BNA Pension and Benefits Blog

In the PPA, Congress endorsed (and well it should have) automatic enrollment 401(k) plans by adopting legislation to make it easier for employers to sponsor such plans.

One issue addressed by the PPA was the appropriate default investment option, since some if not many employees automatically enrolled in such plans will not designate an investment choice. Will a plan fiduciary have liability simply because of the type of default investment option to which salary deferrals are mapped in the absence of participant direction? In particular, will the plan qualify under ERISA section 404(c) as a self-directed plan?)

The PPA directed the Department of Labor to issue rules on permissible default investment options when an employee does not direct how assets are to be invested. The DOL issued proposed regulations in September.

Under the proposed regulations, a plan may use one of three alternative types of funds as the default investment for automatic enrollment plans. The default options are essentially the following: (1) a life-cycle or retirement-date type funds; (2) balanced funds; or (3) individually managed accounts in which assets are allocated on a life-cycle model. The regulations do not permit the use of money-market or stable value funds because the Department of Labor does not believe such funds will generate sufficient returns to provide adequate retirement savings.

I am sympathetic to the Department’s position about money-market and stable value funds, but I wonder whether there should be a window period, perhaps three to six months, where a plan could temporarily park a participant’s initial contributions to a plan in a money-market or stable value fund. (After the window period funds would be mapped to one of the qualified default investment vehicles currently identified in the proposed regulations.)

Use of a “safe” fund for a window period might temper the inclinations of some employees to opt out of participation in response to an early loss of principal. It might also make it more likely that some employees will actually consider how they want their money invested rather than simply having the plan direct contributions to a qualified default fund. (I am assuming that some employees who might accept the default investment chosen by the employer would think about where they wanted their money invested if it would otherwise sit for a few months in a money-market fund. Of course, one could argue that employees might be better off in the plan’s qualified default investment than they would if they make their own investment decisions.)

In any event, employers often know their workforces better than the Department of Labor does and if an employer thinks that a money-market fund is appropriate for its workforce for a relatively brief period of time, the Department should probably respect the employer’s insight.

There would be another advantage to permitting the employer to use a money-market default fund for a brief period of time. Under the proposed regulations, a participant must be given notice, 30 days before initial investment of funds, about the plan’s investment options. Presumably this is in the regulation because it ensures that every employee has either selected an investment option or impliedly consented to the plan’s default investment fund before they have contributed to the plan. If there is loss to principal, the employee will have expressly or impliedly consented to the investment fund in which the loss occurred.

But some observers think that employees do not like to see their paycheck decline after a month of employment and that seeing such a decline may cause some to opt of plan participation (to get their paycheck up to where it was the first month of employment). So how do we square this concern with the Department’s concern that participants might suffer a loss before having time to select an investment option? By mapping the contributions to a risk-free fund until the employee has time to choose another investment option. And if the employee does not exercise that right within the specified window period, then the employee’s account gets automatically mapped to a permissible default fund. (And if the employee decides to opt out, the employee can get their contributions returned without loss of principal.)

Before posting this, I spoke with Marc Iwry, who tells me that he and some others submitted comments to the Department of Labor along these lines. Their comments, in my view, deserve careful consideration. Given this blog, its no surprise that this is my view!

In today’s WSJ, Justin Lahart observes that the United States spends a much larger portion of its GDP on health care than other countries, yet seems to get little for its extra spending. I wonder whether this is true, which is not to say that I disagree with his larger point: that we are spending too much on health care for what we get.

But here are some thoughts:

1. Lanhart points out that both infant mortality and life expectancy are higher in Japan and France, which spend (on average) approximately 55% of what the United States spends on health care. But critics of our system have noted that a large part of what we spend money on is spent on expensive care for people during the very last part of their lives. So a relevant question might be: do people who reach, say, age 60 in the United States live longer and/or more comfortably than members of their comparable cohort in Japan and France. And we can refine that question bit more by limiting the comparison to people in the United States who have access to good health care.

Is there a free-rider problem here? Some have argued that drug costs are high in this country to pay for research, which produces important advances in medical science. Do Americans thus fund new medications (and other medical technologies) whose value other nations can import without paying their share of developing these technologies?

