Skip to main content

What ERISA Preemption Does & Doesn't Do & looking ahead under PPACA

ERISA preemption applies to state INSURANCE law which impacts the ADMINISTRATIVE DECISIONS of an ERISA plan.  So, for example, there was a case in which state automobile law allowed accident victims to benefit from both the other car's insurance pay-out (including medical) and not be liable for subrogation to return employee benefit medical payments (even if defined in the plan) by the ERISA plan.  In another example, when NY applied their surcharge, it also looked like a slam dunk for ERISA preemption, but the high court said that the surcharge was "only money" and not dictating an administrative decision.  Also, ERISA does not preempt other federal law (which will be an issue occasionally as states implementing PPACA unfolds…read below).   So, ERISA preemption gets interpreted more and more narrowly.

So, when evaluating if a state law or ruling or mandate is subject to ERISA preemption, first determine if it is/will be in the insurance code of the state.  Then evaluate if/how the law would impact the flexibility/freedom of plan trustees to make administrative decisions for the plan and fulfill their ERISA fiduciary duty.

The issue of preemption & TPAs is more tenuous.  A TPA is an independent service company in the state a CPA, law firm, barber, etc.  So, there is no  automatic preemption.  (About 1980, there was a case from Florida, and the ruling was interpreted (wishful thinking) that TPAs have total preemption.  Needless to say, that was popular, but I knew it wasn't true.  When blind-sided at another association’s meeting and asked to confirm the wishful thinking.  I asked how many of the TPAs register and have license plates on the TPA corporate cars.  Every hand went up.  I asked why, if they truly believed that no state law applied to a TPA corporation or person.  I just mention this to prepare you, because people tend to latch onto what they want to believe.)

So, the next factor is what the state law or directive tries to do.  If the ERISA plan document & trustees direct the TPA to pay a claim for $X, but a state (presumably in the guise of insurance law) tells the TPA to pay it for $Y, then the state seems to be interfering with the administrative discretion of the plan trustees, and the TPA is just a clerical role obeying an order from its client (just as an attorney or CPA does). So, that would seem to be preempted

Sometimes the easiest way to teach government entities who think TPAs are all-powerful decision makers for the plan (and thus they will whip TPAs into making the plan do what they want) is to say that TPAs are just glorified paper-pushers who perform only the tasks delegated to them by their ERISA clients.  This then makes your ACTIONS (not identity as a TPA) part of the ERISA fiduciary duty & preemption of the plan trustees.  If they huff and puff about that, you can ask what if a client tells his attorney to plead not guilty on behalf of the client....but some law says that that attorney must plead guilty.  What does an attorney (or TPA) do???  So, focus on your FUNCTIONS as delegated by the plan trustees (sample language from one of your admin contracts, for example)...not that you are a TPA wanting blanket exemption.

I know this isn't the slam dunk you were hoping for.  As always, nothing said or written from SBPA should be considered legal advice or opinion.  Only an attorney with access to all facts & circumstances can render such an opinion.  Even then, as noted above, the Supreme Court and DOL sometimes come out opposite what all the legal experts thought would be an obvious ruling.

Preemption in PPACA?  Get ready.  Since ERISA Preemption does not preempt other federal laws, how will state laws to implement the federal PPACA and other laws, regs & requirements be viewed vis a vis ERISA preemption.  The answer that it will take decade or more and dozens of court cases to become a comprehensive body of case law, even though there will be a few signal cases sooner as temporary signposts.  So, for example, what if a state exchange (or a “federally run” state exchange) rule or requirement impacts an ERISA plan?  Does ERISA preemption apply??  Stay tuned.  We will be watching legal precedent in the making.

Not all self-funding is ERISA:  As self-funding has spread to governmental (aka state & local public) sponsored employee plans and religious entities as employers, and intriguing new uses of self-funding emerging all the time, it is important to remember that self-funding & ERISA (and its preemption) are not synonymous.  In 1974, there was going to be an ERISA twin bill for public plans called PERISA.  Support evaporated and it was never passed.  So, public plans are not covered by ERISA.  It is not an exemption to ERISA, it is just that ERISA was never intended to cover governmental plans.  So there is no ERISA preemption.  Similarly, to preserve separation of church & state, religious employer plans were not included under ERISA, so they have no preemption either.  TPAs tend to use similar fiduciary basic administrative  processes for such non-ERISA plans, because those processes were designed to provide plan participants & plan stability maximum protection.  However that does not  give such plans ERISA preemption or other powers.   

Who does regulate those non-ERISA plans??  It is up to each state.  My general observation is that many states look kindly on plans sponsored by governmental entities in their own state, so regulation is often minimal & gentle.  Similarly, to avoid church & state arguments, religious plans tend to have little or not regulation.  Check with the applicable states.