Hailed by its authors as the law’s “crowning glory” or “crowning jewel,” the preemption clause in the Employee Retirement Income Security Act of 1974 (ERISA) was designed to help simplify employee benefits administration for multistate employers.
But what does ERISA preemption mean? How do state laws related to employee benefits plans affect health plans and retirement plans?
It may be helpful to first understand the purpose of ERISA.
ERISA sets minimum standards for the protection of individuals in most voluntarily established pension, health and welfare plans within private industry.
- ERISA requires plans to:
- Provide participants with information about plan features and funding
- Establish a grievance and appeals process by which participants can get benefits.
- ERISA provides fiduciary responsibilities for those who manage and control plan assets and gives participants the right to sue for benefits and breaches of fiduciary duty.
- ERISA established federal preemption of state laws that relate to employee benefit plans.
What is preemption? The preemption clause is in the text of the law in Section 514(a) which states that the provisions of ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” Federal law is the highest authority; therefore, federal law supersedes state law. In other words, when applicable under ERISA, if there are federal and state laws on the same subject, the federal law applies.
What is the purpose? ERISA preemption allows employers to apply practices on a consistent nationwide basis. Employers can avoid the complexity of complying with laws that can vary from one state to another. ERISA’s preemption language provides a uniform federal framework within which employers can operate their benefit plans.
What is the scope of preemption?
The language “relate to any employee benefit plan” was somewhat unclear and led to litigation and Supreme Court rulings. Michael S. Gordon, minority pension counsel to the U.S. Senate Labor and Public Welfare Committee and participant of the drafting of ERISA, wrote on its 25th anniversary that nothing has been litigated more under ERISA than the scope of its preemption clause. ERISA contains perhaps the most prominent example of a preemption clause that uses “related to” language, according to Daniel J. Meltzer’s law review article on preemption. In interpreting this provision, the Supreme Court has identified two categories of state laws that are preempted by ERISA because they “relate to” regulated employee benefit plans: (1) state laws that have a “connection with” such plans, and (2) state laws that contain a “reference to” such plans. To learn more, read the full analysis and case law summaries from Congressional Research Service.
What are the limits to ERISA preemption?
While ERISA preempts state laws relating to employee benefit plans, there are limits to its powers.
- Public employee plans are not subject to ERISA; hence, they do not have to meet federal reporting, and few disclosure requirements apply. Since they do not have ERISA preemption, the plans must meet any applicable state laws and regulations.
- The preemptive effect of ERISA does not relieve any person from state law regulating banking or securities, nor does it preempt any generally applicable state criminal law.
- ERISA does not supersede state laws regulating insurance or multiple employer welfare arrangements (MEWAs).
Are fully insured health plans subject to federal and state insurance laws?
Group health plan sponsors may provide coverage through an insurance contract, and these plans are often referred to as fully insured plans. State insurance laws are not preempted by ERISA with respect to these plans. Because states can regulate insurance companies that sell health insurance policies to these plans, states can indirectly affect health benefit plans by mandating the benefits that must be included in the health insurance policies sold in the state. Fully insured plans have to offer state-mandated benefits.
Are self-funded health plans subject to federal and state insurance laws?
Self-funded private sector employment-based group health plans are not subject to state health insurance laws, which include coverage laws, rating policies and certain other consumer protections.
What are some examples of health plan state laws?
The following are examples of state laws that would apply to fully insured plans but are generally preempted by ERISA and therefore not enforceable against self-funded plans. Mandated benefits (coverage) laws include:
- “Willing provider” laws that require a plan to provide plan participants with open provider networks
- Discretionary language laws that prevent courts from applying a standard of review favoring a plan administrator when reviewing benefit denials
- State laws providing claims for plan benefits and remedies for benefit denials
- Laws that require plans to provide participants with an option to convert group coverage into individual coverage when group coverage expires
- State-mandated external review laws
- Domestic partner laws
- Continuation of coverage laws.
Does ERISA preemption apply to retirement plans?
Several states have enacted state-sponsored automatic individual retirement account (auto-IRA) programs that require employers that do not offer their own retirement plan to facilitate payroll deductions to individual accounts that are set up for employees. In 2018, a legal challenge argued that state auto-IRA plans are preempted by ERISA, but a March 2020 decision in the case Howard Jarvis Taxpayers Association v. California Secure Choice Retirement Savings Program appears to establish that ERISA does not preempt these plans as long as they are established, maintained and sponsored by states. The court did not find that the California auto-IRA program—called CalSavers—related to an ERISA plan such that it would trigger ERISA’s preemption clause. Because state auto-IRAs are designed so that employers do not sponsor the plan and have no discretion, decision-making authority or control, and they only process payroll withholding, the IRAs are not subject to ERISA.
Recap: With the exception of state laws regulating insurance, state laws applying to benefit plans are usually preempted by ERISA. The examples above show that there are more state laws applicable to fully insured health plans than self-funded plans. ERISA preemption was designed to allow multistate employers to avoid the complexity of complying with laws that can vary from one state to another.
To learn more, visit the 50th Anniversary of ERISA toolkit.
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.