What is the infant mortality rate and the life expectancy rate for people in this country who have access to good health care, and how does that compare to the infant mortality and life expectancy rates to people in Japan and France? Do we know if our insured, or at least those of our insured who have good coverage, fare as well or better than the Japanese or French participant in the national health care systems in those countries?

There are certainly other questions we can ask along these lines and the answers might show that we are getting something for the extra resources we expend. It might not be purchasing what we should be purchasing, and our choices might be critiqued on moral grounds (as the folk song goes, if religion were something that money could buy, the rich would live and the poor would die), but I would be hesitant to conclude that we don’t get much for our extra spending.

And of course, there is the extraordinarily important point Frank Cummings makes on his recent post, that the employer system has faults of its own, apart from aggregate costs and quality of medical delivery. Making some employers bear the costs of our imperfect system is itself a serious imperfection in our system.

I intended to end the post two paragraphs up, but let me make two additional points related to the employer system. Two related arguments for the system are: 1) the employer is an efficient purchasing agent for its employees; and 2) the employer pools risk (which is part of the reason it might be an efficient purchasing agent for its employees). But national health care pools risk far more effectively than individual employers and can anybody seriously argue today that the employer has been a good purchasing agent except for its ability, though risk pooling, to create access to the health care market for its higher risk employees? Well I suppose you can say that the employer forcing employees to take part of their compensation in health care coverage is good, but national health care also takes care of this problem.

mostly, but not entirely, exempts from its provisions unfunded plans “maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” In the informal taxonomy of employee benefits speak, these plans carry the label “top-hat” plans. (I personally would have preferred “top-cat plans,” finding a Hanna-Barbera feline a more visualizing arresting image than the pinnacle of Fred Astaire’s formalwear.)

Top-hat plans are not, as I just noted, entirely exempted from ERISA. The statute exempts them from ERISA’s funding, vesting, accrual, and distribution minimum standards, and from ERISA fiduciary regulation. They are subject to minimal reporting and disclosure requirements and are also subject to Part 5 of Title I, which houses ERISA’s enforcement and preemption provisions.

Given this odd patchwork of coverage and exclusion, top-hat plans occupy a somewhat harsh regulatory environment. Participants in such plans get little substantive help from ERISA, either with respect to vesting or fiduciary conduct. At the same time, participants lose the pre-ERISA recourse they had to state law remedies (because top-hat plans are subject to ERISA preemption).

So what is the idea underlying the limited ERISA exceptions for top-hat plans? The legislative history is somewhat sparse, but a few observers, and the Department of Labor, suggest that top-hat plans are exempt from important ERISA protections because their participants can protect themselves by affecting or influencing the design and operation of the plan, through negotiation or otherwise. A few courts have elevated this observation into the statutory definition of top hat plan by examining whether participants had the ability to influence or affect the design of the plan.

Other courts, though, have focused on two facts: the percentage of employees covered by the plan and whether the employees are, in fact, management or highly compensated. To the extent there is a magic percentage, beyond which a plan is not a top-hat plan, the number appears to be somewhere around 15%. (At least one court has suggested that if a plan’s primary purpose is to cover a select group of management and highly compensated employees, the inclusion of a few non-management and non-highly compensated employees does not deny the plan a top-hat exemption.)

But I wonder whether the term select is actually intended to mean a group limited by number. The dictionary definition of “select,” when used as an adjective, is not one of maximum numerical limitation, but rather one of identifying the most fit members of a particular group. Thus, a relevant question, as a matter of statutory interpretation, is how to determine who of a group is the most fit to participate in a plan without most ERISA substantive protections. I would suggest that fitness here should mean that an employee has the ability to influence the design and operation of the plan. This would comport with the Department of Labor’s supposition concerning the purpose of the exemption for top-hat plans.

I’ve become interested in top-hat plans for two reasons, one of which may reveal a bias in my analysis. The first reason is that there is little writing about what a top-hat plan is. (There is, of course, a lot of writing about when a plan for executives is unfunded, but that is because of the tax treatment of non-qualified deferred compensation, an area of law that has just gone through statutory restatement and revision. But after 35 years of ERISA, there has not been a lot written on how we know when a plan wears a top hat.) The second reason is that I have consulted on a case involving a plan that was, by self-characterization and, unfortunately (here is my bias), by judicial characterization (in the district court), a top-hat plan.

