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State-mandated employee benefits: conflict with federal law?

Jason Ford

Over the past three decades, States have passed a wide range of laws that affect employee benefit plans.[1] For example, more than 700 laws mandating provisions in health insurance plans have been enacted since 1965. Most recently, the focus has been on increased efforts requiring provisions for employee leave, particularly for parental obligations. For the most part, these mandates are influential in shaping the extent and characteristics of employer-provided benefits unique to each State.

Federal controls, however, also exist in laws that affect employee benefit plans, thereby limiting the extent and nature of State regulation. Under the U.S. constitutional system, when the Federal Government acts within the scope of its delegated powers, such action supersedes or preempts conflicting State legislation.

The Employee Retirement Income Security Act (ERISA) of 1974, as amended,[2] is the preeminent Federal law regulating private[3] employee benefits. The act requires that employees receive detailed information on their welfare (such as vacation and severance pay) and pension plans, and holds employers responsible for providing those benefits. It also stipulates conditions designed to ensure that the benefit plans remain financially sound and specifies schedules governing the vesting of pension benefits-that is, provisions guaranteeing employees the right to their benefits.

The States still have the authority to pass and enforce some forms of employee benefit legislation. ERISA explicitly gives the States the right to pass legislation affecting certain benefits; the act does not apply to all types of employee benefits.

ERISA contains a strong preemption clause, stating that its provisions "shall supersede any and all State laws insofar as they ... relate to any employee benefit plan . . ." However, an exception states that "nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance . . "I This exception opens the door to continued State influences on benefit plans because employers often provide health, death, or disability benefits through the purchase of insurance policies.

States traditionally have regulated plans "maintained solely for the purpose of complying with applicable workinen's compensation laws, unemployment compensation or disability insurance laws . . "I All States provide for unemployment and workers' compensation, and several mandate coverage for workers unable to work because of short-term disabilities. ERISA's preemption rules reflect a balancing of conflicting objectives-local initiative and national uniformity of employee benefits policy.

This report examines several types of employee benefits, focusing on how ERISA has influenced State law regarding the type of benefits employees receive and discusses, when possible, the influence of State-mandated provisions on employer-provided plans nationwide. The data are from annual Bureau of Labor Statistics Employee Benefit Surveys. Data from the 1989 survey represent plans in 109,000 medium and large establishments in the private sector, employing 32 million workers.[6]

Disability benefits

Although ERISA explicitly allows the States to require employers to provide benefits that replace income lost by employees during nonwork-related disabilities, disputes have arisen over the extent of State authority. Courts have ruled on whether a State law simply regulates disability benefits, or regulates other benefits as well. State laws that mandate income protection for disabled workers have been upheld, but provisions that mandate health care coverage for disabled workers have been overturned because of conflict with ERISA regulation of health benefits.

Five States-California, Hawaii, New Jersey, New York, and Rhode Island-have laws requiring short-term disability income protection. The right of the States to pass such laws was upheld in 1982 in Shaw v. Delta Airlines.1 In question was the status of the New York State Weekly Disability Benefits Law which requires employers to help finance short-term disability insurance benefits and sets minimum benefits standards that employers must meet or exceed.

The exemption from ERISA regulations, and hence, from preemption, is limited to State laws which were enacted "solely for the purpose of complying with ... disability insurance laws."[8] (Italics added.) At times, courts have held that State laws, under the guise of mandating disability benefits, improperly sought to regulate other benefits. For example, West Virginia, in a 1982 law, required that employers continue providing the same level of health care to employees, even if they are unable to work and receive disability income benefits. When challenged in court[9], the law was struck down because, according to the court, extending the coverage of a health plan went beyond merely regulating disability benefits.[10]

In another example, Hawaii cited the exemption of disability insurance laws from ERISA coverage to defend the Hawaii Prepaid Health Care Act. This act requires that firms provide comprehensive health care benefits, and pay at least half the health premiums. The State argued that the law provided health care coverage for disabled employees, and therefore did not conflict with ERISA. The court ruled, however, that the Hawaii statute was superseded by ERISA because employees in any condition of health, not just disabled employees, could benefit." (Congressional action later added a clause to ERISA specifically allowing the operation of the Hawaii Prepaid Health Care Act.)

