Legal Issues Relating to State Health Care Regulation: ERISA Preemption and Fair Share Laws

Prepared for Members and Committees of Congress

In the absence of comprehensive federal health care reform, states and localities have undertaken
certain initiatives in an effort to expand the provision of health care to residents. One type of
measure has been the fair share law, which generally requires employers to choose between
paying a certain amount towards health expenditures or coverage for their employees, or
contributing to a state or locality to offset the cost of medical expenses for uninsured residents.
Questions have been raised as to whether fair share laws can be preempted by the Employee
Retirement Income Security Act (ERISA). This report provides an overview of ERISA
preemption, discusses legal challenges to fair share laws, and analyzes the fair share requirements
included as part of the Massachusetts Health Care Reform Act.

Introduc tion ............................................................................................................................... 1
ERISA Preemption....................................................................................................................1
Fair Share Laws and ERISA.....................................................................................................3
Maryland ....................................................................................................................... ...... 3
Suffolk County....................................................................................................................5
San Francisco......................................................................................................................6
Massachusetts’s Fair Share Requirement..................................................................................9
Author Contact Information..........................................................................................................12

In response to an increasing number of uninsured individuals, the declining number of employers
offering insurance to their employees, and the absence of federal action, states and localities have
experimented with certain measures to address the problems of health care financing and access.
One approach has been to enact fair share laws, also referred to as “pay or play” statutes, which
generally require employers to choose between paying a certain amount for health expenditures
or coverage for their employees, or contributing to the state or locality to offset the cost of
medical expenses for their uninsured residents. Recently, questions have been raised as to
whether the Employee Retirement Income Security Act’s (ERISA’s) express preemption
provision, Section 514, prevents the application of fair share laws. There have been legal
challenges to fair share laws enacted in Maryland, San Francisco, and Suffolk County, New York,
with courts reaching varying conclusions. In addition, the state of Massachusetts, which has
received a great deal of attention for enacting comprehensive health care reform, maintains a fair
share requirement as part of its health care reform package. This report provides an overview of
ERISA preemption, discusses legal challenges that have been brought against fair share laws, and
discusses the fair share requirements of the Massachusetts Health Care Reform Act.
ERISA provides a comprehensive federal scheme for the regulation of employee pension plans,
and a somewhat less detailed scheme for regulating welfare benefit plans, offered by private
employers. An “employee welfare benefit plan” is defined, in relevant part, as
any plan, fund, or program ... established or maintained by an employer ... for the purpose of
providing for its participants or their beneficiaries, medical, surgical, or hospital care or 1
benefits, or benefits in the event of sickness, accident, disability, death or unemployment ...
Although ERISA does not require an employer to offer pension or welfare benefits, it does
mandate compliance with its provisions if such benefits are offered.
Congress enacted ERISA to eliminate the conflicting and inconsistent regulation of pension and
employee welfare benefit plans by state laws. Accordingly, Section 514(a) of ERISA expressly
preempts “any and all State laws insofar as they may now or hereafter relate to any employee 2
benefit plan ...” The U.S. Supreme Court has interpreted this language as applying to any state 3
law that “has a connection with or reference to such a plan.” The Court has explained that to
determine whether a state law has a connection with an ERISA plan, a court must consider the
objectives of ERISA as a guide to the scope of the statute that Congress understood would 4
survive, as well as the nature of the effect of the state law on ERISA plans. A state law has a

1 29 U.S.C. § 1002(1). See 29 U.S.C. § 1002(7) (defining the termparticipant as “any employee or former employee
of an employer, or any member or former member of an employee organization, who is or may become eligible to
receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of
such organization, or whose beneficiaries may be eligible to receive any such benefit.”); 29 U.S.C. § 1002(8) (defining
the term “beneficiaryas “a person designated by a participant, or by the terms of an employee benefit plan, who is or
may become entitled to a benefit thereunder.”).
2 29 U.S.C. § 1144(a). ERISA does exempt from preemption certain laws, including generally applicable criminal laws,
the Hawaii Prepaid Health Care Act, and state insurance laws regulating multiple employer welfare arrangements.
3 See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1982).
4 See California Div. of Lab. Standards Enforcement v. Dillingham Construction, 519 U.S. 316 (1997).