It is an interesting case, worth discussing. The following account of the case somewhat simplifies fairly complex facts, but it does provide a reasonably accurate context in which to present the legal arguments that were resolved by the district court:

The case involved a teaching hospital, whose compensation structure was subject to a university-wide salary cap, which was below the earning level of certain physicians that the hospital wished to attract to its staff (or to retain). To attract such physicians to the hospital (and other physicians who hoped in the future to exceed the salary cap), the hospital adopted a “deferred compensation” plan. (There were actually two plans, but for purposes of this account, I will treat them as a single plan, though their features were not identical.)

A physician employed at the hospital was paid a salary that was partly based on projected practice income. The salary itself could not exceed the salary cap. But the doctor was also paid a portion of his net practice income. If the doctor’s total compensation for a year exceeded the salary cap, a portion of the net practice income would be credited to the plan. (The doctor could direct how the money, held by the hospital, would be invested. Creditors of the hospital could, of course, reach the money, so the plan was technically unfunded.) The doctors paid current tax on plan contributions but not on investment income once the contributions were in the plan.

Although the plan provided for deferred compensation until retirement, it also provided for partial forfeiture if a plan participant left the hospital in a year in which he ran a practice deficit. The plan also provided for circumstances in which the plan could pay a participant current compensation if his or her salary declined substantially or to pay a practice income deficit (where salary anticipated more practice income than was actually produced) to avoid financial hardship. (Otherwise, a deficit was recovered by docking future salary by 10% per year.)

The plaintiff in the plan was a doctor who left the hospital in a year in which he ran a practice deficit. The hospital thus docked his plan account by a significant percentage of its value. (Keep in mind that the forfeited amounts included already-taxed dollars.) Could the plan do this? Not if it were subject to ERISA’s vesting rules. But top-hat plans are not subject to these rules.

But was the plan a top-hat plan? The doctor had several interesting arguments about why the plan was not a top-hat plan, all of which were rejected by the district court.

The first argument was that the doctor had little power to influence the design or operation of the plan. This seems obvious. Who would want to participate in a plan that taxes you on contributions and then provides a forfeiture condition? I think the answer is no one. (By the way, at least so far as I can tell, the hospital did not have a contractual right to recover a practice deficit from a doctor who left the hospital but did not have an account in the plan. In any event, the hospital could not have used a self-help remedy if the plan had not been in existence—it would have had to go to court to enforce whatever contractual right it had.) This suggests that the individual doctor, and probably the doctors as a group, did not have much of an opportunity to influence the design or operation of the plan. And indeed, the facts of the case suggest that the doctors, neither individually nor collectively, could have influenced the hospital to change this basic but alarming plan feature. (In some sense, the proof is in the pudding: if they could have, they would have.) The court, though, essentially ruled that a plan’s top-hat status does not turn on whether a participant has the power to influence plan design. According to the court, Congress intended high compensation levels and/or management status to be a proxy for the ability to influence plan design and operations.

The second argument was that there were too many doctors who participated in the plan for it to be a top-hat plan, i.e., far more than 15% of the workforce. But many of the doctors never exceeded the salary cap and thus never received contributions. Should these doctors be considered part of the select group? Well, if the idea behind the top-hat exemptions is that a participant can protect himself against “abuses” that would otherwise be curtailed by ERISA (or at least understand what the risks of the plan actually are), the hospital employees who participated in the plan were (according to the doctor’s argument) all the hospital’s physicians, since in any given year any physician could have had practice income that exceeded the salary cap and thus received a contribution to the plan. The physicians vastly exceeded 15% of highly paid and management employees and also vastly exceeded 15% of the entire workforce. However, the physicians that actually received a contribution numbered fewer than 10% of the employees. The court held that the only physicians who counted were those who actually received contributions, not those who at the beginning of the year were eligible for contributions depending on their practice income during the year.

The third argument was that the plan’s primary purpose was not deferred compensation, a statutory condition for top-hat status, but rather to negotiate the problems that were presented by the university’s salary cap and the year-to-year fluctuations in a doctor’s practice income. (Remember that the plan not only provided a mechanism for the hospital to recover a practice deficit of a doctor who left the hospital during the year, but also permitted a doctor whose salary declined to receive current distributions from the plan.) Deferred compensation was certainly a result and one purpose of the plan, but perhaps not the primary purpose. The plan would likely have looked different if deferred compensation had been the primary purpose.

