Order Code RL34637
Legal Issues Relating to State Health Care
Regulation: ERISA Preemption and Fair Share
Laws
August 26, 2008
Jon O. Shimabukuro and Jennifer Staman
Legislative Attorneys
American Law Division
Legal Issues Relating to State Health Care Regulation:
ERISA Preemption and State Fair Share Laws
Summary
In the absence of comprehensive federal health care reform, states and localities
have undertaken certain initiatives in an effort to expand the provision of health care
to residents. One type of measure has been the fair share law, which generally
requires employers to choose between paying a certain amount towards health
expenditures or coverage for their employees, or contributing to a state or locality to
offset the cost of medical expenses for uninsured residents. Questions have been
raised as to whether fair share laws can be preempted by the Employee Retirement
Income Security Act (ERISA). This report provides an overview of ERISA
preemption, discusses legal challenges to fair share laws, and analyzes the fair share
requirements included as part of the Massachusetts Health Care Reform Act.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ERISA Preemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fair Share Laws and ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Suffolk County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
San Francisco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Massachusetts’s Fair Share Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Legal Issues Relating to State Health Care
Reform: ERISA Preemption and Fair Share
Laws
Introduction
In response to an increasing number of uninsured individuals, the declining
number of employers offering insurance to their employees, and the absence of
federal action, states and localities have experimented with certain measures to
address the problems of health care financing and access. One approach has been to
enact fair share laws, also referred to as “pay or play” statutes, which generally
require employers to choose between paying a certain amount for health expenditures
or coverage for their employees, or contributing to the state or locality to offset the
cost of medical expenses for their uninsured residents. Recently, questions have been
raised as to whether the Employee Retirement Income Security Act’s (ERISA’s)
express preemption provision, Section 514, prevents the application of fair share
laws. There have been legal challenges to fair share laws enacted in Maryland, San
Francisco, and Suffolk County, New York, with courts reaching varying conclusions.
In addition, the state of Massachusetts, which has received a great deal of attention
for enacting comprehensive health care reform, maintains a fair share requirement as
part of its health care reform package. This report provides an overview of ERISA
preemption, discusses legal challenges that have been brought against fair share laws,
and discusses the fair share requirements of the Massachusetts Health Care Reform
Act.
ERISA Preemption
ERISA provides a comprehensive federal scheme for the regulation of employee
pension plans, and a somewhat less detailed scheme for regulating welfare benefit
plans, offered by private employers. An “employee welfare benefit plan” is defined,
in relevant part, as
any plan, fund, or program ... established or maintained by an employer ... for the
purpose of providing for its participants or their beneficiaries, medical, surgical,
or hospital care or benefits, or benefits in the event of sickness, accident,
disability, death or unemployment ...1
1 29 U.S.C. § 1002(1). See 29 U.S.C. § 1002(7) (defining the term “participant” as “any
employee or former employee of an employer, or any member or former member of an
employee organization, who is or may become eligible to receive a benefit of any type from
an employee benefit plan which covers employees of such employer or members of such
organization, or whose beneficiaries may be eligible to receive any such benefit.”); 29
U.S.C. § 1002(8) (defining the term “beneficiary” as “a person designated by a participant,
(continued...)
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Although ERISA does not require an employer to offer pension or welfare benefits,
it does mandate compliance with its provisions if such benefits are offered.
Congress enacted ERISA to eliminate the conflicting and inconsistent regulation
of pension and employee welfare benefit plans by state laws. Accordingly, Section
514(a) of ERISA expressly preempts “any and all State laws insofar as they may now
or hereafter relate to any employee benefit plan ...”2 The U.S. Supreme Court has
interpreted this language as applying to any state law that “has a connection with or
reference to such a plan.”3 The Court has explained that to determine whether a state
law has a connection with an ERISA plan, a court must consider the objectives of
ERISA as a guide to the scope of the statute that Congress understood would survive,
as well as the nature of the effect of the state law on ERISA plans.4 A state law has
a reference to an ERISA plan if it acts “immediately and exclusively” on ERISA
plans or if the existence of such a plan is essential to the law’s operations.5
A state law that “relates to” an ERISA plan may avoid preemption if it regulates
insurance within the meaning of ERISA’s “saving clause.” Section 514(b)(2)(A)
“saves” from preemption “any law of any State which regulates insurance, banking,
or securities.”6 However, an additional clause serves as an exception to ERISA’s
saving clause. Section 514(b)(2)(B), ERISA’s “deemer clause,” indicates that a state
law that “purport[s] to regulate insurance” cannot deem an employee benefit plan to
be an insurance company for purposes of regulation.7
Until 1995, the Court’s decisions on ERISA preemption suggested generally that
the application of Section 514(a) was limitless. However, with its decision in New
York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., the
Court began to show a greater willingness to uphold various state laws.8
In Travelers, several commercial insurers challenged a state law that required
them, but not Blue Cross and Blue Shield, to pay surcharges on hospital services.
