State Tax Laws Withstand Most ERISA Preemption Challenges after ‘Gobeille' and ‘Self-Insurance Institute of America'

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ERISA

In this article, Albert Feuer of the Law Offices of Albert Feuer discusses the state tax impact of the Gobeille and Self-Insurance Institute of America decisions.

Albert Feuer

By Albert Feuer

Albert Feuer is the principal attorney in the Law Offices of Albert Feuer. The firm focuses on employee benefits, executive compensation, estate planning and administration, and related tax issues. The author thanks Anna Vuyiswa Masilela and Donald Partland, whose repeated challenges substantially improved the article.

On March 1, 2016, the Supreme Court held in Gobeille v. Liberty Mut. Ins. Co., that the Employee Retirement Income Security Act of 1974, as amended (ERISA) preempted a Vermont law to the extent the Vermont law requires an ERISA plan, its third-party administrator, or its insurer to report benefit payments and other information relating to healthcare services to a state agency so that Vermont could compile an all-inclusive healthcare database. On March 6, 2016, the Supreme Court, in Self-Insurance Institute of America v. Snyder, vacated a Sixth Circuit decision that ERISA preempted neither a Michigan state tax of one-percent of the benefits paid by a group health plan, its third-party administrator or its insurer, nor the law's reporting and record-keeping compliance requirements, and remanded the case back to the Sixth Circuit for further consideration in light of its Gobeille decision. On July 1, 2016, the Sixth Circuit reaffirmed its approval of the state law. Gobeille and the Sixth Circuit reaffirmance suggest that ERISA permits a wide variety of state tax laws to be applied to ERISA plans, their third-party administrators and other service providers, including the reporting and record-keeping requirements used to enforce those laws.

I. ERISA Preemption and Its Predictability

The dominating general purpose of ERISA is the protection of participants and beneficiaries of ERISA plans. The ERISA preemption provision, however, does not mention benefit rights. ERISA, instead, preempts any state law that may or does “relate to any employee benefit plan” regulated by ERISA. There are explicit exemptions from preemption for laws regulating banking, insurance, or securities, and for generally applicable criminal laws. There are unambiguous preemption rules, which all pertain to benefit rights. In particular, ERISA preempts state laws that prescribe benefit structures, enforcement mechanisms, duties of care, or plan funding responsibilities. However, beyond those rules, there is little consensus. For example, there is disagreement about the extent, if any, of the presumption against ERISA preemption.

Gobeille clarified the Supreme Court's preemption policies. Before the Gobeille decision, it was often difficult to determine whether ERISA preempted a state law, because the framework for ERISA preemption analysis was quite incoherent. Different coherent frameworks were presented in the Gobeille filings and in a review of all the filings. Justice Clarence Thomas's concurring opinion questioned whether the United States Constitution permits ERISA to preempt substantial areas of traditional state regulation or a state law exercising a traditional state power under any analysis. A prominent commentator described the ERISA preemption field “at least as muddled as it was before the [ Gobeille] decision.”

While Gobeille has not answered all questions, it seems to have clarified when the Supreme Court will hold that ERISA preempts state laws:

  • The Supreme Court has held repeatedly that ERISA does not preempt a state law for imposing cost burdens on an ERISA plan, but preempts such a law if the burdens have the effects discussed below. These holdings are discussed in another article. 
  •  Before Gobeille, the Supreme Court had not decided whether ERISA preempts a state law for imposing administrative burdens on an ERISA plan. In Gobeille, the Supreme Court did so, and set forth conditions to make such a determination. These conditions differed from those for laws imposing cost burdens even when, as occurred in Gobeille, the administrative burdens only added to the plan's existing administrative tasks. The administrative burdens that would be imposed by the law thus appeared to have the same effects on an ERISA plan as a state law that would have imposed only the costs needed to perform the additional tasks. Thus, it is unclear why a different approach is appropriate.

There are now Supreme Court standards for determining whether ERISA preempts a state law for imposing undue cost burdens, and a different set of Court standards for determining whether ERISA preempts a state law for imposing undue administrative burdens.

In 1995, in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co. , the Supreme Court held that ERISA did not preempt a state law that encouraged, but did not require, ERISA healthcare reimbursement plans to use Blue Cross insurance by imposing surcharges on non-Blue Cross insurance. The Court observed that there was no showing that the surcharge mandated any particular choice of benefits or benefit providers. The Court therein unanimously declared that ERISA does not preempt a state law imposing cost burdens on an ERISA plan if those burdens only “indirectly affect what an ERISA or other plan can afford or get for its money.”

