on MA employers. Even some of the employers right on the cusp (those with just over 11 FTE employees) seem to be managing alright, and opening their Section 125 to Connector plans. The one thing I have not seen is a high level of participation in Connector plans by part-time employees, which I'm curious about.

Also, I don't see how this law affects employers in states other than MA. It's supposed to only affect MA employers with 11 or more FTE employees.

mjb -

In line with my points to Don, I think we'll see preemption lawsuits if/when the requirements on employers get to be too much. I think when the Minimum Creditable Coverage regs start taking effect, we'll see some challenges then.

The Maryland law was ham-handed and begging for preemption due to its interference with the employer.

[Don Levit]

WelfareBoy:

Thanks for providing a heads-up on what is happening in MA.

What I meant to say about employers in other states was pertaining to employers that had employees in 2 or more states, one of which is in MA.

How would the structure and administration of plans be uniform in that situation?

Don Levit

[Guest mjb]

WB: how does the Mass law apply to interstate employers who have a health insurance program that differs from the requirement under MA law. As I understand ERISA state law would be preempted because it would prevent uniform administration of the employer's plan.

[Don Levit]

mjb:

I couldn't have said it any better myself!

Do you think that uniform administration applies to fully insured plans as well as self-insured plans (single and multiple employer plans)?

Don Levit

[Guest mjb]

Based on prior precedents (Met life V. Mass) state law would not be preempted as it applies to a fully insured plan.

[Don Levit]

mjb:

That case dealt basically with the state's ability to regulate insurers, as opposed to the ERISA plans themselves.

It did not deal with insurers who provided plans to an employer who was in more than one state.

Don Levit

[Guest mjb]

As I understand it, state ins law could impose rules on employers who adopt an insured health plans, e.g. adopt a cafeteria plan for employee contributions even though the state could not impose the same requirements for a self insured plan, if employee contributions are required under the insurance policy.

[Don Levit]

mjb:

If that is the case, then where does uniform administration of a plan come into play, when an employer is in MA, and at least one other state?

Don Levit

[Guest mjb]

Good Q. The state law may be preempted to the extent it would impose different conditions from the terms of the employer's plan or it would be permissible to have a different plan in MA, same as other state law provisions such as mandated coverage for cancer detection, length of state after childbirth, etc.

[Don Levit]

mjb:

Would your comment be any different if the plan was a self-insured multi-state MEWA?

Don Levit

[Guest mjb]

First tell me who regulates a multi state veba? Each state in which employees work? the feds?

[Don Levit]

mjb:

The states have the primary responsibility to regulate MEWAs, due to the MEWA Amendment passed in 1983.

Don Levit

[Guest mjb]

If the states can regulat MEWAs as if they are insurance co why cant MA regulate MEWAs under its health care act since state laws are not preempted?

[Don Levit]

mjb:

MA can regulate MEWAs.

Do you think the regulation would be any different, considering ERISA, from a self-funded MEWA only in MA, and a self-funded MEWA in MA, and, say 2 contiguous states?

Don Levit

[Guest WelfareBoy]

mjb & Don:

First off, my apologies for not getting back to this thread earlier.

One question that was posed after my last post was how do these MA requirements affect a plan in multiple states that may not comply with MA law.

With regard to MA Health Reform, there are different sets of requirements that are aimed at employers and insurance carriers.

Insurance:

To the extent that the master policy for a group health insurance product is delivered or issued outside of MA, it would not have to comply with the MA rules. This would include the insurance nondiscrimination requirements under MA law, as well as things like state-mandated insurance benefits. In other words, I don't think we, as Mass. residents, have evolved to the point where we're trying to dictate another state's insurance offerings.

Employers:

As of right now, with regard to the employer requirements, there is no minimum plan design required. However, as of 1/1/09, the minimum creditable coverage ("MCC") standard will be in place, giving an employer the option of providing creditable coverage or paying the $295 PEPY Fair Share Contribution penalty.

As you can see, the MCC standard is aimed at employers and is not an insurance mandate (it'll apply to self-insured plans as well). We'll have to see if this withstands an ERISA challenge.