The commercial insurers argued that the law was preempted by ERISA because it
“relate[d] to” employer-sponsored health insurance plans. In addressing the
1 (...continued)
or by the terms of an employee benefit plan, who is or may become entitled to a benefit
thereunder.”).
2 29 U.S.C. § 1144(a). ERISA does exempt from preemption certain laws, including
generally applicable criminal laws, the Hawaii Prepaid Health Care Act, and state insurance
laws regulating multiple employer welfare arrangements.
3 See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1982).
4 See California Div. of Lab. Standards Enforcement v. Dillingham Construction, 519 U.S.
316 (1997).
5 Id. at 325.
6 29 U.S.C. § 1144(b)(2)(A).
7 29 U.S.C. § 1144(b)(2)(B). See Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724,
733 (1984) (discussing ERISA’s “saving clause” and “deemer clause”).
8 514 U.S. 645 (1995).
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application of ERISA’s preemption clause, the Court first noted that there is a
“presumption that Congress does not intend to supplant state law.”9 The Court then
considered whether Congress intended to preempt state law by looking to “the
structure and purpose” of ERISA.10 The Court concluded that “nothing in the
language of the Act or the context of its passage indicates that Congress chose to
displace general health care regulation, which historically has been a matter of local
concern.”11
Although the Court continued to uphold several other state laws following
Travelers,12 it nevertheless concluded in 2001 that a Washington state law was
preempted by ERISA despite the fact that it gave plans an option for avoiding its
requirements. The Washington law at issue in Egelhoff v. Egelhoff provided that the
designation of a spouse as the beneficiary of a nonprobate asset would be revoked
automatically upon divorce.13 Under the law, plan administrators were required to
alter the terms of a plan to indicate that the plan would not follow the law. It was
argued that the law not only avoided the regulation of plan administration, but also
did not apply so long as the plan documents expressly provided otherwise.
The Court determined that the Washington law had an impermissible connection
with ERISA plans because it interfered with nationally uniform plan administration.
The Court explained that one of the principal goals of ERISA is to enable employers
to establish a uniform administrative scheme that provides standard procedures for
the processing of claims and disbursement of benefits. The Court maintained that
uniformity is impossible if plans are subject to different legal obligations in different
states. Moreover, the Court declined to find the law saved from preemption because
of its “opt out” option:
It is not enough for plan administrators to opt out of this particular statute.
Instead, they must maintain a familiarity with the laws of all 50 States so that
they can update their plans as necessary to satisfy the opt-out requirements of
other, similar statutes ... This ‘tailoring of plans and employer conduct to the
9 Id. at 654.
10 Id. at 655.
11 Id. at 661. In analyzing whether the state surcharges violated ERISA’s preemption
provision, the Court stated, “In Shaw, we explained that ‘a law “relates to” an employee
benefit plan, in the normal sense of the phrase, if it has a connection with or reference to
such a plan.’ The latter alternative, at least, can be ruled out ... [T]he surcharge statutes
cannot be said to make ‘reference to’ ERISA plans in any manner.” Id. at 656 (citations
omitted).
12 See, e.g., De Buono v. NYSA-ILSA Medical and Clinical Services Fund, 520 U.S. 806
(1997) (state tax on gross receipts of health care facilities not preempted by ERISA);
California Div. of Labor Standards Enforcement v. Dillingham Constr., 519 U.S. 316 (1997)
(California’s prevailing wage law not preempted by ERISA).
13 532 U.S. 141 (2001).
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peculiarities of the law of each jurisdiction’ is exactly the burden ERISA seeks
to eliminate.14
The fair share laws discussed in this report present similar questions about
preemption and the impact of a plan or plan sponsor’s ability to choose from various
compliance options.
Fair Share Laws and ERISA
Courts have evaluated fair share laws enacted in Maryland, Suffolk County, and
San Francisco, with varying results.
Maryland. In January 2006, Maryland became the first state to adopt
legislation that would have required for-profit employers with 10,000 or more
employees in the state to either spend at least 8% of their total payroll costs on
employee health insurance costs, or pay to the state the amount their spending fell
short of that percentage.15 Shortly after the Fair Share Health Care Fund Act (Fair
Share Act) was enacted, the Retail Industry Leaders Association (RILA), a retail
trade association that includes Wal-Mart as a member, challenged the measure on the
grounds that it was preempted by ERISA.16 In January 2007, the U.S. Court of
Appeals for the Fourth Circuit affirmed the decision of a federal district court that
found the Fair Share Act to be preempted by ERISA.17
Prior to enactment of the Fair Share Act, the Maryland General Assembly heard
extensive testimony about the rising costs of the Maryland Medical Assistance
Program, which provides access to health care services for the state’s low-income
residents.18 The General Assembly also received information concerning Wal-Mart’s
failure to provide adequate health benefits to its employees, and Wal-Mart employees
and dependents enrolling in Medicaid and the state children’s health insurance
program.19
14 Id. at 151 (quoting Ingersoll-Rand v. McClendon, 498 U.S. 133, 142 (1990).
15 2006 Md. Laws 1.
