Sixth Circuit must rethink whether ERISA preempts Michigan health-insurance tax law

The U.S. Supreme Court has vacated a federal appellate panel’s holding that a Michigan law designed to generate revenue to pay the state’s Medicaid obligations was not preempted by ERISA. The High Court granted a petition filed by the Self Insurance Institute of America, Inc. (SIIA) and remanded the case to the U.S. Court of Appeals for the Sixth Circuit for further consideration in light of the Supreme Court’s recent opinion in Gobeille v. Liberty Mutual Insurance Co.

In 2011, Michigan passed the Health Insurance Claims Assessment Act (Michigan Act), codified at Mich. Comp. Laws Secs. 550.1731–1741, in order to generate revenue to fund Michigan’s obligations under Medicaid. The Michigan Act imposes a one percent tax on all “paid claims” by “carriers” or “third party administrators” to healthcare providers for services rendered in Michigan for Michigan residents. “Carriers” include sponsors of group health plans set up under ERISA (P.L. 93–406), codified at 29 U.S.C. Secs. 1002–1461. In addition to the tax, every carrier and third-party administrator paying the tax must submit quarterly returns with the Michigan Department of the Treasury and keep accurate and complete records and pertinent documents as required by the department. Every carrier and third-party administrator must also develop and implement a methodology by which it will collect the tax.

District court action. SIIA, representing various sponsors and administrators of self-funded ERISA benefit plans, argued that the Supremacy Clause of the U.S. Constitution, Article VI, Sec. 2, and ERISA’s express-preemption provision at 29 U.S.C. Sec. 1144(a) prohibit the application of the Michigan Act to ERISA-covered entities. SIIA filed suit against Rick Snyder, Governor of Michigan; R. Kevin Clinton, Director of the Michigan Office of Financial and Insurance Regulation; and Andrew Dillon, Treasurer of Michigan (collectively “Snyder”) seeking a declaratory judgment that ERISA preempts the Act and an injunction preventing implementation and enforcement of the Act against the ERISA-covered entities. Snyder filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a valid claim, which the district court granted after concluding that the Act did not offend ERISA’s express preemption clause because it did not “relate to” an ERISA-governed benefit plan. SIIA appealed.

Appellate analysis. ERISA contains a broad preemption provision at 29 U.S.C. Sec. 1144(a) that supersedes any and all state laws insofar as they “relate to” any employee benefit plan that falls under the regulation of its comprehensive federal scheme. SIIA contended that ERISA preempts the Michigan Act because the Act has an impermissible connection with employee benefit plans, namely, that it: (1) interferes with the administration of the plans; (2) imposes administrative burdens in addition to those prescribed by ERISA; and (3) interferes with the relationships between ERISA-covered entities. The Sixth Circuit addressed the three contentions and ruled as follows.

Interference with administration. The Sixth Circuit found that the Michigan Act did not require a plan administrator to change how it administers an employee benefit plan at all. The state’s definition of “paid claims” still applies, and the state’s reporting and recordkeeping requirements come into play only when the carriers compute the tax—a function entirely divorced from plan administration. The Michigan Act’s provisions simply do not conflict with the plan or impact its administration, according to the court.

Administrative burdens. The Sixth Circuit agreed that Congress intended ERISA to preempt state laws requiring ERISA entities to file reports related to the plans’ financial stability. This basic conclusion, however, does not mean that Congress intended federal law to bar states from imposing additional administrative burdens unrelated to the plans’ core functions.

Interference with relationships. Finally, the Sixth Circuit also disagreed with SIIA’s claim that the Michigan Act’s limitation of the tax to claims paid on behalf of Michigan residents effectively alters the relationship between plan administrators and plan beneficiaries because the requirement forces the administrators to collect information on beneficiaries’ state of residence. By defining residency by reference to the administrators’ already-existing business records, the Michigan Act leaves the relationship between ERISA-covered entities untouched. As a result, the Sixth Circuit did not believe Congress intended ERISA to preempt the Act’s residency requirement.

The Sixth Circuit affirmed the district court’s dismissal of the suit.

Questions presented. SIIA had asked the High Court:

 Whether a state law that imposes new reporting, payment, recordkeeping, and audit requirements on ERISA plan administrators that arise directly from their processing of welfare benefit claims pursuant to ERISA “relate[s] to” ERISA benefit plans and is therefore preempted under Section 514(a).

 Whether the broad preemption language in Section 514(a) can be judicially narrowed to accommodate a presumption against preemption of newly minted state laws that seek to exploit the core functions of ERISA plan administrators.

SOURCE: Self Insurance Institute of America v. Snyder, SCt, Docket No. 14-741, cert. granted March 7, 2016.

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