The MCC standard is eerily reminiscent of the Maryland law that was struck down. However, it should not be nearly as financially burdensome on employers, which might differentiate it enough from the Maryland case. The level of burden on employers might also influence whether it is challenged.

Don - re: your question on a self-funded MEWA in MA versus one covering employers in more than one state, I believe a self-funded MEWA would have to register as an insurance company before doing business in a 2nd state, provided that it's even legal in MA in the first place.

[Don Levit]

WelfareBoy:

Thanks for the insight into how MA regulates employers and insurers.

I agree that MA should regulate employers located only in MA.

However, for multi-state employers, how could each state regulate the employer, as if it was located only in their particular state?

For example, with mandated benefits being different in each state, how would the structure and administration be uniform, if each state wished to impose its mandated benefits on the multi-state employer?

The degree of the burden on employers is certainly relevant to ERISA preemption.

This has legal precedence to a Supreme Court case in New York involving a hospital tax assessed on insurers, but not assessed on Blue Cross.

However, the tax indirectly affected employers.

Here, the assessment directly affects employers.

Don Levit

[Linda]

I question whether an employer will have enough control to administer a Connector-only cafeteria plan (for part-time employees) in a way that complies with IRC 125. The employer submits to the Connector a list of employees who are eligible for the Connector-only cafeteria plan. Then, the next thing the employer gets is a list of employees who signed up for insurance through the Connector and a bill. The employer does not know what family members are covered (e.g., there could be a same sex spouse or an over-age dependent for whom pre-tax contributions are not permitted). And it looks like an employee would go to the Connector to drop coverage – the employer has no way to control a drop or change. The employer won’t even know an employee has dropped until the next month’s bill arrives without the employee’s name. I just hope the IRS is okay with these arrangements because, to me. it sure doesn’t look like it works. Or, am I missing something about the process???

[Don Levit]

Linda:

You are asking some very good questions.

The proposed rules for cafeteria plans, if adopted, will help clarify your tax concerns.

As reported in Benefits Link on 8-3-07, go to:

http://benefitslink.com/taxregs/reg142695-05.pdf.

Part of the material does address cafeteria plans, such as the Connector in MA.

Don Levit

[GBurns]

Don

I must be missing it, but what tax concerns did Linda have, and where were they addressed in the new Proposed Regs?

Where is something like the Connector addressed?

[Don Levit]

George:

Proposed Regulation 1.125-1(m), in which a cafeteria plan can pay or reimburse individual policy insurance premiums. An employee may purchase an individual insurance policy, and elect to have the employer reduce his salary on a pre-tax basis, and be reimbursed for insurance premiums, after proper substantiation of the expenses.

This resembles somewhat the legislation In MA in which employees can buy individual policies and pay the premiums pre-tax via salary reduction.

Don Levit

[GBurns]

But what does that have to do with what Linda posted?

As far as the Proposed Regs go I do not see anywhere where an employee can pre-tax and also be reimbursed for individual coverage premium. Think about it, If for example the employee paid a $100 premium directly to the insurance company, How much will they be allowed to pre-tax? If $100 the employee will have a salary reduction effect of lets say $87 ($100 less taxes), which will be the amount available for eimbursement after the employee substantiates that $100 was previously paid.Upon review I realized that this analogy was in error, but deleting it not seem like the proper method of correction.) Is this a benefit that many employees will even want?

If on the other hand the Proposed Regs (which do reference RR 61-146) means that the employe can pre-tax an amount which is forwarded to the insurance company as premium payment just like any other POP cafeteria plan pre-tax insurance premium, then I can see employees considering this useful.

I also see the application where a Benefits Credit from the employer being used for individual coverage premium payment or being used for reimbursement of a sunstantiated premium payment.

The difference in both cases is that the employee is not being reimbursed that which they pre-taxed.

Also, I see nowhere in the MA program where any reimbursement is contemplated, so I see no similarity with your scenario.

[Don Levit]

George:

The proposed regulations are an important step to easing the transition from group insurance to individually-owned portable policies.