reference to an ERISA plan if it acts “immediately and exclusively” on ERISA plans or if the 5
existence of such a plan is essential to the law’s operations.
A state law that “relates to” an ERISA plan may avoid preemption if it regulates insurance within
the meaning of ERISA’s “saving clause.” Section 514(b)(2)(A) “saves” from preemption “any 6
law of any State which regulates insurance, banking, or securities.” However, an additional
clause serves as an exception to ERISA’s saving clause. Section 514(b)(2)(B), ERISA’s “deemer
clause,” indicates that a state law that “purport[s] to regulate insurance” cannot deem an 7
employee benefit plan to be an insurance company for purposes of regulation.
Until 1995, the Court’s decisions on ERISA preemption suggested generally that the application
of Section 514(a) was limitless. However, with its decision in New York State Conference of Blue
Cross & Blue Shield Plans v. Travelers Ins. Co., the Court began to show a greater willingness to 8
uphold various state laws.
In Travelers, several commercial insurers challenged a state law that required them, but not Blue
Cross and Blue Shield, to pay surcharges on hospital services. The commercial insurers argued
that the law was preempted by ERISA because it “relate[d] to” employer-sponsored health
insurance plans. In addressing the application of ERISA’s preemption clause, the Court first noted 9
that there is a “presumption that Congress does not intend to supplant state law.” The Court then
considered whether Congress intended to preempt state law by looking to “the structure and 10
purpose” of ERISA. The Court concluded that “nothing in the language of the Act or the context
of its passage indicates that Congress chose to displace general health care regulation, which 11
historically has been a matter of local concern.”
Although the Court continued to uphold several other state laws following Travelers,12 it
nevertheless concluded in 2001 that a Washington state law was preempted by ERISA despite the
fact that it gave plans an option for avoiding its requirements. The Washington law at issue in
Egelhoff v. Egelhoff provided that the designation of a spouse as the beneficiary of a nonprobate 13
asset would be revoked automatically upon divorce. Under the law, plan administrators were
required to alter the terms of a plan to indicate that the plan would not follow the law. It was
argued that the law not only avoided the regulation of plan administration, but also did not apply
so long as the plan documents expressly provided otherwise.

5 Id. at 325.
6 29 U.S.C. § 1144(b)(2)(A).
7 29 U.S.C. § 1144(b)(2)(B). See Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 733 (1984) (discussing
ERISAs “saving clause” and “deemer clause”).
8 514 U.S. 645 (1995).
9 Id. at 654.
10 Id. at 655.
11 Id. at 661. In analyzing whether the state surcharges violated ERISAs preemption provision, the Court stated, “In
Shaw, we explained that ‘a law “relates to” an employee benefit plan, in the normal sense of the phrase, if it has a
connection with or reference to such a plan.’ The latter alternative, at least, can be ruled out ... [T]he surcharge statutes
cannot be said to makereference to’ ERISA plans in any manner. Id. at 656 (citations omitted).
12 See, e.g., De Buono v. NYSA-ILSA Medical and Clinical Services Fund, 520 U.S. 806 (1997) (state tax on gross
receipts of health care facilities not preempted by ERISA); California Div. of Labor Standards Enforcement v.
Dillingham Constr., 519 U.S. 316 (1997) (Californias prevailing wage law not preempted by ERISA).
13 532 U.S. 141 (2001).

The Court determined that the Washington law had an impermissible connection with ERISA
plans because it interfered with nationally uniform plan administration. The Court explained that
one of the principal goals of ERISA is to enable employers to establish a uniform administrative
scheme that provides standard procedures for the processing of claims and disbursement of
benefits. The Court maintained that uniformity is impossible if plans are subject to different legal
obligations in different states. Moreover, the Court declined to find the law saved from
preemption because of its “opt out” option:
It is not enough for plan administrators to opt out of this particular statute. Instead, they must
maintain a familiarity with the laws of all 50 States so that they can update their plans as
necessary to satisfy the opt-out requirements of other, similar statutes ... Thistailoring of
plans and employer conduct to the peculiarities of the law of each jurisdiction is exactly the 14
burden ERISA seeks to eliminate.
The fair share laws discussed in this report present similar questions about preemption and the
impact of a plan or plan sponsor’s ability to choose from various compliance options.
Courts have evaluated fair share laws enacted in Maryland, Suffolk County, New York, and San
Francisco, with varying results.
In January 2006, Maryland became the first state to adopt legislation that would have required
for-profit employers with 10,000 or more employees in the state to either spend at least 8% of
their total payroll costs on employee health insurance costs, or pay to the state the amount their 15
spending fell short of that percentage. Shortly after the Fair Share Health Care Fund Act (Fair
Share Act) was enacted, the Retail Industry Leaders Association (RILA), a retail trade association
that includes Wal-Mart as a member, challenged the measure on the grounds that it was 16
preempted by ERISA. In January 2007, the U.S. Court of Appeals for the Fourth Circuit
affirmed the decision of a federal district court that found the Fair Share Act to be preempted by 17
Prior to enactment of the Fair Share Act, the Maryland General Assembly heard extensive
testimony about the rising costs of the Maryland Medical Assistance Program, which provides 18
access to health care services for the state’s low-income residents. The General Assembly also
received information concerning Wal-Mart’s failure to provide adequate health benefits to its