In 1997, in De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, the Supreme Court held that ERISA similarly did not preempt a New York State tax imposed on the gross patient receipts of operators of medical facilities, including those operated by ERISA plans. The Court rejected the Second Circuit's assertion that ERISA preempted any state law that depleted the assets of an ERISA plan. The Court found no showing that the cost of the tax mandated any particular choice of benefits or benefit providers.

In 1997, in California Div. of Labor Standards Enforcement v. Dillingham Const., N.A., Inc. , the Supreme Court held that ERISA did not preempt a California law providing that participants in approved apprentice programs may be paid less than the usual state prevailing requirements applicable to public works contractors. Again, there was no showing that any benefit structure was mandated by the cost burden relief for programs the state approved. The Supreme Court has never found an indirect benefit mandate, although it has held state laws with direct (explicit) benefit mandates were preempted.

In contrast, in Gobeille, the Supreme Court held that ERISA preempts a state law that would impose reporting and record-keeping burdens on an ERISA plan's third-party administrator. However, by explicitly distinguishing the Vermont reporting and record-keeping requirements in Gobeille from those that are “incidental” to the state tax law in De Buono, the Gobeille Court implied that ERISA does not preempt such incidental requirements. If not, a state tax law that is not otherwise preempted, would be preempted in practice because the provisions needed to enforce the law are preempted.

II. The ‘Gobeille' Preemption Tests

In setting out the Gobeille decision, six Supreme Court justices agreed that ERISA preempted the Vermont reporting requirements as applied to ERISA group health plans. The decision declared that ERISA preempts a state law in any of the following four circumstances:

  •  First, if the statute has a “reference to” an ERISA plan. The majority did not cite either of the two major decisions in which the Supreme Court held there was such preemption. In 1988, in Mackey v. Lanier Collection Agency & Service, Inc., the Court held unanimously that a state debtor-protection law that exempted employer welfare plans was preempted to the extent it specifically exempted ERISA plans. In 1992, in District of Columbia v. Greater Washington Bd. of Trade, eight Justices joined in an opinion that the D.C. law that required group healthcare plans to provide benefits to participants eligible for workers' compensation was preempted to the extent the law specifically included ERISA plans. However, there was no explicit reference to ERISA plans in the D.C. law at issue, but the Court held that the required benefits were “set by reference to [ERISA] covered employee benefit plans.” The state in Gobeille, unlike the state in Greater Washington Bd. of Trade, did not concede this point, so this test was not found applicable in Gobeille.
  •  Second, if “acute, albeit indirect, economic effects” of the state law “force an ERISA plan to adopt a certain scheme of substantive coverage or effectively restrict its choice of insurers.” No such claim was made in Gobeille, so the test was not found applicable in Gobeille.
  •  Third, if the statute “governs … a central matter of plan administration.” This citation was from Egelhoff v. Egelhoff, 532 U. S. 141, 148 (2001). Like the second test, this test appears to be focused on effects the state law would have on benefit entitlements. Seven of the justices joined in an opinion therein that ERISA preempted a state-revocation-upon-divorce law which would have permitted an individual to wrest ERISA survivor and death benefits from the former spouse of the participant, whom the participant had designated as his beneficiary pursuant to the terms an ERISA pension plan and of an ERISA life insurance plan. The Justices disagreed about whether the Gobeille reporting and record-keeping requirements are a central matter of administration, i.e., whether they are sufficiently similar to the Egelhoff state law that would have determined who is entitled to keep an ERISA plan benefit payment.
  •  Fourth, if the statute “interferes with nationally uniform plan administration.” This citation was again from Egelhoff. The Justices described this as part of the central administration test. In fact, the majority declared that “reporting, disclosure, and recordkeeping are central to, and an essential part of, the uniform system of plan administration contemplated by ERISA.” However, this is treated as a distinct test herein because unlike the third test, the Court's sole focus appears to be the compliance costs of the administrative requirement. The Justices disagreed about whether the Gobeille reporting and record-keeping requirements interfere with the plan administration that they assert ERISA requires be uniform.

The Court was so uncomfortable with the fourth test that the majority suggested that incidental costs are permitted for some state laws, such as those state tax laws permitted by ERISA. Thus, there is a question about the extent, if any, to which the Court will maintain this fourth test. The Court could have presented a national uniform plan administration test that does not depend on the plan costs imposed by the statute and is consistent with Egelhoff. In particular, does the state law require an ERISA plan to substitute an administrative task for an existing one? The Egelhoff requirement that no person other than a participant's designated beneficiary be entitled to the participant's death benefits, or a requirement that all claims records be maintained only in the form of paper records, would both violate this test. There appears to be little question that ERISA preempts such state-law requirements.