The district court disagreed with these arguments but straightforwardly described the issues. If the case is appealed, it might provide the appellate court a good platform to think through the issues of what types of plans should be able to dance around ERISA’s substantive rules while twirling a top hat on the cane of ERISA preemption. My own view (although, as I said, I am biased) is that the district court’s take was wrong. But the issues are interesting and, I think, important.

Health Care’s Game of  “Let’s Pretend” – Rearranging Deck Chairs on the Titanic?

    The game of health care consensus and “let’s pretend” continues:

        Consensus view #1: We have the best medical system in the world, for those who can afford it.

        Consensus view #2: The “best” is unaffordable, or almost unaffordable, for most people.

        Consensus view #3: The U.S. is the only advanced economy without a National Health system.

    Put that all together, and you get an inkling of an unexpected consensus among big business and big labor:

        Consensus view #4:  Unless the U.S. gets universal health care, U.S. businesses, already paying huge health care costs for their employees, will be non-competitive with Asian and European companies in any (every?) nation where health care costs are paid from general governmental revenues.

    What’s the fix?  As almost always, a real fix must be preceded by a long string of pretenses.  Consider these:

        Pretense #1: At least current employer-provided insurance is workable.  Really?  The employee-paid premium shares, plus deductibles, plus co-payments, are growing to the point where “coverage” is becoming a sham, and at the tipping-point the young and healthy will opt out, leaving the system unaffordable and therefore unsustainable if it only insures the bad risks.

        Pretense #2: Let the poor pay for themselves -- the emergency room, or medicaid, or other state-financed benefits, are “free”.   Really? Look at any hospital bill and pretend that the huge number for each item is its real cost, and then recognize that this is just cost-shifting to the payers from the non-payers (the poor).  The payers pay for everyone else.

        Pretense #3: Fix it with tax deductions?  Really?  Tax deductions for the lower paid, who don’t take deductions – indeed often don’t pay taxes – is trading one sham for another.

        Pretense #4: Solve the problem by mandating benefits, instead of enacting national health.  Really?  It’s just shifting the burden to employers who are already non-competitive because of the current burden, or to employees, many of whom cannot afford what we have now.

    Bottom line: The consensus, stripped of its pretenses, will eventually force something like “national health.”

    Is National Health a “fix”?  National Health has its own pretenses:

        Pretense #1: National Health is a “good” health delivery system.  Really?  Please!  It’s terrible.  Only it’s better than anything else that’s feasible, except for those who can afford completely private top-of-the-line medical care.

        Pretense #2: Good private medical care would be wiped out by National Health.  Really?  Not so in Britain (the “Harley Street” alternative).

    Bottom Line: Sooner or later (and sooner is a better bet) private insurance will not be provided by employers (in which case the private system itself may be non-viable), and will not be affordable by employees, and at that point, like it or not, “let’s pretend” gambits will run out, and National Health will run in.

    Not a happy prospect, but then, rearranging deck chairs on the Titanic is the ultimate pretense.  Rearrange them or not, sinking is still sinking.

On March 21-22, 2007, BNA will present a conference on pension issues and executive compensation.  "ReDesigning Pension Plans and Executive Compensation: New Rules, New Opportunities," will be held in Washington, D.C., and will feature eight top officials from Treasury, DOL, and the SEC.

Conference co-chairs Nell Hennessy and Phyllis Borzi (former co-chairs of the BNA Pension & Benefits Advisory Board) and Stuart Lewis (of Buchanan Ingersoll & Rooney PC) have put together a dynamic, authoritative, and interesting program.

Get more information and register online: legaledge.bna.com.

