2.5.07

Client Bulletin #368 - For PDF version of this Client Bulletin, click here.

In a decision that might affect efforts by states and other localities to regulate employer-sponsored health plans, the U.S. Court of Appeals for the Fourth Circuit (the Carolinas, Maryland, Virginia, and West Virginia) affirmed a lower court’s opinion that the Maryland Fair Share Health Care Fund Act was preempted by the federal Employee Retirement Income Security Act of 1974 and therefore could not be enforced. To see a copy of the decision, click here. Several state and local government entities, including Minnesota, California, and two New York counties, have proposed laws similarly attempting to regulate employer health plans. 

According to the Fourth Circuit, ERISA was enacted by Congress so that employers could design and structure employee benefit plans under a uniform set of federal rules. Even when a state law provides employers with choices, such as whether to implement a state requirement or pay an extra tax, the state law will be preempted by ERISA, the court said. 

The Fair Share Act, which was enacted by the Maryland General Assembly in January 2006 and was scheduled to go into effect January 1, 2007, required non-governmental employers with 10,000 or more employees to show that they spent an amount equal to at least 8 percent of the wages of Maryland employees on health insurance premiums and health care costs.  Employers who failed that test would be required to pay the difference to the State of Maryland for Medicaid and children’s health.  If the employer failed to pay the difference, the Act imposed a $250,000 penalty.

As a practical matter, the Act was aimed at Wal-Mart, the only employer in the state that would have been affected. The state’s other large employers were subject to various exemptions.   

The rationale of the Maryland General Assembly was that health care services for many employees and dependents – that is, Wal-Mart employees and their dependents - are paid by Medicaid and other state funds because the employer does not spend enough on employee health care.

Wal-Mart disagreed, and an industry association of which it was a member filed suit in the U.S. District Court for the District of Maryland against James D. Fielder, Jr., the state Secretary of Labor, Licensing and Regulations at the time, to stop the Act from becoming effective.

The District Court found in Wal-Mart’s favor, determining that the Act would have forced Wal-Mart to increase contributions to its employee health plan and comply with requirements that would not apply in other jurisdictions. To see a copy of the District Court decision, click here. The court also rejected the Secretary’s argument that the Fair Share Act was really a payroll tax, observing instead that the General Assembly’s intent was to force one employer, Wal-Mart, to increase spending on health care, not to assess a tax on a broad class of employers. 

In affirming, the Fourth Circuit panel noted that when state laws indirectly affect employer plans, such as when they provide economic incentives, the state laws generally have not been preempted by ERISA.  Also, noted the court, ERISA permits states to regulate health care providers and insurers, indirectly affecting employer-sponsored health plans.  However, when a state or locality requires employers to tailor their employee benefit plans for employees in that state or locality, the state action runs counter to the intent of ERISA and will be preempted.  Even when a state law provides employers with the ability to opt out of complying with the law, the state law will be preempted.

Thomas E. Perez, the current Secretary, may choose to seek review of the Fourth Circuit panel decision by all of the Fourth Circuit judges, or by the U.S. Supreme Court.  As this goes to press, we await the Secretary’s decision.  

Constangy, Brooks & Smith, LLC has counseled employers, exclusively, on labor and employment law matters since 1946. The firm represents Fortune 500 corporations and small companies across the country. More than 100 lawyers work with clients to provide cost-effective legal services and sound preventive advice to enhance the employer-employee relationship. Offices are located in Georgia, South Carolina, North Carolina, Tennessee, Florida, Alabama, Virginia, Missouri, and Texas. For more information about the firm's labor and employment services, visit www.constangy.com, or call toll free at 866-843-9555.

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