Other than Justice Thomas, who joined the majority opinion but filed a separate concurrence questioning the Court's preemption approach discussed above, none of the Justices questioned any of the four tests. An alternative set of tests for determining which reporting, record-keeping and disclosure requirements ERISA permits state laws to impose may be found in another article, and may be seriously considered when the Court is forced to confront the difficulties of applying the above tests to administrative burdens imposed by other state laws.

III. Justices Differ on the Application of the ‘Gobeille' Preemption Tests
A. Do the Vermont Reporting and Record-keeping Requirements Govern a Central Matter of Plan Administration?

The Supreme Court majority and the dissenters reached different answers.

Justice Kennedy's majority opinion answered that the requirements were a central matter of administration and declared that

The perceived difference here in the objectives of the Vermont law and ERISA does not shield Vermont's reporting regime from pre-emption. Vermont orders health insurers, including ERISA plans, to report detailed information about the administration of benefits in a systematic manner. This is a direct regulation of a fundamental ERISA function. Any difference in purpose does not transform this direct regulation of “a central matter of plan administration,” Egelhoff, supra, at 148, 121 S. Ct. 1322, 149 L. Ed. 2d 264, into an innocuous and peripheral set of additional rules.

One difficulty with the majority approach, which focuses solely on the effects of the state law, is that this analysis does not show which reporting and record-keeping requirements, if any, are not a non-central matter of administration. For example, the reporting and record-keeping state-law requirements, used to enforce the tax approved in Del Buono, are not a central matter.

Justice Ginsburg's dissenting opinion answered that the requirements were not a central matter of administration and declared that

Because ERISA's reporting requirements and the Vermont law elicit different information and serve distinct purposes, there is no sensible reason to find the Vermont data-collection law preempted … Beyond debate, Vermont's data-collection law does not seek to regulate the management and solvency of ERISA-covered welfare plans. See supra, at ___, 194 L. Ed. 2d, at 39 (reciting objectives of the Vermont data-collection law). Vermont requests no information on plan finances. See Reg. H-2008-01, Code of Vt. Rules 21-040-021, §4 (D); supra, at ___, 194 L. Ed. 2d, at 39 (detailing the types of data collected by Vermont). The State collects data on paid health care claims, not denied claims. See §5(A)(8). Vermont seeks a better understanding of how its residents obtain health care and how effective that care is. Unlike ERISA superintendence, Vermont's interest does not lie in reviewing whether a self-insured provider is keeping its bargain to covered employees.

One difficulty with the dissenting approach, which focuses solely on the objective of the state law, is that this analysis does not show which reporting and record-keeping requirements, if any, are a central matter of administration. For example, reporting or record-keeping requirements that prohibit a plan from using its existing format to maintain its benefit records are a central matter of administration.

B. Do the Vermont Reporting and Record-keeping Requirements Interfere with Nationally Uniform Plan Administration?

The Supreme Court majority and the dissenters differed on how to determine whether state-law reporting and record-keeping requirements on an ERISA plan or its third-party administrator would interfere with a nationally uniform plan administration of ERISA plans.

Justice Kennedy's majority opinion declared that no evidence of the cost burden that would be imposed by the administrative requirements is needed because

Differing, or even parallel, regulations from multiple jurisdictions could create wasteful administrative costs and threaten to subject plans to wide-ranging liability …Respondent argues, rather, that Vermont's scheme regulates a central aspect of plan administration and, if the scheme is not pre-empted, plans will face the possibility of a body of disuniform state reporting laws and, even if uniform, the necessity to accommodate multiple governmental agencies. A plan need not wait to bring a pre-emption claim until confronted with numerous inconsistent obligations and encumbered with any ensuing costs.

This approach recognizes the Travelers distinction between cost burdens and administrative burdens imposed by state laws. However, the Court failed to explain why ERISA preempts any law imposing the latter, but only some imposing the former.

