Pension & Benefits News ERISA does not preempt Seattle’s health benefits ordinance
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Friday, May 29, 2020

ERISA does not preempt Seattle’s health benefits ordinance

By Pension and Benefits Editorial Staff

Seattle’s health benefits ordinance, which requires large hotel employers to either provide health insurance coverage or make payments to or on behalf of employees for such coverage, is not preempted by ERISA because it does not require the creation of an ERISA plan where the direct-to-employee payment option is akin to regular wages, a federal district court in Washington ruled. Granting the City of Seattle’s motion to dismiss, the court also found the ordinance lacks a "connection with" or "reference to" an ERISA plan.

Healthcare expenditures. In September 2019, the Seattle City Council passed Seattle Municipal Code (SMC) 14.28, which requires large hotel employers and ancillary hotel businesses to make "healthcare expenditures" on behalf of covered employees. The ordinance requires covered employers to make monthly expenditures of $420 for each employee, $714 for each employee with only dependents, $840 with each employee with only a spouse or domestic partner, and $1,260 for each employee with a spouse or domestic partner and dependents.

Covered employers can satisfy their payment obligation through either (1) additional compensation paid directly to the covered employee; and/or (2) payments to a third party, such as an insurance carrier, for the purpose of providing health care services; and/or (3) average per-capita monthly expenditures made to or on behalf of covered employees to the employer’s self-insured/funded insurance program. The ordinance also requires covered employers to retain records documenting compliance and contains enforcement provisions permitting the city to level fines and penalties. The ordinance is scheduled to go into effect on July 1, 2020, or on the earliest annual open enrollment period for health coverage thereafter.

The ERISA Industry Committee (ERIC) seeks to enjoin SMC 14.28 on the basis that it is preempted by ERISA. The City of Seattle filed this motion to dismiss ERIC’s complaint, arguing ERISA does not preempt the ordinance.

Presumption against preemption. As a threshold matter, the court explained that state and local laws enjoy a presumption against ERISA preemption when they "clearly operate" in a field that has been traditionally occupied by the states. Here, the ordinance "clearly operates" to ensure health benefits for covered Seattle employees. Thus, the ordinance is entitled to a presumption against preemption by federal law.

Doesn’t require creation of an ERISA plan. Turning to ERIC’s first argument, the court rejected the contention the ordinance is preempted because the existence of an ERISA plan is essential to its operation. ERIC focused its challenge on the direct payment option set forth in SMC 14.28. Under this option, employers pay workers a dollar amount directly. The court found SMC 14.28 does not require the creation of an ERISA plan because the direct-to-employee payment option is not an ERISA plan. The payments under this option are similar to regular wages and can be coordinated with employees’ regular pay periods. In addition, the Ninth Circuit explicitly rejected this exact challenge in Golden Gate Rest. Ass'n v. City & Cty. of San Francisco, where it held that a San Francisco ordinance, similar to this one, requiring businesses to make certain minimum healthcare expenditures on behalf of covered employees was not preempted by ERISA.

In addition, Congress did not intend to regulate payments made directly to employees. ERISA was enacted primarily over concerns of employers’ mismanagement of employee benefit programs. ERISA regulates benefit plans because plans implicate ERISA’s concern regarding an employer’s potential mismanagement and abuse of funds. Here, the minimal recordkeeping and administrative requirements do not give employers the discretion to deny or limit benefits under the ordinance. Therefore, the direct payment option does not run the risk of mismanagement of funds or other abuse.

Lacks a "connection with" an ERISA plan. Next, the court rejected ERIC’s argument that SMC 14.28 has an impermissible "connection with" an ERISA plan because it forces an ERISA plan to adopt a certain scheme of substantive coverage or alter current insured or self-funded coverage. Noting that a state or local law has a "connection with" an ERISA plan if it binds, regulates or dictates the administration of the plan, the court found employers subject to SMC 14.28 have multiple options to comply with the ordinance. They may choose to make those expenditures in "connection with" an existing ERISA plan, establish a new ERISA plan, or make those expenditures directly to the employee. "The direct to employee payments are not, in themselves, ERISA plans," according to the court. Therefore, the ordinance does not contain an impermissible connection with an ERISA plan.

Lacks a "reference to" an ERISA plan. The court also disagreed with ERIC’s final argument that SMC 14.28 is preempted because it makes a "reference to" an ERISA plan by (1) mentioning ERISA plans and (2) turning on the value or nature of the benefits available to ERISA plan participants. The court found the ordinance does not require the existence of an ERISA plan. As in Golden Gate, the ordinance is "fully functional" in the absence of a single ERISA plan.

ERIC also contended the ordinance has an impermissible reference to an ERISA plan because its obligations are measured by the level of benefits provided by the ERISA plan to the employee. The court rejected this argument, finding the ordinance does not measure the required level of payments based on an ERISA plan. Rather, it sets payments on dollar amounts determined by the employee’s status.

Thus, because the dollar amount spending requirements in SMC 14.28 do not establish an ERISA plan and do not create impermissible connections with or reference to ERISA plans, the court found ERISA does not preempt SMC 14.28.

Leave to amend. Lastly, the court denied ERIC leave to amend the complaint. The court is bound by the Ninth Circuit’s precedent in Golden Gate and its application to the ordinance. Any amendment to the complaint would not change the legal conclusion that the ordinance is not preempted by ERISA. Thus, the court granted the City of Seattle’s motion to dismiss and dismissed ERIC’s complaint with prejudice.

SOURCE: The ERISA Industry Committee v. City of Seattle, (W.D. Wash.), No. C18-1188 TSZ, May 8, 2020.

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