If the IRS says it is kosher for employees to pay for individual policies in a tax-advantaged manner, then the state departments of insurance will probably have to allow this practice in certain situations.

States like Texas forbid this practice from being used.

Don Levit

[GBurns]

Don

Paying for individual health premiums on a pre-tax basis is not the same as what you stated in your post where you had the employee being reimbursed via a tax free salary reduction for premiums paid. This is very different from from a pre tax reduction that is used as premium payment as has always been the practice in POP cafeteria plans.

Reimbursing pre taxe salary reductions are not allowed as explained in RR 2002--3 and the new Propsed regs make no change to that.

Rev Ruling 61-146 referenced in the new Proposed Regs has no pre taxing of premium.

Regulations whether Proposed or not are not law. They are explanations of the interpretation of existing law. Laws allowing the pre-taxing of individual insurance coverage premiums have always existed. Aflac, Colonial, Allstate AWD etc have for decades sold millions of individual accident and health plans on a pre tax basis. So have many traditional health insurance companies.

Texas is not the only state that has Small Group Health Insurance regulations that prohibit both List Billing and reimbursement of premiums by the employer. This prohibition is also connected to the pricing, eligibility and other aspects of the health insurance laws. I doubt that any law change by the IRS can force any change in state insurance law. That is why the enactment of section 125 did not and could not compel sates to allow the salary deduction and even after 25 years there is still at least 1 state that still does not give the tax break that the IRS does. The same situation ocurred with HSAs and you can see the progress of the sate legislation in the pinned section of that Forum. What the IRS does, does not necessarily make a State do anything.

[Don Levit]

George:

I agree with you that the states do not have to agree with the IRS proposed cafeteria plan regulations.

States do have the right to regulate insurance, as long as their interpretations do not conflict with ERISA.

The key issue here is whether or not an ERISA plan has been established and maintained by the employer, when individual policies are invloved.

Court cases have gone in several directions on this issue.

I am not aware of any cases, in which employer payment of premiums for an individual policy, in and of itself, established an ERISA plan.

Rather, the courts believe that in grey areas, that the facts and circumstances will establish whether or not an ERISA plan has been established.

It seems to me that the TX DOI is suggesting that any subsidizing of premiums for 2 or more individual policies establishes an ERISA plan.

This, to me, has no rational basis to be applied across the board.

To access the bulletin, go to:

http://www.tdi.state.tx.us/bulletins/2006/cc9.html.

Don Levit

[GBurns]

Don

Nowhere in the Bulletin or State Law does the texas DOI make any claim regarding ERISA or the creation of an ERISA plan. It very clearly states that the issue is "that an individual or group health benefit plan[1] is a small employer health benefit plan ".

How is the issue of the creation of an ERISA plan relevant?

[Don Levit]

George:

How can an individual policy be part of a small employer health benefit plan that is not subject to ERISA?

Don Levit

[gc@chimentowebb.com]

<<So in my opinion, the regulations do not require establishment of an ERISA plan (though it is very easy to end up establishing one "by accident"). But I understand that is up for debate, and am interested in alternate views that consider this an ERISA plan.>>

Like you, I don't care to have my clients be a test case. But the 125 requirement has to be viewed in the context of the entire statute. I don't believe it would pass muster in a preemption attack.

Here's what an employer is required to do: (1) provide a cafeteria mechanism and administer it (2) obtain HIRD Forms annually from those who decline 125 coverage (3) report to the State whether they sponsor a 125 plan and provide other plan data. And, (4) if a 125 plan is not sponsored, the employer is essentially required to self-insure medical costs, because of the potential assesment through the state's free care pool if employees use it. That's just too many mandates for the entire thing not to be preempted.

Considering how few employees actually use the MA 125 arrangements, I wish the legislature would remove that mandate from the statute. Employers who sponsor health insurance have enough to do, and there are few part-timers for whom this 125 tax break is meaningful. In fact, most of them would be better off to pay employment taxes and build up SS credit, and it's disingenuous for the State to promote a progam that lowers social security pensions for part-timers.

GC