The Employee Retirement Income Security Act of 1974 (“ERISA”) aims to balance the dual policies of (1) ensuring fair and prompt enforcement of rights under employee benefit plans, and (2) encouraging the creation of such plans. To strike this balance, ERISA pairs comprehensive rules regarding fiduciary responsibility with federal causes of action that allow plan participants and beneficiaries to recover benefits due, enforce ERISA’s mandates, obtain injunctive relief, and, where applicable, obtain attorney’s fees. At the same time, to protect employers and plan sponsors from operating under a patchwork of potentially conflicting state and local regulations, ERISA promotes uniformity in benefits administration by preempting “any and all state laws insofar as they may now or hereafter relate to” any ERISA benefit plan. 29 U.S.C. § 1144(a).
The Supreme Court is currently considering a petition for certiorari that addresses the application of ERISA preemption to local “play-or-pay” laws. Ostensibly, these location-specific laws are intended to improve low-wage employee access to affordable health coverage by requiring large employers to make enhanced healthcare expenditures on behalf of such employees who reside in that location. To evade ERISA preemption, these laws typically provide that, instead of altering their existing ERISA plans to accommodate the enhanced benefits, employers can simply cut a check in the same amount directly to their employees, or in some cases the local government.
Seattle passed such a law in September 2019. Seattle Ordinance SMC 14.28 (“Ordinance”) mandates that large employers in the hotel sector operating within the City make monthly healthcare payments on behalf of their covered local employees. Payments increase depending on whether the employee is single or has a spouse and/or dependents. Employers who fail to comply with the Ordinance are subject to fines, penalties, and other damages. Employers may comply by creating new ERISA plans specifically for the covered employees, increasing contributions for their employees to existing ERISA plans, or making payments directly to the covered employees.
The ERISA Industry Committee, a nonprofit trade association, brought suit alleging that ERISA preempted the Ordinance because it “relates to” an ERISA benefit plan. The District Court granted the City’s motion to dismiss, holding that ERISA does not preempt the Ordinance because it offers employers a compliance option (i.e., the direct cash payments to employees) that does not require creating a new ERISA plan or altering an existing ERISA plan. ERISA Industry Committee v. City of Seattle, 2020 U.S. Dist. LEXIS 81750 (W.D. Wash. May 8, 2020). In an unpublished opinion, the Ninth Circuit affirmed. 840 F. A’ppx. 248 (2021).
The Committee petitioned for certiorari to the United States Supreme Court, arguing that the Ninth Circuit’s decision deepened an existing split with other courts of appeals, which have held that even a direct payment option interferes with ERISA plan administration because it requires employers to consistently monitor state and local minimum spending requirements and adjust their healthcare expenditures.
Large employers have a vested interest in the Supreme Court granting certiorari and reversing the Ninth Circuit decision. Even though local play-or-pay laws may serve the salutary purpose of ensuring good benefits for local employees, large employers maintain that such purpose cannot trump the overriding federal concern that nationwide employers be able to design benefits that work for their nationwide workforce. ERISA already imposes significant obligations on plan sponsors and fiduciaries when it comes to benefits administration, and it is important that those employers be able to administer their plans uniformly pursuant to ERISA.
The direct-payment option does not make play-or-pay laws such as the Ordinance any less intrusive upon ERISA’s domain. As the Committee argued in the proceedings before the district and appeals courts, direct payments are “financially more onerous and therefore not a realistic and legitimate alternative” to altering an employer’s current coverage to address covered employees. This effectively compels employers to alter their current coverage to meet the requirements of whatever local play-or-pay laws may be in effect in every jurisdiction in which they operate. Such tiptoeing through administrative raindrops of multiple (and potentially conflicting) local regulations – and the additional costs and complications associated with such maneuvering – is precisely what ERISA preemption is intended to eliminate.
If you need more information or have questions, please contact the Jackson Lewis attorney with whom you regularly work, or any member of our ERISA team.