This has been a big year for ERISA preemption cases. Section 514 of ERISA boldly states that unless one of the statutory exceptions apply—none of which are relevant here—that Titles I and IV of ERISA supersede “any and all State laws insofar as they . . . relate to any employee benefit plan” covered by ERISA (29 U.S.C. §1144(a)). While the “relate to” standard suggests an expansive scope to ERISA preemption, federal litigation has narrowed that scope materially. Conflicts between the states’ desire to implement legislative agendas that impact ERISA plans and ERISA’s broad preemption language will continue to generate controversies for the judiciary.
Earlier this year, in Gobeille v. Liberty Mutual, the US Supreme Court held that ERISA preempted a Vermont law requiring ERISA-covered plans to report certain claims data to the state (which is addressed in our March 7 post). After Gobeille was decided (and as discussed in our March 10 post), the Supreme Court remanded to the US Court of Appeals for the Sixth Circuit the case that is the subject of today’s post, Self-Insurance Institute of America v. Rick Snyder, to be reconsidered in light of Gobeille.
On July 1, the Sixth Circuit issued its decision on remand and again found the Michigan tax not to be preempted by ERISA. When the Supreme Court remanded the Michigan case in light of Gobeille, one might have inferred that the Supreme Court believed its decision in Gobeille should have a material effect on the analysis of the Michigan case. The Sixth Circuit’s decision is noteworthy for its minimization of the effect of the Gobeille decision, drawing a sharp distinction between state laws that directly affect ERISA plans (such as the Vermont law in Gobeille) and state laws with a different purpose (such as tax laws) that indirectly affect ERISA plans.
The court’s analysis holds state tax laws in a privileged status vis-a-vis the preemption analysis. The court cites several Supreme Court decisions for the proposition that state tax law “and its ancillary requirements” represent “an attribute of state sovereignty” and goes on to state, following a Seventh Circuit decision, that for an ERISA preemption challenge to a state law to succeed, it must be shown that “(1) the law at issue must mandate (or effectively mandate) something, and (2) that mandate must fall within the area that Congress intended ERISA to control exclusively.” The Sixth Circuit also views Gobeille as standing for the proposition that “what triggers ERISA preemption is not just any indirect effect on administrative procedures but rather an effect on the primary administrative functions of benefit plans.” In the Sixth Circuit’s view, “only state laws that directly regulate these aspects of ERISA—whether by imposing additional administrative burdens or by interfering with uniform administration—are preempted.”
The Sixth Circuit had relatively little trouble finding that the Michigan tax did not “directly regulate” primary administrative functions of the affected ERISA plans. Instead, the administrative burdens resulting from the Michigan tax regime were found to be ancillary to the state tax function. The Sixth Circuit placed significant weight on prior Supreme Court precedent in other cases involving state taxation (e.g., Travelers and De Buono) as supporting the view that administration of state tax laws involves a fair degree of administrative imposition (e.g., tax calculations and filings) and that those decisions support the view that tax administration processes do not rise to the level of a direct regulation of ERISA plan functions.
We expect that the Self-Insurance Institute of America (SIIA) will seek further view at the Supreme Court. If so, it is likely that SIIA will argue that the way the Michigan tax is structured triggers ERISA preemption because it imposes administrative burdens that were not present in the state tax statues upheld in Travelers and De Buono. SIIA argued that because the Michigan tax is applied to only those parties identified as “residents” of Michigan (ultimately to be determined by their domiciliary status), the Michigan statute improperly requires the plan to make that subjective evaluation. The Sixth Circuit seemed to view that argument as potentially having merit except that the Michigan statute allows the plan to rely on its current records to make such a determination without doing a further investigation.
The Sixth Circuit also rejected claims that the statute impermissibly alters the relationship between the plan and carriers/third party administrators by requiring the latter to collect the tax. The Sixth Circuit viewed what had been posited as a collection requirement as simply a permissive provision (i.e., that the law allows such a collection process but does not require it). The court seems to suggest that if the collection process were mandatory such that a plan amendment would be required, a preemption problem could ensue.
Finally, the court rejected (as waived on procedural grounds) an argument raised by friends of the court that the Michigan tax impermissibly “refers to” ERISA plans. Apparently, SIIA had waived that argument, and the court would not allow it to be revived by the friends of the court argument. This argument may be revived in other cases where waiver is not an issue.
Conclusion
While it might be difficult to predict the ultimate outcome in this case, one thing is certain: ERISA’s preemption provisions will continue to generate controversies. For those involved in administering or advising ERISA plans subject to the Michigan tax, we would advise that you file protective refund claims so that the statute of limitations does not expire should the Supreme Court agree to review the case and reverse the Sixth Circuit.