The influence of State temporary disability insurance benefit laws can be seen in the Bureau's Employee Benefits Survey findings on sickness and accident insurance benefit provisions. The State laws compel the kinds of benefits that may voluntarily be provided through the purchase of commercial sickness and accident insurance policies. This is true even though the 1989 Employee Benefits Survey directly reflects the influence of only two of the five State temporary disability insurance laws-those of New York and New Jersey. The California and Rhode Island laws do not require employer contributions toward financing benefits (the survey is essentially restricted to the analysis of benefit plans financed wholly or partly by employers). Furthermore, prior to 1990, Hawaii was outside the geographic scope of the Bureau's survey.

Several examples illustrate the State plan-private plan relationship. Three States-New York, New Jersey, and Hawaii-require up to 26 weeks of coverage per disability. Nationwide, the Employee Benefits Survey found that in 1989, 64 percent of full-time employees under sickness and accident plans could receive a maximum of 26 weeks of disability benefits.

In California, disability benefits may last up to 52 weeks. Nationwide, 10 percent of employees under sickness and accident plans could receive up to 52 weeks of benefits. Rhode Island requires that benefits last 30 weeks; a maximum that is unusual nationwide.[13]

All five States require that benefits be based on a percentage of weekly earnings, from 50 percent for the State of New York, to 75 percent for the State of California. Again, the national data for 1989 indicate that employer-provided benefits reflect the State mandated figures. Fifty-seven percent of employees with sickness and accident insurance plans received a fixed percent of earnings during disability; virtually all in the range of 50 to 75 percent of pay.

This pattern of the majority of participants in voluntarily provided disability benefits may result from the earlier establishment of State statutes. Four of the five States enacted their laws in the 1940's, before private sickness and accident insurance benefits were widespread. (The exception is Hawaii, which enacted its law in 1968.) The State requirements may well have established parameters for subsequent voluntarily adopted plans. In addition, firms that do business in several States might want their benefit plans to be uniform, and therefore, follow the State requirements in all jurisdictions in which they operate.

Health care benefits

The effect of ERISA's exemption of State regulation is most apparent in the patterns of health care benefits. In 1989, about two-thirds of all employees participating in medical care plans of medium and large private establishments had benefits funded through the purchase of policies from commercial insurance companies or Blue Cross/Blue Shield organizations.

The States have made extensive use of the insurance exemption, often enacting laws requiring specific coverage in health insurance plans. For example, 40 States mandate inclusion of alcoholism treatment coverage in health insurance plans, with all but one of these States passing its law since the enactment of ERISA in 1974. Since then, the percentage of employees in medium and large private establishments with health care benefits that included alcoholism treatment increased from 36 percent (in 1981) to 97 percent (in 1989). Although a number of factors contribute to this growth, the influence of the State requirements are significant.

The same pattern occurred for drug abuse treatment. Twenty-two States mandated coverage for drug abuse treatment, with all but Minnesota passing or updating these laws since 1974, and eight States passing laws since 1982. From 1982 to 1989, the percentage of employees with health care benefits that included drug abuse treatment coverage more than doubled; from 37 percent to 96 percent.

