The Ordinanceâ€™s health care expenditure requirements are preempted because they have an impermissible connection with employee welfare benefit plans. By mandating employee health benefit structures and administration, those requirements interfere with preserving employer autonomy over whether and how to provide employee health coverage, and ensuring uniform national regulation of such coverage. Golden Gate Restaurant Association v. City and County of San Fransisco et al., (N.D. Cal) (December 26, 2007)
In a well-reasoned opinion, a California district court has held that ERISA preempts the San Francisco Health Care Security Ordinance. The 2006 ordinance consisted of an employer health spending requirement and a government health care program, funded in part by those employer contributions. (The opinion can be viewed here.)
The litigation focused on the employer spending requirement, which was to become operative on January 1, 2008. Under that portion of the ordinance employers faced a multi-tier assessment based upon how many employees they had.
Since ERISA preempts state and local laws that invade its purview, the ordinance was clearly doomed from its genesis given the its various levies, penalties, and administrative and recordkeeping requirements. The district court based its holding on several bases.
Reason # 1 – The Ordinance Had An Impermissible Connection With ERISA Plans
First, the Court held that the Ordinanceâ€™s health care expenditure requirements were preempted “they have an impermissible connection with employee welfare benefit plans.”
By mandating employee health benefit structures and administration, those requirements interfere with preserving employer autonomy over whether and how to provide employee health coverage, and ensuring uniform national regulation of such coverage.
The court evaluated the ordinance with reference to the following series of factors:
(1) whether the state law regulates the types of benefits of ERISA employee welfare plans;
(2) whether the state law requires the establishment of a separate employee benefit plan to comply with the law;
(3) whether the state law imposes reporting, disclosure, funding, or vesting requirements for ERISA plans; and
(4) whether the state law regulated certain ERISA relationships, including relationships between an ERISA plan and employer and, to the extent an employee benefit plan is involved, between the employer and the employee.
(citing Operating Engineers Health and Welfare Trust Fund v. JWJ Contracting Co., 135 F.3d 671, 678 (9th Cir. 1998)
On each point except the second factor, the court found the ordinance defective.
Reason # 2 – The Ordinance Expenditure Requirements Made Unlawful Reference to Employee Benefit Plans.
This analysis presented the easiest reason for finding the ordinance preempted.
The Court held that the provisions of the ordinance made unlawful reference to employee benefit plans by:
(1) specifically referencing the existence of ERISA plans in its expenditure requirements provisions. Ord. Â§ 14.1(b)(7) (calculating employer liability by looking at â€œamounts paid by a covered employer to its covered employees or to a third party … for the purpose of providing health care services for covered employees.â€); Final Regs. Â§ 6.2(E) (specifically referring to different types of ERISA plans, and providing that employers do not receive credit if an employee declines coverage under a plan â€œthat requires contributions by a covered employee.â€).
(2) determining liability exclusively with reference to employer-provided health benefits, mostly under existing ERISA plans, which plans are essential to the operation of the Ordinance
Note: Strategies for circumventing ERISA’s preemption through artful drafting of “pay or play” legislation have been bandied about for years. The viability of such proposals are, in my judgment, seriously questionable. See, Lawmakersâ€™ Negligence in Proposing Health Care Initiatives Bureau of National Affairs (August 2007. The San Francisco ordinance presented no test case for the concept, however, as it fell flatly on the impaling preemptive provisions as gracelessly as one can imagine.
Implications – This decision further illustrates the fundamental problem with pay or play legislation and the continuing influence of the Fourth Circuit’s opinion in RILA v. Fielder (cited several times in the district court’s opinion). These defects have not prevented legislatures from moving ahead with their proposals. Massachusetts has had one of the longest runs yet. On the other hand, given the financial problems that lie in the future for the Massachusetts health care program, a more aggressive stance by that state to gain revenues from employers will likely find that program facing a preemption challenge as well. When that day comes, the Massachusetts plan will be held preempted. See, :: Reluctant Massachusetts Tax Collector Has Good Reasons
See also – :: Healthcare Security Ordinance Challenged As Preempted By ERISA; :: Retail Industry Leaders Association Takes Out Another â€œPay Or Playâ€ Mandate Through ERISA Preemption Challenge; :: Maryland Bows To ERISAâ€™s Preeminence ; :: Retail Industry Leaders Association v. Fielder: A Case of Preemption Over Federalism