16 RILA also alleged that the Fair Share Act violated the Equal Protection Clause of the U.S.
Constitution. See Retail Industry Leaders Association v. Fielder, 435 F.Supp.2d 481 (D.
Md. 2006).
17 RILA v. Fielder, 475 F.3d 180 (4th Cir. 2007). In November 2006, the U.S. Dept. of Labor
filed an amicus brief in support of RILA and the preemption of the Fair Share Act. See
Brief of the Secretary of Labor as Amicus Curiae Supporting Plaintiff-Appellee and
Requesting Affirmance, RILA v. Fielder, 475 F.3d 180 (4th Cir. 2007) (No. 06-1840, 06-
1901).
18 Fielder, 475 F.3d at 183.
19 Id. at 184.
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Wal-Mart would have been the only for-profit employer in Maryland to be
subject to the Fair Share Act.20 Other for-profit employers with at least 10,000
employees in Maryland either satisfied the Fair Share Act’s 8% threshold or were
exempted from the measure.21
James D. Fielder Jr., Maryland’s Secretary of Labor, Licensing, and Regulation
and the defendant in the case, made two arguments in favor of upholding the Fair
Share Act. First, the Secretary contended that the Fair Share Act was a revenue
statute of general application and not one that involved an employer’s provision of
health care benefits. He asserted that the revenue from the “payroll tax” imposed
under the Fair Share Act would fund the Fair Share Health Care Fund established
under the measure, which would be used to offset the costs of the Maryland Medical
Assistance Program.22
Second, the Secretary argued that the Fair Share Act did not have a connection
with employee benefit plans because an employer could act in ways that did not
involve such plans.23 For example, an employer could increase health care spending
by establishing on-site medical clinics or by contributing more money to employees’
health savings accounts. An employer could also refuse to increase benefits under
an ERISA plan and simply pay the amount by which its spending fell short of the
measure’s 8% threshold.24
The Fourth Circuit rejected both of the Secretary’s arguments. Acknowledging
the legislative history of the Fair Share Act and what the Maryland General Assembly
knew at the time of its consideration, the court indicated that the measure “could
hardly be intended to function as a revenue act of general application.”25 The court
stated,
[L]egislators and interested parties uniformly understood the Act as requiring
Wal-Mart to increase its healthcare spending. If this is not the Act’s effect, one
would have to conclude, which we do not, that the Maryland legislature
misunderstood the nature of the bill that it carefully drafted and debated. For
these reasons, the amount that the Act prescribes for payment to the State is
actually a fee or a penalty that gives the employer an irresistible incentive to
provide its employees with a greater level of health benefits.26
In response to the Secretary’s second argument, the Fourth Circuit distinguished
the Fair Share Act from state laws that were found to not be preempted by ERISA.
Citing Travelers, the court noted that the Supreme Court upheld the state law in that
20 Id. at 185.
21 Id.
22 Id. at 190.
23 Id. at 194-95.
24 Id. at 195.
25 Id. at 194.
26 Id.
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case because it did not act directly upon employers or their plans, but merely created
“an indirect economic influence” on plans.27 In contrast, the Fourth Circuit found
that the Fair Share Act “directly regulates employers’ structuring of their employee
health benefit plans.”28 The court indicated that “the only rational choice employers
have” is to structure their ERISA health care benefit plans so as to meet the minimum
spending threshold.29
The availability of alternatives to increase health care spending without affecting
an ERISA plan did not persuade the Fourth Circuit. The court noted that from an
employer’s perspective, the categories of ERISA and non-ERISA health care
spending would not be isolated, unrelated costs: “Decisions regarding one would
affect the other and thereby violate ERISA’s preemption provision.”30
The dissent maintained that the Fair Share Act was not preempted by ERISA
because it offered a means of compliance that does not impact ERISA plans.31 The
dissent explained that an employer could comply with the measure by paying an
assessment or increasing spending on employee health insurance. By not expressing
a preference for one method over the other, the dissent concluded that the act is not
preempted.32 The dissent suggested that preemption would be more likely if the Fair
Share Act dictated a plan’s system for processing claims, paying benefits, or
determining beneficiaries.33 However, any burden imposed on ERISA plans by the
Fair Share Act was “simply too slight to trigger ERISA preemption.”34
On April 16, 2007, the Maryland Attorney General announced that his office
would not seek review of the Fourth Circuit’s decision by the Supreme Court.35
However, since Fielder, fair share ordinances in other jurisdictions have been
challenged similarly on the grounds that they are preempted by ERISA. In RILA v.