14 Id. at 151 (quoting Ingersoll-Rand v. McClendon, 498 U.S. 133, 142 (1990).
15 2006 Md. Laws 1.
16 RILA also alleged that the Fair Share Act violated the Equal Protection Clause of the U.S. Constitution. See Retail
Industry Leaders Association v. Fielder, 435 F.Supp.2d 481 (D. Md. 2006).
17 RILA v. Fielder, 475 F.3d 180 (4th Cir. 2007). In November 2006, the U.S. Dept. of Labor filed an amicus brief in
support of RILA and the preemption of the Fair Share Act. See Brief of the Secretary of Labor as Amicus Curiae th
Supporting Plaintiff-Appellee and Requesting Affirmance, RILA v. Fielder, 475 F.3d 180 (4 Cir. 2007) (No. 06-1840,
18 Fielder, 475 F.3d at 183.

employees, and Wal-Mart employees and dependents enrolling in Medicaid and the state 19
children’s health insurance program.
Wal-Mart would have been the only for-profit employer in Maryland to be subject to the Fair 20
Share Act. Other for-profit employers with at least 10,000 employees in Maryland either 21
satisfied the Fair Share Act’s 8% threshold or were exempted from the measure.
James D. Fielder Jr., Maryland’s Secretary of Labor, Licensing, and Regulation and the defendant
in the case, made two arguments in favor of upholding the Fair Share Act. First, the Secretary
contended that the Fair Share Act was a revenue statute of general application and not one that
involved an employer’s provision of health care benefits. He asserted that the revenue from the
“payroll tax” imposed under the Fair Share Act would fund the Fair Share Health Care Fund
established under the measure, which would be used to offset the costs of the Maryland Medical 22
Assistance Program.
Second, the Secretary argued that the Fair Share Act did not have a connection with employee 23
benefit plans because an employer could act in ways that did not involve such plans. For
example, an employer could increase health care spending by establishing on-site medical clinics
or by contributing more money to employees’ health savings accounts. An employer could also
refuse to increase benefits under an ERISA plan and simply pay the amount by which its spending 24
fell short of the measure’s 8% threshold.
The Fourth Circuit rejected both of the Secretary’s arguments. Acknowledging the legislative
history of the Fair Share Act and what the Maryland General Assembly knew at the time of its
consideration, the court indicated that the measure “could hardly be intended to function as a 25
revenue act of general application.” The court stated,
[L]egislators and interested parties uniformly understood the Act as requiring Wal-Mart to
increase its healthcare spending. If this is not the Acts effect, one would have to conclude,
which we do not, that the Maryland legislature misunderstood the nature of the bill that it
carefully drafted and debated. For these reasons, the amount that the Act prescribes for
payment to the State is actually a fee or a penalty that gives the employer an irresistible 26
incentive to provide its employees with a greater level of health benefits.
In response to the Secretary’s second argument, the Fourth Circuit distinguished the Fair Share
Act from state laws that were found to not be preempted by ERISA. Citing Travelers, the court
noted that the Supreme Court upheld the state law in that case because it did not act directly upon 27
employers or their plans, but merely created “an indirect economic influence” on plans. In

19 Id. at 184.
20 Id. at 185.
21 Id.
22 Id. at 190.
23 Id. at 194-95.
24 Id. at 195.
25 Id. at 194.
26 Id.
27 Id. at 195 (citing New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645,
659 (1995)).

contrast, the Fourth Circuit found that the Fair Share Act “directly regulates employers’ 28
structuring of their employee health benefit plans.” The court indicated that “the only rational
choice employers have” is to structure their ERISA health care benefit plans so as to meet the 29
minimum spending threshold.
The availability of alternatives to increase health care spending without affecting an ERISA plan
did not persuade the Fourth Circuit. The court noted that from an employer’s perspective, the
categories of ERISA and non-ERISA health care spending would not be isolated, unrelated costs:
“Decisions regarding one would affect the other and thereby violate ERISA’s preemption 30
The dissent maintained that the Fair Share Act was not preempted by ERISA because it offered a 31
means of compliance that does not impact ERISA plans. The dissent explained that an employer
could comply with the measure by paying an assessment or increasing spending on employee
health insurance. By not expressing a preference for one method over the other, the dissent 32
concluded that the act is not preempted. The dissent suggested that preemption would be more
likely if the Fair Share Act dictated a plan’s system for processing claims, paying benefits, or 33
determining beneficiaries. However, any burden imposed on ERISA plans by the Fair Share Act 34
was “simply too slight to trigger ERISA preemption.”
On April 16, 2007, the Maryland Attorney General announced that his office would not seek 35
review of the Fourth Circuit’s decision by the Supreme Court.
Under the Suffolk County Act, covered employers would have been required to make specified
minimum employee health care expenditures. Employers with health care expenditures below the
specified level would have been required to pay a penalty equal to the shortfall. The Suffolk
County Act defined the term “health care expenditure” to mean any amount paid by a covered
employer to its employees or to another party for the purpose of providing health care services or
reimbursing the cost of such services for employees or their families, including contributions to 36
health savings accounts and expenditures to operate a workplace health clinic.
The Suffolk County Act defined a “covered employer” as “any person that operates at least one
retail store located in Suffolk County where groceries or other foods are sold for off-site
consumption” and that meets one of the following requirements: (1) 25,000 square feet or more of
the store’s selling area floor space is used for the sale of groceries or other foods for off-site