Another type of health benefit that has been affected by State mandates is mental health coverage. Thirty-two States compel inclusion of mental health care benefits in insurance policies, with all but one State passing or updating laws since 1974. Seven States require insurers to provide coverage for hospice care, and 17 States require coverage for home health care. These mandates were established after the passage of ERISA.[14]

The States' right to mandate insurance benefits was upheld by the Supreme Court in Metropolitan Life Insurance Co. v. Massachusetts." Citing ERISA's exemption of insurance regulation from its preemption provision, the court upheld a Massachusetts law requiring specified minimum mental health care coverage in health insurance policies. In reaching its decision, the court emphasized that ERISA distinguished between insured and uninsured plans, allowing insured plans to be regulated indirectly by the States-not uninsured plans. This stems from the following "deemer" clause in ERISA: "Neither an employee benefit plan ... nor any trust established under such a plan, shall be deemed to be an insurance company ... for purposes of any law of any State purporting to regulate insurance companies . . . ."

Invoking this provision, the U.S. Court of Appeals for the Fifth Circuit held that a Louisiana statute was preempted by ERISA as it applied to self-insured plans, but it was not preempted with respect to insured plans." The statute requires that mental illness benefits under employee benefit plans equal benefits for physical illness.

Such a result enhances the attractiveness of self-insurance to organizations. In a self-insured plan, the employer pays for all covered health costs. The employer, rather than an insurance company, assumes the risk for any catastrophic health payments that may occur. Self-insured plans generally do not have to provide any of the variety of health care provisions mandated by the States. This option is particularly attractive to multistate organizations that would otherwise have to follow a variety of regulations. Organizations may also choose self-insurance to avoid costs of premium taxes, and to monitor usage more closely.

Self-insurance of health care benefits has grown in popularity among employers since the passage of ERISA. In 1979, only 11 percent of employees in medium and large establishments with health care benefits were covered by self-insured plans.[17] By 1989, this figure had grown to 36 percent.

Because of ERISA, States generally cannot regulate benefit arrangements between insurance companies and businesses. Georgia and Alabama both had laws prohibiting the sale of prescription drugs at less than the usual, customary, and reasonable price to employees participating in Preferred Provider Organization health plans. Both laws were held to be preempted by ERISA." Although insurance companies usually set up the arrangements with the pharmacies, the laws were interpreted to be regulating benefit plans rather than insurance.

Pension benefits

ERISA was originally designed primarily as a law to protect workers' pensions. The courts have generally ruled that the intent of ERISA is to supersede virtually all State laws in this area.

ERISA provides a complex set of rules for pension plans, such as requiring certain standards for vesting and survivor benefits. The States have little leeway in regulating this type of benefit because most aspects of pension plans are regulated by ERISA.

The case of Alessi v. Raybestos Manhattan in 1981 illustrates the kind of issues that have arisen with respect to pensions.[19] In this case, the Supreme Court held that ERISA preempted a provision of the New Jersey Worker's Compensation Act that prohibited pension plans from reducing retiree benefits by amounts of workers' compensation awards. The court noted that such pension offsets were common, and not in violation of ERISA provisions.

Vacation and severance pay ERISA governs the operation of employee welfare benefit plans" and "employee pension benefit plans," and its preemption clause affects State action with respect to such plans. States have broad leeway to regulate vacation and severance pay practices, however, because these benefits are often regarded as "payroll practices" and not benefit plans within the scope of ERISA. ERISA covers commonly funded plans. Vacations and severance pay plans that are financed out of current operating funds are not covered by ERISA.

Rulings on vacation plans are of considerable interest to employees throughout the Nation. In 1989, 97 percent of full-time employees in medium and large establishments received some form of paid vacation benefit. Vacations accounted for 3.4 percent of all employer outlays for employee compensation in March 1991.[10]

Massachusetts v. Morash considered whether ERISA preempts a provision of the Massachusetts Payment of Wages Statute that requires employers to pay discharged employees full wages, including holiday or vacation payments, upon the date of discharge." In upholding the applicability of the State requirement, the Supreme Court found that an employer's policy regarding payment to discharged employees for unused vacation time was not an "employee welfare benefit plan" under ERISA and, therefore, that enforcement of State requirements was not preempted by the Federal statute.