Suffolk County, a New York federal district court concluded that the Suffolk County
Fair Share for Health Care Act (Suffolk County Act) was preempted by ERISA.36
And, in Golden Gate Restaurant Association v. San Francisco, a California federal
district court found the San Francisco Health Care Security Ordinance (San Francisco
27 Id. at 195 (citing New York State Conference of Blue Cross & Blue Shield Plans v.
Travelers Ins. Co., 514 U.S. 645, 659 (1995)).
28 Fielder, 475 F.3d at 195.
29 Id. at 193.
30 Id. at 197.
31 Id. at 198.
32 Id. at 201.
33 Id. at 202.
34 Id.
35 Maryland Attorney General Will Not Seek Supreme Court Review of “Fair Share” Law,
Daily Lab. Rep. (BNA) No. 73 (Apr. 17, 2007).
36 497 F.Supp.2d 403 (E.D.N.Y. 2007).
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Ordinance) preempted by ERISA.37 In January 2008, the U.S. Court of Appeals for
the Ninth Circuit ordered a stay of the district court’s judgment pending appeal of
that court’s decision.38
Suffolk County. Under the Suffolk County Act, covered employers would
have been required to make specified minimum employee health care expenditures.
Employers with health care expenditures below the specified level would have been
required to pay a penalty equal to the shortfall. The Suffolk County Act defined the
term “health care expenditure” to mean any amount paid by a covered employer to
its employees or to another party for the purpose of providing health care services or
reimbursing the cost of such services for employees or their families, including
contributions to health savings accounts and expenditures to operate a workplace
health clinic.39
The Suffolk County Act defined a “covered employer” as “any person that
operates at least one retail store located in Suffolk County where groceries or other
foods are sold for off-site consumption” and that meets one of the following
requirements: (1) 25,000 square feet or more of the store’s selling area floor space
is used for the sale of groceries or other foods for off-site consumption; (2) 3% or
more of the store’s selling area floor space is used for the sale of groceries or other
foods for off-site consumption and the store contains at least 100,000 square feet of
selling area floor space; or (3) the retail store had total annual revenues of $1 billion
or more in the most recent calendar year and the sale of groceries comprises more
than 20% of the company’s revenue.40 The definition for “covered employer”
appeared to reflect the Suffolk County Act’s express legislative intent to protect
small retailers from large employers that did not provide health care for employees.41
RILA contended that the Suffolk County Act was preempted by ERISA because
it mandated a certain level of health care benefits for employers, interfered with the
uniform national administration of benefit plans, and imposed reporting requirements
beyond those prescribed by ERISA. To bolster its position, RILA cited Fielder and
asserted that the Suffolk County Act should be found similarly preempted.
Although the court noted that it was not bound by the Fourth Circuit’s decision,
it nevertheless indicated that the Suffolk County Act was “substantially similar” to
the Fair Share Act, and that it was “in accord with the Fourth Circuit’s well reasoned
and comprehensive analysis.”42 The court rejected the county’s claim that a state law
is not preempted by ERISA where the existence of a plan is not necessary to be in
compliance with the state law. The county had argued that the Suffolk County Act
37 535 F.Supp.2d 968 (N.D. Cal. 2007).
38 Golden Gate Restaurant Ass’n v. City and County of San Francisco, 513 F.3d 1112 (9th
Cir. 2008).
39 See Suffolk County, 497 F.Supp.2d at 407.
40 Suffolk County Reg. Local Law § 325-2.
41 Suffolk County, 497 F.Supp.2d at 408.
42 Id. at 416.
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did not require the establishment or modification of an ERISA plan, and that a
company had various options for complying with the law.
Quoting Fielder, the court maintained that the only rational choice for covered
employers under the Suffolk County Act was “to structure their ERISA health care
benefit plans to meet the minimum spending threshold.”43 Because covered
employers would have been forced to change how their employee benefit plans
would be structured, the court concluded that the Suffolk County Act had an
“obvious connection with employee benefit plans” and thus, was preempted by
ERISA.44
San Francisco. In Golden Gate Restaurant Association, the district court
concluded that the San Francisco Ordinance was similarly preempted by ERISA.
Like the Suffolk County Act, the San Francisco Ordinance requires covered
employers to make minimum health care expenditures on behalf of covered
employees. “Covered employers” are defined by the San Francisco Ordinance as
those that are engaging in business within the city with an average of at least 20
employees performing work for compensation during a quarter and nonprofit
corporations with an average of at least 50 employees performing work for
compensation during a quarter.45 A “covered employee” under the San Francisco
Ordinance includes any individual who works in the city and county of San
Francisco, works at least 10 hours per week, has worked for his employer for at least
90 days, and is not excluded from coverage by other provisions of the ordinance.46
The San Francisco Ordinance identifies various qualifying health care expenditures,
including contributions to health savings accounts.