28 Fielder, 475 F.3d at 195.
29 Id. at 193.
30 Id. at 197.
31 Id. at 198.
32 Id. at 201.
33 Id. at 202.
34 Id.
35 Maryland Attorney General Will Not Seek Supreme Court Review of “Fair Share” Law, Daily Lab. Rep. (BNA) No.
73 (Apr. 17, 2007).
36 See RILA v. Suffolk County, 497 F.Supp.2d 403, 407 (E.D.N.Y. 2007).

consumption; (2) 3% or more of the store’s selling area floor space is used for the sale of
groceries or other foods for off-site consumption and the store contains at least 100,000 square
feet of selling area floor space; or (3) the retail store had total annual revenues of $1 billion or
more in the most recent calendar year and the sale of groceries comprises more than 20% of the 37
company’s revenue. The definition for “covered employer” appeared to reflect the Suffolk
County Act’s express legislative intent to protect small retailers from large employers that did not 38
provide health care for employees.
RILA contended that the Suffolk County Act was preempted by ERISA because it mandated a
certain level of health care benefits for employers, interfered with the uniform national
administration of benefit plans, and imposed reporting requirements beyond those prescribed by
ERISA. To bolster its position, RILA cited Fielder and asserted that the Suffolk County Act
should be found similarly preempted.
Although the court noted that it was not bound by the Fourth Circuit’s decision, it nevertheless
indicated that the Suffolk County Act was “substantially similar” to the Fair Share Act, and that it 39
was “in accord with the Fourth Circuit’s well reasoned and comprehensive analysis.” The court
rejected the county’s claim that a state law is not preempted by ERISA where the existence of a
plan is not necessary to be in compliance with the state law. The county had argued that the
Suffolk County Act did not require the establishment or modification of an ERISA plan, and that
a company had various options for complying with the law.
Quoting Fielder, the court maintained that the only rational choice for covered employers under
the Suffolk County Act was “to structure their ERISA health care benefit plans to meet the 40
minimum spending threshold.” Because covered employers would have been forced to change
how their employee benefit plans would be structured, the court concluded that the Suffolk
County Act had an “obvious connection with employee benefit plans” and thus, was preempted 41
Like the Suffolk County Act, the San Francisco Health Care Security Ordinance requires covered
employers to make minimum health care expenditures on behalf of covered employees. “Covered
employers” are defined by the Ordinance as employers engaged in business within the city that 42
have an average of at least 20 employees performing work for compensation during a quarter.
The term also applies to nonprofit corporations with an average of at least 50 employees 43
performing work for compensation during a quarter. A “covered employee” under the Ordinance
is defined as any individual who works in the city and county of San Francisco, works at least 10

37 Suffolk County Reg. Local Law § 325-2.
38 Suffolk County, 497 F.Supp.2d at 408.
39 Id. at 416.
40 Id. at 417 (internal quotation marks omitted).
41 Id. at 418 (internal quotation marks omitted).
42 See Golden Gate Restaurant Assn v. City and County of San Francisco, Nos. 07-17370, 07-17372, 2008 WL
4401387, at *2 (9th Cir. Sept. 30, 2008).
43 Id.

