BNA Pension and Benefits Blog

The house passed its version of ERISA in the fall of 1973. The Senate approved its version in February of 1974. There were many differences to be reconciled by the Conference, which got underway in April of that year. One of them, however, was not the preemption of state law rule, which was the same in both bills. It provided for "subject matter" preemption. States were precluded from legislating with respect to matters addressed in ERISA. For example, no state could have imposed a vesting standard for retirement income plans because ERISA had a vesting rule for retirement income plans. Likewise, the other minimum standards (participation, accrual) and the funding standards. And no state could have imposed fiduciary standards on any kind of employee benefit plan because ERISA's rules applied to all plans. But that preemption rule could not have been used to prevent states from regulating, e.g., health care plans, in areas in which ERISA does not regulate. It was believed by the ERISA drafters that subject matter preemption was sufficient to prevent states from regulating that which Congress was regulating, and thus gave plan sponsors protection against having to cope with a multitude of differing state schemes that sought to do so.

And you all remember your high school civics textbook explanation of the role of conference committees in Congress: they reconcile differences between the respective bills passed by each of the houses, but they don’t mess with provisions that are the same in both bills.

So how, then, did we wind up with the utterly different, and much broader, preemption rule that was in ERISA as enacted? And why does the enacted provision say, "(1) the term 'State Law' includes all laws, decisions, rules, regulations, or other State action having the effect of law, of any State," and "(2) the term 'State' includes a State, any political subdivision thereof, or any agency or instrumentality of either, which purports to regulate, directly or indirectly, the terms and conditions of employee benefit plans covered by this title"?

Late in the Conference, a delegation of big business and big labor clambered up the Hill and confronted the conferees. The subject matter preemption rule, they said, had to be dramatically broadened, and if the conferees wouldn't change it, they threatened to combine their forces and defeat the conference substitute when it was brought to the floor of each house. What had gotten them so exercised?

For big business, it was the Monsanto case, in which the Supreme Court of Missouri had just upheld the assertion by the Missouri Insurance Commissioner that he had authority to regulate a self-insured health care plan sponsored by Monsanto. The big companies saw the specter of 50 state insurance commissioners miring them in a swamp of inconsistent regulations. For the unions, it was the efforts of some of the state supreme courts, acting in their capacity as arbiters of the ethics of the bar licensed to practice in their states, to outlaw "closed panel" legal services plans. The unions liked closed panel plans because they were cheaper to operate and easier to manage, and they were incensed that the bars of various jurisdictions that wanted more expensive plans and didn't like the idea of being managed were thwarting their effort to bring affordable legal services to their members. Take note that among the strongest advocates of "open panel" plans—plans in which participants were free to use any lawyer licensed in the jurisdiction— was the Litigation Section of the American Bar Association.

Facing the double-whammy of big business and big labor, the conference principals caved and directed the staff to work something out. The staff, already shattered by marathon sessions with a cast of thousands trying to reconcile serious differences in the two houses' bills and facing the very real deadline of an impending impeachment of our 37^th President (all believed that there was going to be an impeachment by the late summer of '74, and all knew that, if the ERISA conference substitute was not adopted by both houses before that point, it would be put off until the next Congress, and the two houses then would have to start all over again, literally from the beginning). So staff did what we all do when our choices are narrowed and become painfully clear—they hastily drafted what the business and labor lobbyists told them to draft. The logic was overpowering—get it done quickly because there is much else to do and very little time in which to do it.

But here's the human interest story. On the day the conference substitute came before the Senate, staff of four of the key senators scripted a colloquy for them to explain the operation of the new preemption rule. The senators, however, botched it. Badly. So badly, that it came out sounding as though they had decided to revert back to the original subject matter preemption and call the bluff of the Bigs. Sitting in the gallery that afternoon were two ABA Litigation Section lawyers who had come out from Chicago to observe. They heard what they heard, were ecstatic, zipped out to National Airport, and hopped on a plane back to Chicago to report their victory.