The California federal district court maintained that the San Francisco
Ordinance was preempted by ERISA because it had an impermissible connection
with employee welfare benefit plans and made unlawful reference to such plans.47
The court observed,
By mandating employee health benefit structures and administration, [the health
care expenditure] requirements interfere with preserving employer autonomy
over whether and how to provide employee health coverage and ensuring
uniform national regulation of such coverage.48
The court noted that the San Francisco Ordinance had an impermissible connection
with employee benefit plans not only because it required a certain level of benefits
43 Id. at 417 (internal quotation marks omitted).
44 Id. at 418 (internal quotation marks omitted).
45 See Golden Gate Restaurant Ass’n, 512 F.3d at 1117.
46 Id.
47 See Golden Gate Restaurant Ass’n, 535 F.Supp.2d at 973 (explaining that the analysis of
whether a state law is preempted by ERISA “follows one of two paths — if the law is either
found to be connected with or to make reference to an ERISA plan, the law is found to be
preempted.”).
48 Golden Gate Restaurant Ass’n, 535 F.Supp.2d at 975.
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typically provided by ERISA plans, but because it affected the structure of existing
plans. 49 Employers were required to either modify the administration of existing
plans or make additional payments with reference to the amounts paid under such
plans to comply with the San Francisco Ordinance.
The court also explained that the San Francisco Ordinance made unlawful
reference to employee benefit plans in two ways. First, it specifically referenced the
existence of ERISA plans in its expenditure requirements provisions.50 Second,
liability under the San Francisco Ordinance was determined exclusively with
reference to employer-sponsored health benefits that are provided mostly under
existing ERISA plans.51 In other words, to determine liability, the ordinance required
an examination of how much an employer pays for employee health coverage under
these existing plans.
Because the San Francisco Ordinance was found to have an impermissible
connection to ERISA plans and made unlawful reference to such plans, the court
enjoined the implementation and enforcement of it. However, in January 2008, the
Ninth Circuit ordered a stay of the district court’s judgment pending appeal of that
court’s decision. The Ninth Circuit’s decision was based on its application of two
tests that have been used to determine whether a stay is appropriate. The court
indicated that the tests represent the “outer reaches of a single continuum.”52 A court
reviewing a motion for a stay pending appeal will consider at one end of the
continuum the probability of success on the merits and the possibility of irreparable
injury if preliminary relief is not granted.53 At the other end of the continuum, the
party seeking the stay must demonstrate that serious legal questions are raised and
that the balance of hardships tips sharply in its favor.54 Applying these tests, the
Ninth Circuit concluded that there was a probability of success on the merits and that
the balance of hardships tips sharply in favor of the city.
In reviewing the merits of the city’s claim, the Ninth Circuit considered whether
the San Francisco Ordinance had a connection with or reference to ERISA plans.
Unlike the district court, the Ninth Circuit maintained that the San Francisco
Ordinance did not require an employer to adopt an ERISA or other health plan. In
addition, the Ninth Circuit found that the ordinance did not require any employer to
provide specific benefits through an existing ERISA or other health plan:
Any employer covered by the Ordinance may fully discharge its expenditure
obligations by making the required level of employee health care expenditures,
whether those expenditures are made in whole or in part to an ERISA plan, or in
49 See id. (observing that the San Francisco Ordinance’s provisions cannot operate
successfully without the existence of employee welfare benefit plans).
50 Golden Gate Restaurant Ass’n, 535 F.Supp.2d at 978.
51 Id.
52 See Golden Gate Restaurant Ass’n, 512 F.3d at 1115-16.
53 Id.
54 Id.
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whole or in part to the City. The Ordinance thus preserves ERISA’s ‘uniform
regulatory regime.’55
Because the San Francisco Ordinance did not require the adoption of an ERISA or
other health plan, and because it did not require an employer to provide specific
benefits through such plans, the Ninth Circuit concluded that it did not have a
connection with ERISA plans.