-- Sarah Stevens, managing editor, BNA Pension & Benefit Publications

People who purchase their own individual health insurance may be particularly interested in less expensive high deductible plans paired with a tax-advantaged health savings account (HSA). But it remains unclear whether employers will embrace these so-called "consumer-directed" products, whose objective is to expose enrollees to costs of care and, it is hoped, thereby lower their health care expenditures. HSAs have been embroiled in controversy since being authorized by 2003 tax code amendments. An HSA is established by individuals but may receive employer contributions; income they earn is tax deferred (and never taxed if spent on health care); unlike employer-funded "health reimbursement arrangements" (HRAs), their balances belong to the individual - even when changing jobs or leaving the workforce.

It is difficult to obtain accurate data on the numbers of Americans enrolled in high deductible health plans (HDHP) that qualify to be used with an HSA -- proponents of this model tend to report growth while opponents report low uptake. An objective national survey (by the Kaiser Family Foundation and Health Research and Educational Trust) reports that in 2006 only about 7 percent of American employers offered an HSA-qualifying HDHP or an HDHP with a HRA. Four percent of workers were enrolled in these products -- and only 19 percent of employees who were offered these products along with other health coverage options enrolled in such a plan. The proportion of firms offering and employees enrolling in these products in 2006 were not statistically signficantly different from those in 2005.

One reason employers may be less excited about these products is that their average national total cost (the HDHP premiums plus the employer contributions to an HSA or HRA, if employers make such a contribution) is no lower than that of traditional plans (like HMOs and PPOs). Likewise, employee premium contributions for the HDHP plans are similar to those for other types of coverage, yet the consumer-directed plans include much higher cost sharing.

Employers may also not be very impressed with the cost savings experience of consumer-directed products. While the current HDHP + HSA model has been in place only 3 years, research on experience of HRAs and other earlier types of individual spending accounts reveal mixed results. For example, some studies show that enrollees in these plans incurred lower medical costs while others show no spending differences. And several studies find that people who enroll in such plans are younger and healthier and have higher incomes than those who do not.

The distribution of medical care spending across the population also casts doubt on the ability of HDHP products (with or without a spending account) to reduce overall medical care spending growth -- only 10 percent of Americans account for 69 pecent of health care costs --- because they either have expensive long-term chronic illness or experience high cost acute episodes. Even if these people desire to be "prudent" health care purchasers, they quickly exhaust their deductibles and thereafter no longer have such an economic incentive. In fact, some opponents of the consumer-directed model express concern that high deductible plans create incentives to skimp on early preventive and primary care that will lead to worse health and no reduction in (but possibly higher) overall spending for their later care.

It is too early in the experience of these products to predict whether they will beome a favored health coverage option for employers. Recent HSA amendments may make them more attractive to employers and employees. Because they are tax-advantaged savings vehicles, HSAs may be particularly popular with higher income individuals who buy their own coverage. Because HDHP premiums are lower than those for low deductible plans, small employers who cannot afford more generous coverage may offer them (without funding an HSA). But more research on their prevalence and take-up, costs, and health care spending experience will be needed before many employers turn to consumer-directed products as the solution to their own (and the nation's) health care spending dilemma.

Faced with growing numbers of uninsured, rising Medicaid costs, and no likelihood of timely federal leadership, states have -- again -- taken the lead in expandingn health coverage. Following 2005 implementation of Maine's "Dirigo" voluntary health purchasing pool, in 2006 Maryland, Massachusetts and Vermont passed laws to expand access to health coverage. Policy makers in California are drafting universal coverage bills and similar initatives are under discussion in several other states, such as Colorado and Wisconsin.

As the level of government constitutionally responsible for the "health, safety, and welfare" of their residents, state governments have long provided health care and health coverage to vulnerable (e.g., poor, disabled and elderly) populations, preceding, for example, federal programs like Medicaid and Medicare. Recognizing that the uninsured are not only the low income unemployed but also low and moderate income working people, for almost three decades, many states have tried to assist low wage workers to obtain coverage through both public and private sector sources. In the late 1980s and early 90s, several states (including Massachusetts, Minnesota, Oregon and Washington) enacted programs to make insurance available to most state residents, but these laws were never fully implemented and most were eventually repealed. Because 2/3 of Americans receive health coverage through the workplace, state programs typically include a role for employers as financers and/or providers of coverage in order to retain employer dollars currently spent on health care and not disrupt existing employee benefit programs and expectations. But ERISA's preemption clause complicates state policy development -- for example, shortly after ERISA was passed, courts held that it preempted Hawaii's law requiring employers to offer and pay for health coverage (eventually restored by a 1983 ERISA amendment).