To reach this conclusion, the Court distinguished between benefits, such as vacations, that are financed out of a company's general assets, and those financed through the establishment of funds. "In enacting ERISA, Congress' primary concern was with the mismanagement of funds accumulated to finance employee benefits and the failure to pay employee benefits from accumulated funds," the Court stated. But "because ordinary vacation payments are typically fixed, due at known times, and do not depend on contingencies outside the employee's control, they present none of the risks that ERISA is intended to address. If there is a danger of defeated expectation, it is no different from the danger of defeated expectations of wages for services performed-a danger Congress chose not to regulate in ERISA." The Court did, however, indicate that vacation plans would be subject to ERISA, and preemption of State law would apply, if benefits came from formal vacation funds.

The Court's decision cites Department of Labor regulations defining ERISA terms. The regulations interpret vacations as a payroll practice and not as an employee welfare benefit plan of the type governed by ERISA."

The reasoning that has exempted unfunded vacation plans from ERISA coverage has not necessarily been applied to other employee benefits. This is clear from an analysis of cases involving severance pay plans, which covered 39 percent of full-time employees in medium and large establishments in 1989. Courts have ruled that ERISA preempts action pursuant to State wage payment laws seeking to enforce claims for benefits under unfunded company severance pay plans.13 Similarly, the Department of Labor regulations include severance benefits within the definition of welfare plans."

In Fort Halifax Packing Co. v. Coyne, however, the Supreme Court upheld a Maine severance pay statute against a challenge that it was preempted by ERISA.[25] The act provides that employers who close operations at a plant with 100 or more workers, or who relocate such operations more than 100 miles away, must provide 1 week's severance pay for each year of service to employees with at least 3 years' seniority. In upholding the statute, the Court stated that ERISA preemption provisions refer to State laws relating to "employee benefit plans," and not to laws relating to "employee benefits." In the Court's view: "The Maine statute neither establishes, nor requires an employer to maintain an employee benefit plan. The requirement of a onetime, lump-sum payment triggered by a single event requires no administrative scheme whatsoever to meet the employer's obligation."

Other benefits

It is not possible in this report to review the applicability of the ERISA preemption clause to State action affecting all employee benefits. The ERISA definition of employee welfare benefit plans specifically includes employer-paid day care centers, scholarship funds, and prepaid legal services.[26] These benefits, consequently, cannot be regulated by the States.

In contrast, regulations of the U.S. Department of Labor, which has some of the responsibility for the enforcement of ERISA, cite the following benefits as being outside the scope of ERISA enforcement: Jury and military leave when paid out of normal payroll funds, sabbatical leave, recreation facilities, onsite medical services, employee discounts, remembrance funds, tuition reimbursement, and nonproduction cash bonuses.[27] State regulation in those areas is not preempted by the Federal statutes.

ERISA was intended to provide a single standard of legislation for benefit areas. In reality, both the States and the Federal Government have been active. Organizations often must follow multiple laws when providing benefit plans.


1 Spencer's Research Reports (Chicago, Charles D. Spencer & Associates, Inc. 1991).

2. U.S.C.A. sections 1001 - 1461.

3. ERISA does not apply to benefits provided by Federal, State, and local governments.

4. 29 U.S.C.A section 1144. In 1945, The McCarran-Ferguson Act put insurance matters under State control. (See 15 U.S.C.A. section 1011.) Congress did not intend for ERISA to take away this right.

5. 29 U.S.C.A. Sect. 1003(b)(3).

6. Data from the 1989 survey may be found in Employee Benefits in Medium and Large Firms 1989, Bulletin 2363 Bureau of Labor Statistics, 1990). This survey sampled 2,400 establishments with 100 employees or more. It covers nonagricultural workers in the private sector. Data for 1979-86 and 1988-89 are for medium and large private establishments. Data for 1990 are for State and local governments. Data for medium and large firms will be collected in odd-numbered years. Data for firms with under 100 employees, and on State and local governments will be collected in even-numbered years.