The Ninth Circuit declined to find that the San Francisco Ordinance made
unlawful reference to ERISA plans. The court noted that the ordinance did not act
on such plans and that the existence of ERISA plans was not essential to the
operation of the ordinance. The Ninth Circuit declared, “Where a law is fully
functional even in the absence of a single ERISA plan ... we have great difficulty in
seeing how the law makes an impermissible reference to ERISA plans.”56
Having determined that there was a probability of success on the merits, the
Ninth Circuit considered the hardships that would be experienced if a stay was
denied. Although it was unclear how many employees would be eligible for health
benefits if the San Francisco Ordinance was implemented, the court posited that a
reasonable number of employees work for covered employers and would likely
become covered employees if the ordinance was permitted to go into effect. Faced
with a conflict between financial concerns and preventable human suffering, the
Ninth Circuit indicated that it had little difficulty concluding that the balance of
hardships tips decidedly in favor of the latter.57
Finally, the Ninth Circuit determined that the public interest was served by
granting a stay of the district court’s order. The court explained that its consideration
of the public interest in a stay is broader than its analysis of the balance of hardships
to the parties. For example, the court indicated that it could consider the indirect
hardships to the friends and family members of individuals covered by the ordinance.
The Ninth Circuit maintained that a stay would serve the public interest in various
ways: health care providers would benefit because more individuals with health
insurance would use their services; overall health care expenses would likely
decrease as more cost-effective preventive care was promoted; and fewer individuals
would burden emergency care divisions.
In ordering the district court’s judgment stayed, the Ninth Circuit stated that the
city had a “strong likelihood” of success with their argument that the San Francisco
Ordinance is not preempted by ERISA.58 In February 2008, a request to lift the stay
was denied by Supreme Court Justice Anthony M. Kennedy, acting in his capacity
55 Golden Gate Restaurant Ass’n, 512 F.3d at 1121 (quoting Aetna Health Inc. v. Davila,
542 U.S. 200, 208 (2004)).
56 Golden Gate Restaurant Ass’n, 512 F.3d at 1125.
57 Id. at 1126.
58 Id. at 1127.
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as Circuit Justice for the Ninth Circuit.59 Justice Kennedy did not provide an opinion
that explained the reasons for the denial.
Massachusetts’s Fair Share Requirement
In 2006, Massachusetts enacted “An Act Providing Access to Affordable,
Quality, Accountable Health Care,” considered to be the most comprehensive health
care reform legislation ever enacted by a state.60 The act has received a great deal of
attention, in part due to the fact that it is the first state law to require residents to
obtain and maintain health care coverage or be subject to adverse tax consequences.61
The act establishes a “Connector”62 through which individuals and small groups may
obtain health coverage, and creates numerous requirements for private insurers as
well as employers.63 One of the employer requirements is a fair share requirement.
There has been speculation over whether this requirement of the Massachusetts Act
could be preempted by ERISA.64
Under the act, employers with more than 11 full-time equivalent employees that
do not make a “fair and reasonable” contribution to a group health plan65 for their
59 See Justice Kennedy Denies Request for Order to Block San Francisco Fair Share Health
Law, 8 Pens. & Ben. Daily (BNA) No. 36 (Feb. 25, 2008).
60 Anthony Ten Haagen, Surviving Preemption: The Importance of Chapter 5 in the Context
of America’s Health Care Crisis, 33 American Journal of Law and Medicine 663 (2007).
61 MASS. GEN. LAWS ch. 111M, § 2 (2008). Under this provision of the act, Massachusetts
residents are only required to purchase coverage that is deemed affordable. Thus,
Massachusetts residents may be exempted from the individual mandate if they can
demonstrate that, based on their income and other factors, they do not meet certain
affordability standards. See 956 C.M.R. 600 et. seq. (regulations addressing the
affordability standards).
62 The Commonwealth Health Insurance Connector is one of the most significant parts of
the act. The Connector is an independent public entity that facilitates access to private
insurance plans for small employers and individuals. The Connector assists individuals who
are not offered insurance by a large employer (one with more than 50 employees) that pays
part of the premium. See MASS. GEN. LAWS. ch. 176Q.
63 For a broader discussion of the act’s requirements, see CRS Report RS22447, The
Massachusetts Health Reform Plan: A Brief Overview, by April Grady.
64 See, e.g., Amy B. Monahan, Symposium: The Massachusetts Plan and the Future of
Universal Coverage: Regulatory Issues: Pay or Play Laws, ERISA Preemption, and
Potential Lessons from Massachusetts, 55 Kan. L. Rev. 1203 (2007); Marcia S. Wagner and
Barry M. Newman, Will ERISA Preemption Derail Massachusetts Health Care Reform? 23
Tax Management Financial Planning Journal, No. 6., (June 19, 2007). Edward Zelinsky,
Article: The New Massachusetts Health Law: Preemption and Experimentation, 49 Wm. and
Mary L. Rev. 229, 268 (2007). It is important to note that there may be other provisions of
the Massachusetts Act susceptible to an ERISA preemption challenge. See, e.g., id. at 268
(2007) (tax expert Edward Zelinsky argues that the requirement for individuals to have
coverage is preempted by ERISA). This report only discusses the fair share requirements of
the Massachusetts Act.