hours per week, has worked for his employer for at least 90 days, and is not excluded from 44
coverage by other provisions of the Ordinance.
The San Francisco Ordinance identifies various qualifying health care expenditures, including
contributions to health savings accounts and payments to a third party for the purpose of
providing health care services for covered employees. Covered employers may also satisfy the
Ordinance’s spending requirement by making payments directly to the city. Regulations that
implement the Ordinance confirm that a covered employer has discretion with regard to the type 45
of health care expenditure it chooses to make for its covered employees.
In Golden Gate Restaurant Association v. City and County of San Francisco, a California federal
district court concluded that the San Francisco Ordinance was preempted by ERISA because it 46
related to employee benefit plans. The court determined that the Ordinance had an
impermissible connection with employee welfare benefit plans and made unlawful reference to
such plans. The court observed,
By mandating employee health benefit structures and administration, [the health care
expenditure] requirements interfere with preserving employer autonomy over whether and
how to provide employee health coverage and ensuring uniform national regulation of such 47
The court maintained that the San Francisco Ordinance had an impermissible connection with
employee benefit plans not only because it required a certain level of benefits typically provided 48
by ERISA plans, but because it affected the structure of existing plans. Employers were
required to either modify the administration of existing plans or make additional payments with
reference to the amounts paid under such plans to comply with the Ordinance.
The court also explained that the San Francisco Ordinance made unlawful reference to employee
benefit plans in two ways. First, it specifically referenced the existence of ERISA plans in its 49
expenditure requirements provisions. Second, liability under the Ordinance was determined
exclusively with reference to employer-sponsored health benefits that were provided mostly 50
under existing ERISA plans. In other words, to determine liability, the Ordinance required an
examination of how much an employer paid for employee health coverage under these existing
In September 2008, the Ninth Circuit reversed the district court’s decision and concluded that
ERISA does not preempt the San Francisco Ordinance. On appeal, the court addressed two
arguments espoused by the Golden Gate Restaurant Association. First, the Association contended
that the so-called “city-payment option,” which allows covered employers to make payments to

44 Id.
45 Id. at *3.
46 535 F.Supp.2d 968 (N.D. Cal. 2007). The court explained that the analysis of whether a state law is preempted by
ERISA follows one of two pathsif the law is either found to be connected with or to make reference to an ERISA
plan, the law is found to be preempted.
47 Id. at 975.
48 See id. (observing that the provisions of the Ordinance cannot operate successfully without the existence of employee
welfare benefit plans).
49 Golden Gate Restaurant Ass’n, 535 F.Supp.2d at 978.
50 Id.

the city to satisfy the Ordinance’s requirements, establishes an ERISA plan. Thus, the Association
maintained that the Ordinance impermissibly relates to an ERISA plan. Second, the Association
argued that even if the city-payment option does not create an ERISA plan, the Ordinance
requires an employer to make health care expenditures that relate to the ERISA plans of covered
employers in violation of the statute.
The Association believed that the city-payment option established an ERISA plan because of the
administrative obligations that are imposed on employers by the Ordinance. The Ninth Circuit,
however, found that the Ordinance imposed only minimal administrative duties on employers that
chose the city-payment option. The court observed, “Under the Ordinance, an employer has no
responsibility other than to make the required payments for covered employees, and to retain 51
records to show that it has done so.”
In addition, the Ninth Circuit declined to apply criteria that had been used previously to identify
the existence of an ERISA plan based on the notion that plan creation requires only that a
reasonable person can ascertain the intended benefits, beneficiaries, source of financing, and 52
procedures for receiving benefits. The court noted that this criteria has been employed only in
cases that involve some type of unwritten or informal promise made by an employer to its 53
employees. The court maintained that the criteria has never been used to evaluate arrangements
required by state or local law.
The Ninth Circuit evaluated the Association’s argument that the San Francisco Ordinance
impermissibly relates to the ERISA plans of covered employers by examining whether the
Ordinance and its health expenditure requirements have a connection with or reference to such
plans. After conducting this two-part inquiry, the court concluded that the Ordinance does not
relate to an ERISA plan, and is thus not preempted by the statute.
The Ninth Circuit distinguished the San Francisco Ordinance from other laws that have been
found to have a connection with an ERISA plan. Citing Egelhoff, for example, the court noted
that unlike the Washington law at issue in that case, the Ordinance does not bind plan
administrators to a particular choice of rules for determining plan eligibility or entitlement to 54
particular benefits. The court further explained that the Ordinance does not require employers to
structure their employee benefit plans in a particular manner or to provide specific benefits.
The Ninth Circuit also determined that the San Francisco Ordinance does not have an unlawful
reference to an ERISA plan. The court found that the Ordinance does not act immediately and
exclusively on ERISA plans, and that the existence of ERISA plans is not essential to the
operation of the Ordinance. The court observed the following:
[T]he Ordinance can have its full force and effect even if no employer in the City has an
ERISA plan. Covered employers without ERISA plans can discharge their obligation under 55
the Ordinance simply by making their required health care expenditures to the City.