In the meantime, the Senate staff kicked into action. They hustled into the clerk's office, where the stenographers' transcripts were being edited, and began a little editing of their own. In short order, they had unbotched the colloquy. The next morning, the ABA envoys eagerly tore the plain brown wrapper off their newly arrived Congressional Record. Quel surprise!  In their anguish, they called a Labor Department lawyer who they knew had also listened to the colloquy. "You heard it," they said. "This is the exact opposite of what the senators said." He replied, "Do you see the words in the Record? That's what you heard." Not without some sympathy, he added, "Don't you know that the victors always write the history books?"

And, to come full circle, it obviously is not true that conferees cannot mess with a provision that is alike in both bills. They cannot mess with it only if a member objects to their having done so when the bill comes up for final passage.

So, that's how a relatively modest preemption rule was replaced by a hastily drafted, much broader rule that may be the most litigated provision in the statute.

If you could draft a new ERISA preemption rule, what would it say?

Steve Sacher

Jones Day

April 2, 2008

In January the Fourth Circuit decided RILA v. Fielder, 39 EBCases 2217, 2007 U.S. App. LEXIS 920 (4th Cir. 2007) holding, in a split decision, that Maryland's law requiring certain large employers (most notably Wal-Mart) to spend 8% of payroll on healthcare for their employees or pay the difference to the state to defray the cost of Medicaid.  According to the court, such a law is preempted because it "effectively requires employers in Maryland covered by the Act to restructure their employee health plans."   

The preemption test is fair enough, but the law does no such thing.  It gives employers a choice between increasing health care spending to a certain level or paying the state--a real choice as far as the dissent was concerned--hardly a "requirement."  In any event, contrary to what the court thought there are ways to spend money on health care for employees without establishing a plan--all that's required is that employers avoid promising a particular level of benefits, i.e. decide what to pay for as an act of genuine discretion.  Oddly, this concept horrifies every defender of free enterprise I meet.  But the law is pretty clear; absent a specifically identified benefit--i.e. something definite enough that you know a promise has been broken when it doesn't get paid, there is no employee benefit plan.  A discretionary bonus payment is not an ERISA plan.

But I don't want to belabor the point.  The law shouldn't have been held preempted, but the Maryland Fair Share Health Care Fund Act was hardly comprehensive health care reform.

I write to suggest that there are other ways to skin this cat (and irritate fellow Advisory Board member Frank Cummings).  The outlines of one approach can be found in a proposal that was before the Wisconsin Legislature last year.   See www.wisaflcio.org which contains a summary and text of the bill. 

I'll omit details, but the basic approach is simple.  Employers pay a per capita assessment to the state which some state agency decides is about equal to the cost of coverage.  The state provides coverage.  Employees in the state get the coverage whether the employer actually pays or not--so the employer payments are in the nature of a tax, not the payment of a premium without which no coverage is provided.  The employer doesn't establish or maintain the plan--the state does.   No employee benefit plan, no preemption. It's a miracle.  ERISA doesn't preempt everything.

If the employer wants to provide more (e.g. a smaller co-pay for his employees), he's free to do so or not, so everyone is not reduced to the least common denominator; employers who want to use richer coverage to attract employees are free to do so.

The success of this scheme is based on the notion that the state, with all employee in the system, can provide health care more cheaply than the hodge podge of employer and individual arrangements that we now have, and cover at least all employees and their families to boot.  Large employers with older workforces stop paying more than their fair share--there's a real risk pool-no opting out for the young and the healthy, and no skimming the cream by hiring and providing coverage to just the kids in their twenties. 

I'm a lawyer, not a health care economist. The plan makes sense to me, but maybe it won't work.  But suppose it does.  Wouldn't that be grand (for everyone but health care insurers)?  Shouldn't at least one state give it shot so we'll finally know the answer?  Must we try this only on the national level, or not at all? The states should be laboratories to try out new ideas.  It's time to set them free.  End the tyranny of ERISA preemption.  If it works, the federal government can incentivize other states to do the same thing, and our long national health care nightmare will be over. 

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.