65 For purposes of the Massachusetts statute, a group health plan is defined as “a plan
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employees’ health coverage must pay a “fair-share contribution” into a state trust
fund in order to help cover costs of health care provided to uninsured Massachusetts
residents.66 Regulations set forth two alternative tests to determine whether an
employer has made a fair and reasonable contribution. Under the “primary test,” an
employer has made a fair and reasonable contribution if 25% or more of its
employees who are employed at Massachusetts locations are enrolled in the
employer’s health plan.67 Under the “secondary test,” an employer who fails the
primary test, but offers to pay at least 33% of the cost of premiums of a group health
plan offered to full time employees employed over a certain time period, meets the
contribution requirements.68 If the employer cannot meet either of these tests, the
employer must make a fair-share contribution, which is required to be calculated
annually and takes into account factors such as the cost of the state-funded care used
by the employees of non-contributing employers.69 However, the fair-share
contribution amount cannot exceed $295 per employee.70
Despite speculation that the Massachusetts Act would be subject to a
preemption challenge under ERISA, to date, no actions have been brought.71 If the
fair share provisions were to be challenged, it is likely that a reviewing court would
look to the Travelers case and its progeny in making its determination. Similar to
those cases, a court may evaluate whether the Massachusetts fair share requirements
have a “connection with” ERISA plans by looking to ERISA’s objectives (e.g.,
establishing uniform, nationwide regulation of employee benefit plans) “as a guide
to the scope of the state law that Congress understood would survive” preemption.72
A reviewing court may also look to the “nature of the law’s effect on ERISA plans”
(i.e., whether the Massachusetts fair share requirements mandate the structure or
administration of employee benefit plans, or have more of an indirect influence on
65 (...continued)
(including a self-insured plan) of, or contributed to by, an employer (including a
self-employed person) or employee organization to provide health care ... to the employees,
former employees, the employer, others associated or formerly associated with the employer
in a business relationship, or their families.” MASS. GEN. LAWS ch. 149, § 188(a) (2008)
(citing 26 U.S.C. § 5000(b)(1)).
66 MASS. GEN. LAWS ch. 149, § 188 (2008).
67 114.5 MASS CODE REGS 16.03(1)(a) (2008).
68 114.5 MASS CODE REGS 16.03(1)(b) (2008). It should be noted that the Massachusetts
Division of Health Care Finance and Policy has issued proposed regulations that would,
among other things, require employers to meet both the primary and secondary tests. The
proposed regulations are available at [http://www.mass.gov/Eeohhs2/docs/dhcfp/g/regs/
114_5_16_p.pdf].
69 114.5 MASS CODE REGS 16.04 (2008).
70 MASS. GEN. LAWS ch. 149, § 188 (2008).
71 See Joan Indiana Rigdon, Universal Health Care? Washington Lawyer, Vol. 22, No. 11
at 27-28 (2008) (discussing speculation of why the Massachusetts Act has not been
challenged).
72 Dillingham Construction, 519 U.S. at 325 (quoting Travelers, 514 U.S. at 658-59).
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ERISA plans).73 In addition, a reviewing court could examine whether the fair share
requirements of the Massachusetts Act have a “reference to” an employee benefit
plan. As stated by the Supreme Court, “where a State’s law acts immediately and
exclusively upon ERISA plans ... or where the existence of ERISA plans is essential
to the law’s operation ... that ‘reference’ will result in pre-emption.”74 Further, a
court could also rely on or distinguish the fair share requirements of the
Massachusetts Act from the Egelhoff case. As the Court held in Egelhoff, a law that
regulates the structure or administration of an ERISA plan will not be saved from
preemption just because there is a way to opt out of its requirements.
It is also possible that a reviewing court could adopt similar reasoning used by
courts in evaluating other fair share laws.75 For example, as discussed above, in
Fielder, the Fourth Circuit found the Maryland Fair Share Act was preempted
because it effectively forced employers to restructure their employee health plans,
and as such, interfered with ERISA’s goal of providing uniform nationwide
administration of these plans.76 The Fielder court opined that just because an
employer had the option not to spend money on health care for their employees, this
option was not a “meaningful alternative” and did not protect the law from
preemption. A court evaluating the fair share requirements of the Massachusetts Act
could make arguments similar to those articulated in the Fielder case. Like
Maryland’s fair share law, the Massachusetts Act provides that employers covered
by the act must either make a contribution towards employee health benefits, or
contribute to a state trust fund. And, as argued in Fielder, any “reasonable employer”
would choose not to pay money to a state when it can, in the alternative, reap benefits
from spending money on employee health care.77
Some commentators have pointed out that compared to the Maryland Fair Share
Act, the Massachusetts Act requires a relatively small amount (i.e., no more than
$295 per employee) to be paid to the state, as a “penalty” for not offering health
coverage.78 It may be argued that since the Massachusetts fair share contribution
73 Id.
74 Id.
75 It is important to point out that if the Massachusetts Act was to be challenged on
preemptive grounds, it would likely be in the First Circuit. If a preemption challenge was
brought in this circuit, a court would not be bound to follow any of the previous fair share
cases discussed above, but could still rely on these cases in support of its decision.