51 Golden Gate Restaurant Ass’n, 2008 WL at *9.
52 Id. at *10-*11.
53 See id. (citing Scott v. Gulf Oil Corp., 754 F.2d 1499 (9th Cir. 1985); Modzelewski v. Resolution Trust Corp., 14
F.3d 1374 (9th Cir. 1994); Winterrowd v. American General Annuity Ins. Co., 321 F.3d 933 (9th Cir. 2003)).
54 Golden Gate Restaurant Ass’n, 2008 WL at *15.
55 Id. at *16.

The court further noted that an employer’s obligations under the Ordinance are based on the
hours worked by its employees, and not on the value or nature of benefits available to ERISA
plan participants.
Finally, the Ninth Circuit responded to the Association’s concern of a “circuit split” with the
Fourth Circuit if it upheld the San Francisco Ordinance. The court emphasized that the Ordinance
does not require employers to structure their employee health care plans to provide a certain level
of benefits. In contrast, the court maintained, the Maryland Fair Share Act did not provide
meaningful alternatives to comply with the law. Covered employers were given an “irresistible 56
incentive” to provide employees with a greater level of health benefits.
In 2006, Massachusetts enacted “An Act Providing Access to Affordable, Quality, Accountable
Health Care,” considered to be the most comprehensive health care reform legislation ever 57
enacted by a state. The act has received a great deal of attention, in part due to the fact that it is
the first state law to require residents to obtain and maintain health care coverage or be subject to 5859
adverse tax consequences. The act establishes a “Connector” through which individuals and
small groups may obtain health coverage, and creates numerous requirements for private insurers 60
as well as employers. One of the employer requirements is a fair share requirement. There has
been speculation over whether this requirement of the Massachusetts Act could be preempted by 61
Under the act, employers with more than 11 full-time equivalent employees that do not make a 62
“fair and reasonable” contribution to a group health plan for their employees’ health coverage

56 Id. at *19. On October 21, 2008, the Golden Gate Restaurant Association filed a petition for rehearing en banc (full
court) to the U.S. Court of Appeals for the Ninth Circuit. The Association argues that the decision by the three-judge
panel of the Ninth Circuit is inconsistent with ERISA preemption precedent and ignores the purpose of the statute’s
regulatory regime. For additional information on the petition, see Restaurant Group Seeks En Banc Review of Ninth
Circuit’s ERISA Preemption Ruling, Pens. & Ben. Daily (BNA) (Oct. 23, 2008).
57 Anthony Ten Haagen, Surviving Preemption: The Importance of Chapter 5 in the Context of America’s Health Care
Crisis, 33 American Journal of Law and Medicine 663 (2007).
58 MASS. GEN. LAWS ch. 111M, § 2 (2008). Under this provision of the act, Massachusetts residents are only required to
purchase coverage that is deemed affordable. Thus, Massachusetts residents may be exempted from the individual
mandate if they can demonstrate that, based on their income and other factors, they do not meet certain affordability
standards. See 956 C.M.R. 600 et. seq. (regulations addressing the affordability standards).
59 The Commonwealth Health Insurance Connector is one of the most significant parts of the act. The Connector is an
independent public entity that facilitates access to private insurance plans for small employers and individuals. The
Connector assists individuals who are not offered insurance by a large employer (one with more than 50 employees)
that pays part of the premium. See MASS. GEN. LAWS. ch. 176Q.
60 For a broader discussion of the acts requirements, seeCRS Report RS22447, The Massachusetts Health Reform
Plan: A Brief Overview, by April Grady.
61 See, e.g., Amy B. Monahan, Symposium: The Massachusetts Plan and the Future of Universal Coverage: Regulatory
Issues: Pay or Play Laws, ERISA Preemption, and Potential Lessons from Massachusetts, 55 Kan. L. Rev. 1203
(2007); Marcia S. Wagner and Barry M. Newman, Will ERISA Preemption Derail Massachusetts Health Care Reform?
23 Tax Management Financial Planning Journal, No. 6., (June 19, 2007). Edward Zelinsky, Article: The New
Massachusetts Health Law: Preemption and Experimentation, 49 Wm. and Mary L. Rev. 229, 268 (2007). It is
important to note that there may be other provisions of the Massachusetts Act susceptible to an ERISA preemption
challenge. See, e.g., id. at 268 (2007) (tax expert Edward Zelinsky argues that the requirement for individuals to have
coverage is preempted by ERISA). This report only discusses the fair share requirements of the Massachusetts Act.
62 For purposes of the Massachusetts statute, a group health plan is defined asa plan (including a self-insured plan) of,