Last July, a federal court struck down Maryland's law requiring large employers (i.e., Wal-Mart) to spend at least 8% of payroll on health coverage or pay the difference to the state's Medicaid program. Whether the much smaller employer taxes in Massachusetts or Vermont will face and survive preemption challenges remains to be seen.

Proposals recently outlined by California Governor Schwarzenegger and the heads of the state's Senate and Assembly contain elements of the Massachusetts and the Maryland laws, including assessments on employers to partially fund a public coverage program while allowing employers to offer health coverage if they choose. Because it seems undeniable that states can tax employers for such public purposes, the issue will be whether a state law allows multi-state employer-sponsored health plans the type of choice Supreme Court decisions indicate are the primary objective of ERISA's preemption clause. And this outcome will likely depend on the precise language of a final legislative compromise -- if the myriad and contentious stakeholders can craft one.

The DB system continues to contract.  With new FASB disclosure rules and greater funding volatility under PPA, additional DB plan freezes can be anticipated.  Last year a number of healthy major companies announced plan freezes. 

Once a plan is frozen, it may present a number of long-term regulatory issues for the plan sponsor.  But perhaps more importantly, in a typical situation, a plan sponsor may look at continuing to sponsor a frozen DB plan as more of a required nuisance than something it is really interested in doing.  And, some of the factors that probably generated the freeze in the first place (e.g., FASB and funding volatility) continue even with a frozen plan.  We understand that many companies with frozen plans would prefer that they not have to continue sponsoring them, with all that that entails. 

Most of these companies are probably waiting until asset values can cover the costs of acquiring shared annuities.  However, the insured annuity market has limited capacity to date and, of course, represents an expensive alternative for a company that wants to rid itself of pension liabilities.

Recent press and other reports have indicated that a number of large Wall Street and other financial institutions have an interest in "acquiring" frozen plans at a lower cost to sponsors than insured annuities.  The plans would continue to be maintained by the acquiring institution which would assume all funding and other legal obligations for the plan.  The acquisition of the plan would occur through the vehicle of a business acquisition of a subsidiary of the employer sponsor.  The subsidiary would assume responsibility for the plan prior to the business acquisition.  Employer sponsors would have to contribute some cash or other assets to the business transaction representing the negotiated determination of any plan underfunding (although such amount would presumably be less than would be required to purchase insured annuities). These assets would be dedicated to the pension fund, but held in a "side-bar" non ERISA vehicle.

The benefit to plan participants would be the plan would remain subject to ERISA, carry the PBGC guarantees, and reflect enhanced security because of the additional dedicated assets as part of the business transaction.  The benefit to the historic plan sponsor is that it has rid itself of the plan in total and everything that goes with it in a responsible fashion.  Presumably, the acquiring institutions would make money through enhanced investment portfolio techniques which would allow it, over time, to not have to contribute the entire dedicated additional asset funds to the plans.  We understand that well-capitalized entities with significant capital dedicated solely to acquired plans would be involved in these transactions.  These tranasctions could apply to plans in whole or to just the terminated liabities of such (e.g. retirees and terminated vested).

The transactions would seem to be permissible under existing law if properly structured.  No doubt, PBGC would have a strong interest in assuring plan security and its own well-being. 

ERISA has served American workers relatively well over the past 30 plus years.  Millions of employees have achieved relative retirement security with significant pension and retiree health benefits.  Employers have presumably found employee benefit plans to be a generally positive means of attracting and retaining workers and easing them into dignified retirement in order to replenish the workforce (or sometimes downsize it).  However, the entire employee benefits system has become frayed at the edges, if not the core, and currently seems not to be serving either employers or employees well in many situations. 

ERISA has been constantly amended and Congress, the regulatory agencies and the courts have imposed many burdens that employers would prefer not to deal with.  And the business and economic landscape has changed dramatically over the years.  The DB system appears to be in its death-throes.  Even healthy, successful companies are freezing their plans.  And generous retiree health plans are already a thing of the past except for a relatively small union workforce in certain industries (and even there it is not sustainable). 