76 The Department of Labor, in an Amicus brief, had argued for this result. It was argued that
“[b]y setting an aggregate amount (by percentage of payroll) affected employers must spend
on employee health benefits, Maryland is taking away employers’ fundamental authority
over whether, and on what terms, to sponsor a plan, and potentially subjecting employers
to the competing demands of a multiplicity of state and local regulatory schemes.” Brief of
the Secretary of Labor as Amicus Curiae, supra note 16.
77 These benefits include employee retention and the ability to attract better employees. See
Fielder, 475 F.3d at 193.
78 See, e.g., Monahan, 55 Kan. L. Rev. at 1214 (“Because of the modest - or weak - penalty
associated with the fair share contribution, it will likely survive an ERISA preemption
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amount is relatively small, it does not bind the choices of employers, as the court
found in Fielder. Still, despite this smaller “penalty,” a court may still see the
Massachusetts fair share scheme as a means of coercing an employer to offer health
coverage and thus, not escape ERISA preemption.
In addition, it is possible to argue that the Massachusetts fair share requirements
may be more susceptible to preemption than the Fielder and Suffolk County cases.
This is because the Massachusetts Act requires employers to pay the fair and
reasonable premium contribution amounts to a group health plan (which is likely
regulated by ERISA), in order to avoid making a fair-share contribution to the state.
Under Maryland and Suffolk County’s fair share laws, employers had some choices
as to how an employer could make these expenditures (e.g., under the Maryland’s fair
share law, expenditures could be made towards an on-site medical clinic). Given that
the Fielder and Suffolk County courts found that requiring an employer to pay these
health care expenditures directly affected employers’ ERISA plans, it may be argued
that requiring employers to contribute to a group health plan (versus contributing
money to the state) creates an impermissible “reference to” an employee benefit
plan.79
Alternatively, if a court were to review the Massachusetts Act, it could sustain
the fair share requirements by applying the reasoning used by the Ninth Circuit in
Golden Gate Restaurant Association. As discussed above, the Ninth Circuit, in
explaining why the ordinance was not likely to be preempted by ERISA, focused on
the idea that the San Francisco Ordinance did not require an employer to adopt an
ERISA or other health plan, or provide specific benefits through such plans.80
Because an employer could discharge its obligations in whole or in part to an ERISA
plan, or in whole or in part to the city, the ordinance preserved ERISA’s uniform
regulatory regime and was not preempted. A similar argument could be made for the
Massachusetts fair share requirement, as an employer is not required to establish an
ERISA health plan, or provide any health benefits to its employees.81 While the
78 (...continued)
challenge because it is a mere indirect economic incentive for a plan administrator to make
certain choices with respect to its health care plan.”)
79 See Zelinsky, 49 Wm and Mary L. Rev. at 257.
80 The court also distinguished the fair share ordinance from the Washington statute in
Egelhoff, explaining that “the Ordinance does not ‘bind[ ] ERISA plan administrators to a
particular choice of rules’ for determining plan eligibility or entitlement to particular
benefits.” Golden Gate Rest. Ass’n, 512 F.3d at 1122 (quoting Egelhoff, 532 U.S. at 147).
81 It should be noted that Massachusetts does require employers to establish a cafeteria plan.
MASS. GEN. LAWS ch. 151F, § 2 (2008). Cafeteria plans are employer-established benefit
plans under which employees may choose between receiving cash (typically additional
take-home pay) and certain normally nontaxable benefits (such as employer-paid health
insurance) without being taxed on the value of the benefits if they select to receive the latter.
See 26 U.S.C. § 125. The Department of Labor has taken the position that cafeteria plans
are not ERISA plans. See U.S. Dep’t of Labor Advisory Opinion 96-12A (July 17, 1996).
See also Edward Zelinsky, Article: The New Massachusetts Health Law: Preemption and
Experimentation, 49 Wm. and Mary L. Rev. at 264-65 (...”ERISA does not preempt
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Ninth Circuit made these arguments in its decision to stay the judgment of the district
court, it is anticipated that when the Ninth Circuit rules on the merits of the case, it
will decide the case on similar grounds.82
81 (...continued)
[Massachusetts’s] requirement that employers maintain cafeteria plans qualifying under
Code section 125. Such cafeteria plans are not ERISA regulated welfare plans.”)
82 See Rigdon, Washington Lawyer, Vol. 22, No. 11 at 26 (2008).