must pay a “fair-share contribution” into a state trust fund in order to help cover costs of health 63
care provided to uninsured Massachusetts residents. Regulations set forth two alternative tests to
determine whether an employer has made a fair and reasonable contribution. Under the “primary
test,” an employer has made a fair and reasonable contribution if 25% or more of its employees 64
who are employed at Massachusetts locations are enrolled in the employer’s health plan. Under
the “secondary test,” an employer who fails the primary test, but offers to pay at least 33% of the
cost of premiums of a group health plan offered to full-time employees employed over a certain 65
time period, meets the contribution requirements. If the employer cannot meet either of these
tests, the employer must make a fair-share contribution, which is required to be calculated
annually and takes into account factors such as the cost of the state-funded care used by the 66
employees of non-contributing employers. However, the fair-share contribution amount cannot 67
exceed $295 per employee.
Despite speculation that the Massachusetts Act would be subject to a preemption challenge under 68
ERISA, to date, no actions have been brought. If the fair share provisions were to be challenged,
it is likely that a reviewing court would look to the Travelers case and its progeny in making its
determination. Similar to those cases, a court may evaluate whether the Massachusetts fair share
requirements have a “connection with” ERISA plans by looking to ERISA’s objectives (e.g.,
establishing uniform, nationwide regulation of employee benefit plans) “as a guide to the scope of 69
the state law that Congress understood would survive” preemption. A reviewing court may also
look to the “nature of the law’s effect on ERISA plans” (i.e., whether the Massachusetts fair share
requirements mandate the structure or administration of employee benefit plans, or have more of 70
an indirect influence on ERISA plans). In addition, a reviewing court could examine whether
the fair share requirements of the Massachusetts Act have a “reference to” an employee benefit
plan. As stated by the Supreme Court, “where a State’s law acts immediately and exclusively
upon ERISA plans ... or where the existence of ERISA plans is essential to the law’s operation ... 71
that ‘reference’ will result in pre-emption.” Further, a court could also rely on or distinguish the
fair share requirements of the Massachusetts Act from the Egelhoff case. As the Court held in
Egelhoff, a law that regulates the structure or administration of an ERISA plan will not be saved
from preemption just because there is a way to opt out of its requirements.

or contributed to by, an employer (including a self-employed person) or employee organization to provide health care
... to the employees, former employees, the employer, others associated or formerly associated with the employer in a
business relationship, or their families.” MASS. GEN. LAWS ch. 149, § 188(a) (2008) (citing 26 U.S.C. § 5000(b)(1)).
63 MASS. GEN. LAWS ch. 149, § 188 (2008).
64 114.5 MASS CODE REGS 16.03(1)(a) (2008).
65 114.5 MASS CODE REGS 16.03(1)(b) (2008). It should be noted that the Massachusetts Division of Health Care
Finance and Policy has adopted regulations that would, among other things, require employers with 51 or more full-
time employees to meet both the primary and secondary tests, or have at least 75% of their full-time employees
enrolled in the health plan. This new requirement will take effect on January 1, 2009. The regulations are available at
66 114.5 MASS CODE REGS 16.04 (2008).
67 MASS. GEN. LAWS ch. 149, § 188 (2008).
68 See Joan Indiana Rigdon, Universal Health Care? Washington Lawyer, Vol. 22, No. 11 at 27-28 (2008) (discussing
speculation of why the Massachusetts Act has not been challenged).
69 Dillingham Construction, 519 U.S. at 325 (quoting Travelers, 514 U.S. at 658-59).
70 Id.
71 Id.

It is also possible that a reviewing court could adopt similar reasoning used by courts in 72
evaluating other fair share laws. For example, as discussed above, in Fielder, the Fourth Circuit
found the Maryland Fair Share Act was preempted because it effectively forced employers to
restructure their employee health plans, and as such, interfered with ERISA’s goal of providing 73
uniform nationwide administration of these plans. The Fielder court opined that just because an
employer had the option not to spend money on health care for their employees, this option was
not a “meaningful alternative” and did not protect the law from preemption. A court evaluating
the fair share requirements of the Massachusetts Act could make arguments similar to those
articulated in the Fielder case. Like Maryland’s fair share law, the Massachusetts Act provides
that employers covered by the act must either make a contribution towards employee health
benefits, or contribute to a state trust fund. And, as argued in Fielder, any “reasonable employer”
would choose not to pay money to a state when it can, in the alternative, reap benefits from 74
spending money on employee health care.
Some commentators have pointed out that compared to the Maryland Fair Share Act, the
Massachusetts Act requires a relatively small amount (i.e., no more than $295 per employee) to 75
be paid to the state, as a “penalty” for not offering health coverage. It may be argued that since
the Massachusetts fair share contribution amount is relatively small, it does not bind the choices 76
of employers, as the court found in Fielder. Still, despite this smaller “penalty,” a court may still
see the Massachusetts fair share scheme as a means of coercing an employer to offer health
coverage and thus, not escape ERISA preemption.
In addition, it is possible to argue that the Massachusetts fair share requirements may be more
susceptible to preemption than the Fielder and Suffolk County cases. This is because the
Massachusetts Act requires employers to pay the fair and reasonable premium contribution
amounts to a group health plan (which is likely regulated by ERISA), in order to avoid making a
fair-share contribution to the state. Under Maryland and Suffolk County’s fair share laws,
employers had some choices as to how an employer could make these expenditures (e.g., under
the Maryland’s fair share law, expenditures could be made towards an on-site medical clinic).
Given that the Fielder and Suffolk County courts found that requiring an employer to pay these
health care expenditures directly affected employers’ ERISA plans, it may be argued that
requiring employers to contribute to a group health plan (versus contributing money to the state) 77
creates an impermissible “reference to” an employee benefit plan.