Accordingly, we need some alternative to the current system.  I suggest a program under which benefit programs are disassociated from employer sponsorship.  The plans could be developed and provided by major financial, administrative, insurance and other companies.  The programs could pretty much parallel the types of designs that are in use today, even though there would be complete portability and probably only account-based DB type programs under which an account balance could be used, at ultimate retirement, to acquire lifetime annuity benefits.  Employers would provide funding for the benefits which could be flexible from year to year and be subject to some nondiscrimination standards.  Individuals would supplement employer contributions with their own.  People without an employment and employment relationship would also participate in the system.  The current tax advantages for employee benefit plans could largely be preserved, but there would probably need to be a cap on the tax advantage healthcare premium (i.e. amount that either an employee could receive from an employer tax free or that an individual could pay himself/herself on a tax deductible basis- note below, I am proposing equality of access and treatment between employees and those and those not employed).  Presumably, these programs and the new sponsors would be subject to a uniform federal regulation generally similar to ERISA and employers would be permitted to either maintain their own ERISA plan or elect for the new non-sponsorship model.  Health benefits would probably need to be developed through community rating and regional plans somewhat analogous to Medicare part D (with some form of cross subsidy between local or regional plans based on age and experience demographics of each plan's participating pool).

The entire program would certainly be easier to establish for financial type benefits (e.g. 401(k), account based db, life and disability insurance) than it would be for active and retiree health coverage (because the latter would require other market force and legal changes).

The benefit to employers who are willing to continue to provide significant funding for benefits is that they would have little or no fiduciary responsibilities or other obligations associated with sponsorship and they would have no long-term financial commitment to the vagaries of pension funding or the cost spiral of healthcare.  The benefit to employees and others who would now gain access to a benefits system is complete portability, continued partial funding by employers, and equality of treatment of those working and those not working (who could fund their own benefits, or if deemed poor, could receive some government subsidy). 

This new benefit design would, of course, require legislative and regulatory changes and assumption by various companies in the financial and other industries of responsibility for new plan design, effective sponsorship, some financial risk (although that could be limited because DB benefits would presumably be account based and health benefits would be repriced each year as they now are), and fiduciary responsibilities. 

More Mandated Benefits?  Stop!  Think!

    ERISA regulates and mandates a system that is, above everything else, voluntary.  In my view, mandates have no place in it, not because they are not good objectives, but because they are not voluntary, not free, and inevitably counter-productive.

    Why not mandate?  Because mandates undermine the voluntary market - a market that produces for the employees of most participating employers a package of benefits that is better than anything a government could or would mandate .  The voluntary market is not universal (like Social Security or Medicare).  It is a result of business decisions to provide these benefits because they are good business.   Universal mandates (for example, so-called “Mandatory Universal Pensions” or “MUPs”) are always just a devious way of making private employers pay for a safety net that should be paid by taxes.  A mandate will always be minimal, like the minimum wage, because it is a national, universal, rock-bottom benefit.  That is not what private employee benefits are about.

    Why not mandate at the state level (like Maryland’s Pay or Play)?  Same reason, only worse: It’s not even a universal mandate.   It’s still ultra-minimal.  And it guts the private employee benefit system’s cornerstone – federal preemption.  It just balkanizes the system.

    But why not abandon federal preemption?  Take a look at 14(b) of the National Labor Relations Act (the so-called “right to work” provision).  The supporters of non-preemption are, these days, at the liberal end of the political spectrum – and there they are supporting the same theory as “right to work” laws (which they have always opposed).  Those who ignore past experience are condemned, of course, to repeat it.

    Once that preemption door is opened, what, inevitably, also comes through it?  How about these: Each new unpreempted state law will come with a new unpreempted state remedy (without which, of course, the state law is meaningless).  And that state remedy – bet on it – will come with compensatory and punitive damages – the very thing that ERISA preemption sought to head off. 

    What’s wrong with that?  If you don’t know, you won’t care, but it’s the death knell of the ingenuity and further development of the private voluntary system.  It just converts the floor into a ceiling.

    The moral to the story?  If you want to pass a federal benefits law (“National Health” for example), OK.  Go for it.  But do it as a governmental benefit with governmental financing and governmental control.  Don’t pretend it is or should be part of the private voluntary ERISA system.  In the private system, it’s pure poison.