Justice Ginsburg's dissenting opinion declared that evidence of the cost burden that would be imposed by the state-law administrative requirements is essential because

While a law imposing costs so acute as to effectively dictate how a plan is designed or administered could trigger preemption, no such extreme effects are present here… .As the United States explains, the supposition indulged by the Second Circuit that Vermont's law imposed a substantial burden “is not obvious, or even particularly plausible, without any factual support.” … . Because data-collection laws like Vermont's are not uniform from State to State, compliance is inevitably burdensome, Liberty successfully argued in the Court of Appeals. The Court replays this reasoning in today's opinion. But state-law diversity is a hallmark of our political system and has been lauded in this Court's opinions. See, e.g.,Arizona State Legislature v. Arizona Independent Redistricting Comm'n, 576 U. S. ___, ___, 135 S. Ct. 2652, 192 L. Ed. 2d 704, 732 (2015) (“This Court has long recognized the role of States as laboratories for devising solutions to difficult legal problems.” (citing New State Ice Co. v. Liebmann, 285 U. S. 262, 311, 52 S. Ct. 371, 76 L. Ed. 747 (1932) (Brandeis, J., dissenting); internal quotation marks omitted)). Something more than an inherent characteristic of our federal system, therefore, must underpin the ERISA-grounded preemption Liberty urges.

This approach recognizes that Travelers failed to explain why cost burdens should be treated differently than administrative burdens imposed by state laws. However, the dissenting opinion failed to explain the significance of the phrase "to dictate how a plan is administered." The majority seems to presume that the Vermont reporting and record-keeping requirements do so.

IV. The Incidental Reporting and Record-keeping Exception in ‘Gobeille'

All the justices seemed to agree that ERISA does not preempt incidental reporting and record-keeping requirements needed to enforce a state law that ERISA otherwise permits, although they disagree on which state laws ERISA permits and do not define incidental. Justice Ginsburg's dissenting opinion contained the following statement:

Reporting and recordkeeping incident to state laws of general applicability have been upheld as they bear on ERISA plans. In De Buono, 520 U. S., at 809-810, 816, for example, the Court held that a gross-receipts tax on patient services provided by a hospital operated by an ERISA plan was not preempted, even though administration of the tax required filing quarterly reports. And in Dillingham, 519 U. S., at 319, the Court held that California's prevailing-wage law was not preempted as applied to apprenticeship programs established by ERISA plans. Prevailing-wage laws typically require employees to keep records of the wages paid to employees and make them available for review by state authorities.

However, in De Buono and Dillingham Constr., the Court did not appear to consider the reporting and record-keeping requirements of the statutes that the Court held were not preempted. That question was before neither Court. However, the fact that the Justices wrote extensive opinions reviewing preemption principles and holding that ERISA did not preempt the state laws at issue shows that the Justices assumed that ERISA permitted the reporting and record-keeping requirements used to enforce those same laws?

Justice Kennedy's majority opinion seemed to respond to the above statement by declaring:

The [preemption] analysis may be different when applied to a state law, such as a tax on hospitals, see De Buono v. NYSA-ILA Medical and Clinical Services Fund, 520 U. S. 806, 117 S. Ct. 1747, 138 L. Ed. 2d 21 (1997), the enforcement of which necessitates incidental reporting by ERISA plans; but that is not the law before the Court.

This statement leaves open the possibility that the Court may hold that ERISA preempts the reporting and record-keeping requirements needed to enforce the De Buono tax, and thereby, as a practical matter, overturn De Buono. This is rather unlikely because the Court would thereby overturn the very preemption decisions it was explicitly relying upon for its Gobeille decision. If this were seriously contemplated, it seems more likely that the Court would have described its dissatisfaction with those decisions in Gobeille.

It seems more likely that Justice Kennedy drew an unfavorable contrast between the New York reporting and record-keeping requirements that were used to assure compliance with the De Buono tax, and the Vermont reporting and record-keeping requirements that were not used to assure compliance with a specific state activity. In short, the Vermont data would not be generated incidental to a state activity that ERISA clearly does not otherwise preempt. For example, ERISA may permit a state to prepare and maintain a healthcare price comparison tool for its residents. In such case, the Vermont reporting and record-keeping requirements would appear to be an incidental part of a permitted state activity.

V. The Sixth Circuit Decision Following the ‘Self-Insurance Institute of America' Remand

A week after issuing the Gobeille decision, the Court granted certiorari in Self-Insurance Institute of America v. Snyder, and vacated a Sixth Circuit decision that ERISA did not preempt the Michigan state tax of one-percent of the benefits paid by a group health plan (explicitly including ERISA plans), its third-party administrator or its insurers. The certiorari petition by the Self-Insurance Institute of America (SIAA), included the following question:

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).

The question, unlike the Gobeille certiorari question, explicitly mentioned both the tax-payment provisions and the tax-enforcement provisions. This raises the possibility that ERISA preempted only parts of the local tax statute. The Gobeille Supreme Court avoided such a result for the Vermont statute by finding ERISA preempted the statute. By apparently permitting the incidental reporting and record-keeping requirement of state tax laws that were not otherwise preempted by ERISA, such as the De Buono tax, the Court upheld such state tax laws as applied in the real world.

