"Will Changes to the Employer Fair Share Contribution be Preempted by Federal Law?" Amy B. Monahan

Under proposed regulations, the conditions under which Massachusetts employers can avoid the “fair share contribution” will change effective October 1st. Currently, employers with eleven or more full-time employees must make a fair share contribution of $295 per employee per year, unless (1) 25% of the employer’s employees are enrolled in the employer’s group health plan, OR (2) the employer offers to pay at least 33% of the premium cost of any group health plan offered by the employer to its full time employees that were employed at least 90 days. The proposed regulations would require employers to satisfy both of the above tests in order to avoid the fair share contribution. Employers would need to both have 25% of employees enrolled in a group health plan and pay 33% of the applicable premium. One issue that has been raised is whether this change will cause the fair share contribution to be preempted by federal law. For reasons discussed below, I do not think the new fair share requirements will be preempted.

The Employee Retirement Income Security Act of 1974 (“ERISA”) is a federal law governing nearly all employee benefit plans, including employer-provided group health plans. One of Congress’ purposes in passing ERISA was to allow for nationally-uniform administration of employee benefit plans. As a result, ERISA broadly preempts state laws that “relate to” an employee benefit plan. Defining the boundaries of ERISA preemption has been a difficult task for the courts, and even after many Supreme Court opinions there are not clear answers on when a state law relates to an employee benefit plan.

In the cases dealing with so-called pay or play mandates (where employers are given a choice between complying with a health care law or paying a monetary fee to the state), the outcome seems to turn on whether the penalty associated with non-compliance is so significant as to effectively force compliance.

These rulings are based on a 1995 Supreme Court case, New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., which held that indirect economic incentives that do not mandate employee benefit structures or their administration are not preempted by ERISA. For example, Maryland’s law which required employers to contribute 8% of payroll toward employee health care or pay the difference between 8% and their health care expenditures to the state was held to be preempted by ERISA. The court found that the penalty (up to 8% of payroll) was so great as to leave an employer with no rational choice other than to set up a group health plan and contribute at least 8% of payroll. Because the penalty was so great, the court found that law functioned as a mandate to establish an ERISA plan and spend a certain amount on its benefits. In evaluating a San Francisco city ordinance requiring employers to contribute between $1.17 and $1.76 per employee per hour for employee health care or pay the difference to the city, the Court of Appeals for the 9th Circuit found that the city had a “strong likelihood” of success in establishing that the ordinance was not preempted by ERISA. The court characterized the ordinance as mandating a payment, not specific employee benefits. In other words, the penalty was sufficiently low as to leave employers with a reasonable choice between compliance and payment.

Because ERISA preemption turns on the nature of the penalty, rather than the requirements for avoiding the penalty, the change in the Massachusetts fair share contribution requirements should not cause the law to be preempted by ERISA. The $295 per employee fee remains unchanged and, when we examine whether the fee is sufficient to force an employer to either establish an employee benefit plan or amend it to comply with the 25% participation and 33% contribution standards, no irresistible incentive is present. Employers have a reasonable choice between (1) paying the fee or (2) meeting the standards and avoiding the fee, and this, according to current case law, is enough to avoid preemption.

Amy B. Monahan
Visiting Associate Professor
University of Minnesota Law School