7. Shaw v. Delta Airlines 463 U.S. 85 (1982). This case grew out of provisions in the New York law requiring benefits to employees unable to work because of pregnancy, as well as those of the State's Human Rights Law forbidding discrimination in employee benefit plans because of pregnancy. One issue involved the inclusion of disability insurance benefits in an employer's multibenefit plan that was subject to ERISA regulations. The Supreme Court stated that while the State may not require an employer to alter its ERISA plan, it may force the employer to choose between providing disability benefits in a separately administered plan and including the State-mandated benefits in itS ERISA plan. If the State is not satisfied that the ERISA plan conforms with the requirement of its disability insurance law, it may compel the employer to maintain a separate plan that does comply.

8. 29 U.S.C.A. Section 1003 b(3).

9. Fixx v. United Mine Workers, 645 F. Supp. 352 (1982). A similar ruling was made recently in the case of a New Jersey parental leave law that required health care continuation while employees were on parental leave. (New Jersey Business & Industry Association v. State Of New Jersey, NJ S. Ct., No. L-90-4271, 1991). The court ruled that extending the health benefits during parental leave was in conflict with ERISA.

10 The Consolidated Omnibus Budget Reconciliation Act of 1985 (commonly known as COBRA; PL 99-272), contains a clause requiring that employers make available health plan coverage after termination, disability, or reduction of hours, thus achieving the goal of the West Virginia law. Because the act is a Federal law, ERISA rules do not apply.

11. Standard Oil Company of California v. Agsalud, 633 F. 2d 760 (1980).

12. Sickness and accident insurance provides income replacement during short-term periods of incapacitation.

Two percent of employees with sickness and accident insurance coverage have maximum weeks of coverage between 27 and 51 weeks.

14. "State Laws Specify who, when, and what Health Insurers will Cover," Spencer's Research Reports 324.6-.5 (Chicago, Charles D. Spencer & Associates, Inc., 1989).

15 Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S. 724 (1985).

16. Children's Hospital v. Whitcomb, 778 F.2d 239 (1985).

17. Employee Benefits in Industry: A Pilot Survey, Report 615 (Bureau of Labor Statistics, July 1980).

18. The 1981 Alabama law, The Pharmacy Act, was overturned in Blue Cross/Blue Shield of Alabama v. Peacock's Apothecary, 567 F. Supp. 1258 (1983). The Georgia Law, The Third Party Prescription Act, was overturned in General Motors Corp. v. Caldwell, 647 F. Supp. 585 (1986).

19. Alessi v. Raybestos Manhattan, 451 U.S. 504 (1981).

20. "Employer Costs for Employee Compensation-March 1991" (USDL/U.S. Department of Labor 91-167, June 1991).

21. Massachusetts v. Morash 109 S. Ct 1668 (1989).

22. 29 C.F.R section 2510.3-1 (b)(3).

23. See Holland v. Burlington Industries, Inc., 772 F.2d 1140 (CA 4,1985) summarily affirmed, 477 U.S. 901 (1986); and Gilbert v. Burlington Industries, Inc., 765 f.2d 320 (CA2, 1985; summarily affirmed, 477 U.S. 901 (1986).

24. 29 C.F.R. section 2510.3-1(a)(3).

25. 482 U.S. 1 (1987).

26. U.S.C.A. section 1002(l).

27. 29 C.F.R. section 2510.3 - 1G(3).

A note on communications

The Monthly Labor Review welcomes communications that supplement, challenge, or expand on research published in its pages. To be considered for publication, communications should be factual and analytical, not polemical in tone. Communications should be addressed to the Editor-inChief, Monthly Labor Review, Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC 20212.
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Author:Ford, Jason
Publication:Monthly Labor Review
Date:Apr 1, 1992
Previous Article:Injuries and illnesses in the workplace, 1990.
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