Legal Alert: Federal Court Strikes Maryland's Health Care Mandate

Date   Jul 20, 2006
A federal court in Maryland has held that Maryland's recently enacted "Fair Share Act" is pre-empted by federal law and, thus, unenforceable.
A federal court in Maryland has held that Maryland's recently enacted "Fair Share Act" is pre-empted by federal law and, thus, unenforceable. See Retail Industry Leaders Association v. Felder (July 19, 2006).
The act, the first of its kind, applies to non-governmental employers of 10,000 or more people in the state of Maryland. It requires for-profit employers that meet the size requirement either to pay 8% of the total wages paid to employees in the state on health insurance costs or pay to the state an amount equal to the difference between what the employer spends for health insurance costs and an amount equal to 8% of the total wages paid to employees in the state. (The amount is 6% for covered non-profit employers.) The act also imposes certain reporting requirements on covered employers.
The court first addressed standing, that is whether the party filing the complaint is entitled to have the court decide the dispute. The court held that the Retail Industry Leaders Association (RILA) has standing to challenge the law because at least one of its members is affected by the act and because one of RILA's objectives as an association is to oppose health care mandates like the Maryland act. The court also held that the Tax Injunction Act (a law that prohibits federal courts from enjoining the levy or collection of a tax under state law if an effective remedy can be had in state court) does not preclude it from hearing the case because the act does not impose a tax; it is, in actuality, a health care regulation.
The court then held that ERISA pre-empts the act, rendering it unenforceable. Section 514(a) of ERISA pre-empts any state law that relates to any employee benefit plan that is covered by ERISA. Courts have interpreted ERISA pre-emption to apply to state laws that have "a reference to" or "a connection with" an ERISA-covered benefit plan. Here, the court held that the Maryland act has a connection with an ERISA plan and is pre-empted on that ground. It did not address the "reference to" part of the pre-emption analysis.
In determining whether a state law is connected with an ERISA plan, a court must consider the objectives of ERISA and the nature of the effect of the state law on ERISA-covered plans. The purpose of the ERISA pre-emption requirement is to avoid a multiplicity of regulation and permit nationally uniform administration of employee benefit plans. The court held that uniformity is impossible if plans are subject to different obligations in different states and noted that the requirements of the Maryland act conflict with the laws of at least two other jurisdictions (New York and Suffolk County, NY). The court also noted that the Maryland act conflicts with legislation that is pending in several other states (for example, a law pending in Oklahoma would require employee health care expenditures of 9% for for-profit employers and a pending Minnesota law would require 10%). Thus, a finding of pre-emption would be consistent with the objectives of ERISA.
Additionally, the court held that the law has an effect on ERISA-covered plans by coercing covered employers to increase their contributions to their covered benefit plans.
The court held that its decision is consistent with U.S. Supreme Court decisions interpreting ERISA pre-emption and noted that the Maryland act, unlike the acts addressed in the Supreme Court cases, is "not merely tangentially related to ERISA plans but is focused upon them." Accordingly, the court held that the act "violates ERISA's fundamental purpose of permitting multi-state employers to maintain nationwide health and welfare plans, providing uniform nationwide benefits and permitting uniform national administration."

Employers' Bottom Line:

The court's decision in this case is good news for employers in states in which similar legislation is pending. The decision is well-reasoned and, although subject to appeal to a higher federal court, may impact whether similar legislation will be passed in other states. We will continue to keep you advised regarding this developing area of law.