Michigan Claims Assessment Act Upheld, Sixth Circuit Finds No ERISA Preemption

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Matthew Loughran  

Aug. 4 — The Employee Retirement Income Security Act doesn't preempt Michigan's Health Insurance Claims Assessment Act, the U.S. Court of Appeals for the Sixth Circuit has ruled.

In a Aug. 4 opinion, Judge Karen Nelson Moore affirmed a ruling by the U.S. District Court for the Eastern District of Michigan, which had found that the state tax law statute wasn't preempted by ERISA.

In upholding the law, the court found that the state law didn't interfere with plan administration and didn't impose undue administrative burdens on plans or their administrators.

When reached for comment Aug. 4, Mike Ferguson, president and chief executive officer of the Self-Insurance Institute of America Inc., told Bloomberg BNA, “We are obviously disappointed by the court's ruling and will be consulting with our legal team regarding whether to appeal the decision.”

The executive office of the Governor of Michigan and the state attorney general's office didn't respond to Bloomberg BNA's requests for comment.

The various parties that filed amicus curiae briefs with the court had very different opinions of the court's ruling.

Patricia J. Tarini, an attorney with Sachs Waldman PC in Madison Heights, Mich., and who represented a number of multiemployer funds as amici before the court told Bloomberg BNA on Aug. 4, “We are disappointed with the outcome, and that the court did not exercise its discretion and consider the arguments presented by the amici briefs.”

Tarini was referencing the last section of the court's opinion where it refused to take up an argument put forward by the amici that the Michigan law “related to” ERISA plans. In that section, the court ruled that the SIIA, as appellant, had “conceded” that the law “does not have a ‘reference to' ERISA plans” and that the amici couldn't raise an issue that the appellant had effectively waived.

However, Richard Kraus, a shareholder at Foster Swift Collins & Smith PC in Lansing, Mich., who represented nine associations and organizations that were directly affected by the tax, including groups of providers, health plans and employers with group health plans as amici, supported the state law in comments to Bloomberg BNA on Aug. 4.

“Despite their different perspectives,” Kraus said of his clients, “these groups share the belief that Michigan's tax on paid health care claims is a responsible and lawful approach for dealing with difficult policy and fiscal issues related to funding the state share of the Medicaid program.”

Kraus added that his clients “do not view the Act as imposing any unreasonable or burdensome obligations that interfere with the administration of their insured or self-insured group health plans.”

Tax Established to Fund Medicaid

According to the court, the state law was passed in 2011 and imposes a 1 percent tax on employers and third-party administrators for all medical claims paid within the state for state residents. It also requires those entities to maintain records of all taxable claims and to submit returns to the state treasury department on a quarterly basis.

The law was originally enacted to replace a 6 percent use tax on Medicaid managed care organizations that had been previously been imposed to help the state comply with its obligations under the Medicaid program.

The SIIA, a trade association that represents companies which sponsor and administer self-funded welfare benefits plans governed by ERISA, brought suit against the governor of Michigan, as well as the state's treasurer and director of the state regulatory office that administered the law in December 2011, seeking a declaration that the law was preempted by ERISA Section 514.

According to the SIIA, the law was impermissibly connected with ERISA-governed plans in three ways: by interfering with the goal of uniform plan administration under ERISA, by adding to the reporting and record-keeping provisions to ERISA and by changing the relationships between administrators and beneficiaries by requiring the administrators to collect additional information to determine residency.

District Court Finds No Preemption

In an August 2012 opinion, the district court found that the law didn't affect the administration and structure of employee benefit plans and was thus not truly connected with ERISA plans.

The court also found that the law didn't specifically relate to an ERISA plan and that it treated all health insurance plans equally in terms of both the imposition of the tax and the record-keeping requirements.

Sixth Circuit Affirms Tax Provisions

In affirming the ruling of the district court, the appellate court relied heavily on decisions by the U.S. Supreme Court in N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 19 EBC 1137, U.S. (1995) and De Buono v. NYSA-ILA Medical & Clinical Servs. Fund, 520 U.S. 806, 21 EBC 1041, U.S. (1997) in which the high court found that two New York laws that involved surcharges imposed upon hospitals and medical centers were outside of the core functions of ERISA and thus not preempted.

Similarly, the Sixth Circuit found in the instant case that the tax imposed by Michigan was outside of the main purpose of ERISA, which was to provide uniformity in the administration of employee benefits.

The court found that the imposition of the tax by the state, while it cut into the profits of the administrator, had no effect on the uniformity with which benefits were paid and plans were administered.

Court Affirms Reporting Requirements

The court also found that the reporting requirements imposed by the state law, while additional to those imposed by ERISA, were also of a different character than the federal requirements.

According to the court, the purpose of ERISA's reporting requirements was to guarantee the solvency of employee benefit plans and protecting the financial security of the plan participants and beneficiaries.

Meanwhile, the court found, the state law's reporting requirements only require the administrators to keep track of paid claims for the purposes of tracking compliance with the taxation provisions of the law.

Addressing a seemingly contradictory holding by the U.S. Court of Appeals for the Second Circuit in Liberty Mut. Ins. Co. v. Donegan, 746 F.3d 497, 57 EBC 2009 (2d Cir. 2014), the court argued that the Second Circuit took too literal of an interpretation of preemption when deciding that “reporting” was a core function of ERISA and thus “shielded from inconsistent and burdensome state regulation.”

The court further distinguished the Vermont law at the center of the Liberty Mutual case was significantly different from the Michigan law in that the Vermont law required plans to violate their terms by turning over private data to the state for the purposes of building a health-care database.

Circuit Judge Danny J. Boggs and District Court Judge Michael R. Barrett of the U.S. District Court for the Southern District of Ohio, sitting by designation, joined the opinion of the court.

SIIA was represented by Stephen Wasinger of Stephen F. Wasinger PLC in Royal Oak, Mich. and John H. Eggertsen of the Law Offices of John H. Eggertsen in Ann Arbor, Mich.

The state authorities were represented by Aaron D. Lindstrom and Bradley K. Morton of the Office of the Michigan Attorney General in Lansing, Mich.

To contact the reporter on this story: Matthew Loughran in Washington at mloughran@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

Text of the opinion is at http://www.bloomberglaw.com/public/document/SelfInsurance_Institute_of_Am_v_Rick_Snyder_et_al_2014_BL_214919_.

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