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What's the Regulatory Status of Government & Religious Plans?

This is being written on a foggy day...which is an apt way to describe this whole issue. It is foggy. There is little which is provably clear.

ERISA (and thus ERISA preemption, reporting & fiduciary) are purposely blind to plans sponsored by state & local government entities and by religious groups. They are not preempted by ERISA. They are simply ignored by ERISA.

Why? When ERISA was taking shape, a similar bill "PERISA" (Public Employee......") was envisioned. Thus, ERISA purposely did not apply itself to public employee plans because it did not want to overlap or conflict with PERISA. Unfortunately, when governmental plan sponsors saw how strict ERISA would be about funding & tracking & fiduciary duty, they lobbied hard to abort PERISA. Thus, public employee plans are not in ERISA...but they are covered by the Public Health Services Act (PHS). Therefore, for example, public plans are subject to HIPAA because of PHS, not because of employee benefit laws.

Religious plans were not included in ERISA for fear of triggering a Constitutional challenge to the whole law based on separation of church & state. ERISA was very unpopular at the time it was being written, because it was deemed to be so tough that no plan could survive, so the last thing that the framers of ERISA wanted was more ammunition for the enemies (such as the church & state issue). So, ERISA simply says that it has nothing to do with religious plans.

WARNING: Sometimes what seems like a public employee or religious group plan is not. Look carefully at who the sponsor truly is. Read the plan's actual contract & paperwork. For example, a city's police health plan (thus seemingly sponsored by the government entity of the city) was actually technically sponsored by the police union, and thus an ERISA plan. Similarly, a contractor who provided the staff for a religious hospital (almost like leased employees) did not qualify as a religious plan. The legal sponsor was the private firm contracting with the religious group to run the hospital. The actual religious group was not sponsoring the plan. With employee leasing and various new innovations in employment format, you need to look deeper and deeper into the specifics of each plan.

May states regulate public & religious plans? Here's where it get fuzzy because of lack of specific mention. Both "yes" and "no" answers can be rationalized.

The McCarran-Ferguson Act of 1945 was passed by Congress to clarify the power of states to regulate "the business of insurance". Since self-funding was in its infancy in 1945, almost any kind of risk-sharing was considered "insurance". So, don't look for references to self-funding, stop-loss, ERISA, or other types of funding.

The most definitive interpretation of "the business of insurance" subject to regulation by the states came in the U.S. Supreme Court 1979 case of Group Life v. Royal Drug. In that case the Supreme Court set forth a three-part test to determine which insurance industry activities involve "the business of insurance" under McCarran-Ferguson:

(a). Involves the spreading and underwriting of policyholder risk.
(b). Must relate to the contract between the insurer and the insured.
(c). Must be limited to entities with the insurance industry.

Item (b) has been noted in subsequent U.S. Supreme Court cases, and viewed as anytime there is a direct relationship between an insurance company and an individual plan participant. Example #1: Insurer issues a policy to John Doe and deals with John Doe as an individual relating to his policy. That situation would trigger test (b).

Example #2: John Doe is in the XYZ Employer plan. Even though the plan has stop-loss insurance, there is no direct relationship between John Doe and the stop-loss insurer. This would not trigger McCarran Ferguson.

So, your challenge is first to see if McCarran-Ferguson would apply to the facts & circumstances of each public employee and/or religious plan. If so, then some would say that in the absence of any other overwhelming reason, McCarran Ferguson and state regulatory power would apply if the state wishes to exercise that power (remembering that ERISA simply does not exist for your thinking on this issue).

On the other hand, there may be other legal considerations which block state regulatory power. For example, just as ERISA feared a Constitutional challenge on the question of separation of church & state, attorneys for states might feel that the issue of regulating church plans might be better left alone. Similarly, there might be laws in states that dictate the relations between state government and local or governmental entities. Thus, there is a chance that states might not have regulatory power over some or all religious or public employee plans.

What about court cases? Court cases are not really much use. Why? As DOL always says, the status of every situation depends on the facts & circumstances of only that particular situation. So, while lawyers can try to draw parallels & precedents, the true judgement is on the very specific facts & circumstances. Court cases are often odd situations and/or involve side issues, which is why they ended up in court. So, counsel your counsel not to get too excited by court cases that may or may not match your situation precisely. There is no one-and-only answer. Also, if you're thinking of taking this to court, it could conceivably be an expensive & years-long trip all the way up to the U.S. Supreme Court, since major federal & state laws are at question as well as the Constitutional issue of separation of church & state.

What happens in the real world? Well, most SPBA members who have public employee & religious group clients tend to run them as if they were ERISA plans (meaning they follow the procedures and fiduciary safeguards because that is simply prudent), but they do not do Form 5500 filings or other ERISA-specific compliance. Important note: Voluntarily deciding to follow ERISA rules does not in any way make the plan an ERISA plan or give any preemption protection for governmental or church plans.

Meanwhile, most states tend to either turn a blind eye to public and/or religious group plans. On the other hand, some states occasionally proclaim and exercise, to some degree, reporting or regulatory powers over public employee plans in their own state, but rarely over plans of true religious groups.

So, what should you do? A well-run plan and professional TPA & Stop-Loss coverage usually have nothing to fear from reasonable regulatory oversight. Thus, most SPBA member plans tend to informally follow ERISA practices and/or meet state registration and stability requirements. SPBA normally suggests that TPAs acquiring such new clients at least research and probably discuss the issue cooperatively with the state authorities before a problem arises. States are more reasonable when they know what is going on. They hate to get blind-sided.