72 It is important to point out that if the Massachusetts Act was to be challenged on preemptive grounds, it would likely
be in the First Circuit. If a preemption challenge was brought in this circuit, a court would not be bound to follow any
of the previous fair share cases discussed above, but could still rely on these cases in support of its decision.
73 The Department of Labor, in an Amicus brief, had argued for this result. It was argued that[b]y setting an aggregate
amount (by percentage of payroll) affected employers must spend on employee health benefits, Maryland is taking
away employers fundamental authority over whether, and on what terms, to sponsor a plan, and potentially subjecting
employers to the competing demands of a multiplicity of state and local regulatory schemes.” Brief of the Secretary of
Labor as Amicus Curiae, supra note 17.
74 These benefits include employee retention and the ability to attract better employees. See Fielder, 475 F.3d at 193.
75 See, e.g., Monahan, 55 Kan. L. Rev. at 1214 (“Because of the modest—or weak—penalty associated with the fair
share contribution, it will likely survive an ERISA preemption challenge because it is a mere indirect economic
incentive for a plan administrator to make certain choices with respect to its health care plan.)
76 See Golden Gate Restaurant Ass’n, 2008 WL at *19, where the Ninth Circuit, in upholding the San Francisco
Ordinance, distinguished the Ordinance from the Maryland Fair Share Act because the Ordinance offers employers a
“realistic alternative” to creating or amending an ERISA plan.
77 See Zelinsky, 49 Wm and Mary L. Rev. at 257.

Alternatively, if a court were to review the Massachusetts Act, it could sustain the fair share
requirements by applying the reasoning used by the Ninth Circuit in Golden Gate Restaurant
Association. As discussed above, the Ninth Circuit, in explaining why the Ordinance had no
“connection with” an ERISA plan, pointed to the fact that the San Francisco Ordinance did not
require an employer to adopt an ERISA or other health plan, or provide specific benefits through
such plans. Because an employer could discharge its obligations in whole or in part to an ERISA
plan, or in whole or in part to the city, the Ordinance preserved ERISA’s uniform regulatory 78
regime and was not preempted. A similar argument could be made for the Massachusetts fair
share requirement, as an employer is not required to establish an ERISA health plan, or provide 79
any health benefits to its employees. The Ninth Circuit also found that the Ordinance does not
make reference to an ERISA plan because, among other things, it “does not act on ERISA plans at
all, let alone immediately and exclusively” and is “fully functional” in the absence of an ERISA 80
plan. Again, it may be argued that the Massachusetts Act does not “solely apply” to ERISA
plans, and that the formation of a plan is not essential for meeting the requirements of the 81
Massachusetts Act.
Jon O. Shimabukuro Jennifer Staman
Legislative Attorney Legislative Attorney, 7-7990, 7-2610

78 Golden Gate Restaurant Ass’n, 2008 WL at *15.
79 It should be noted that Massachusetts does require employers to establish a cafeteria plan. MASS. GEN. LAWS ch.
151F, § 2 (2008). Cafeteria plans are employer-established benefit plans under which employees may choose between
receiving cash (typically additional take-home pay) and certain normally nontaxable benefits (such as employer-paid
health insurance) without being taxed on the value of the benefits if they select to receive the latter. See 26 U.S.C. §
125. The Department of Labor has taken the position that cafeteria plans are not ERISA plans. See U.S. Dep’t of Labor
Advisory Opinion 96-12A (July 17, 1996). See also Edward Zelinsky, Article: The New Massachusetts Health Law:
Preemption and Experimentation, 49 Wm. and Mary L. Rev. at 264-65 (...ERISA does not preempt [Massachusettss]
requirement that employers maintain cafeteria plans qualifying under Code section 125. Such cafeteria plans are not
ERISA regulated welfare plans.”)
80 Golden Gate Restaurant Ass’n, 2008 WL at *16-*18.
81 See id. (quoting Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 829-30 (1988).