The Sixth Circuit applied an incidental approach to a state tax law on benefit payments following the Supreme Court remand, while recognizing that ERISA may preempt incidental reporting and record-keeping requirements.

The appellate court first presented the presumption that Congress does not intend to preempt state tax laws. The court then observed that there would be ERISA preemption if there was a state tax law mandate of a benefit structure, substantive coverage or choice of an insurer. The court found none present in this case. The court then described its ERISA preemption analysis, which seemed to try to bridge the divide between Justice Kennedy's majority opinion and Justice Ginsburg's dissenting opinion, as follows:

Thus, there are two critical points that we take away from Gobeille, in addition to the Court's statement that reporting, disclosure, and record-keeping are fundamental functions of ERISA: first, Gobeille held that only direct regulations of fundamental functions are preempted, and second, state laws imposing incidental burdens may need to be evaluated under the principles established by De Buono and Travelers .Both of these points counsel against preemption in this case. Michigan's Act does not directly regulate any integral aspects of ERISA. The Act is, at its core, an Act to generate the revenue necessary to fund Michigan's obligations under Medicaid. Though it does touch upon reporting and record-keeping, the thrust of the Act is to collect taxes—not to amass data… .In order to facilitate collection of the tax, the Act requires every carrier and third-party administrator with paid claims subject to the tax to submit quarterly returns to the Michigan Department of the Treasury. [Mich. Comp. Laws] §550.1734(1). The Act also states that carriers or third-party administrators liable for the tax must “keep accurate and complete records and pertinent documents as required by the department.”… The Act's only other potential effects on employee benefit plans are to cut the plans' profits—as did the surcharges upheld in De Buono and Travelers—and to create work independent of the core functions of ERISA—as do permissible state property, contract, and tort laws .

The court further asserted that under this approach ERISA permits state laws that require ERISA-covered entities to submit income tax returns, property tax returns, or employment records. If this were not the case, ERISA would prevent states from imposing income taxes, property taxes, and employment minimum compensation requirements on ERISA plans, which the court presumed were all permitted. The court, however, like the Gobeille Justices, never defined the phrase “an incidental burden.”

The court accepted the principle that a state tax law is preempted if the law intrudes upon “relations among the traditional ERISA plan entities, including the principals, the employer, the plan, the plan fiduciaries, and the beneficiaries.” Thus, it appears that even reporting and record-keeping requirements that impose incidental burdens on ERISA plans are preempted if they intrude on any of these relations. The court then dismissed two arguments based on this principle.

The first argument was that the state law, which limited the tax to benefits paid on behalf of Michigan residents to Michigan providers, required the plan to determine the residency of plan participants, which information the plan did not otherwise have. The court dismissed this because under the law the participant's residence was determined by the administrator's records. Thus, the plan had the information.

The Commerce Clause of the United States Constitution prohibits states from “discriminating against or imposing excessive burdens on interstate commerce without congressional approval.” Therefore, a taxing state must allocate to the taxing state a reasonable portion of the feature of the ERISA plan being taxed, such as the benefit payments made by SIIA. The traditional ERISA plan entities question is whether such an allocation may be made with the information an ERISA plan otherwise has about its participants and beneficiaries. If so, the question is resolved, as in SIIA, in favor of ERISA permitting the reporting and record-keeping requirements. If not, ERISA preempts the requirements.

The second argument had nothing to do with the reporting and record-keeping requirements at issue. In particular, SIIA argued that the relation between the plan and its insurers and third-party administrators would be altered because the latter must pay the benefit tax. This was rejected because Michigan has declared that such third-party payments are voluntary.

One set of commentators has argued that other state tax laws with slightly different features will be preempted under this analysis. Such differences seem rather unlikely. Why would a state require benefit payors to determine a participant's state affiliation other than by relying on the plan's usual records? Even assuming that the party paying an ERISA plan's claims is a plan fiduciary, so the tax raises a question about a relation between traditional ERISA plan entities, most third-party benefit payors would want to be responsible for paying the taxes accruing on claims paid by the payor, inasmuch they would earn fees for taking on such responsibility. Thus, the state law would not change the relation among traditional ERISA plan entities.

Another commentator, who focused on Gobeille, suggested that ERISA may not preempt state-law requirements on service providers, such as insurers or third-party administrators, but only may preempt state-law requirements on ERISA plans.

VI. Implications of ‘Gobeille' and ‘SIIA' for the State Taxation of the Income of ERISA Plans, the Benefits Paid by ERISA Plans, the Property of ERISA Plans, and Participant Loans from ERISA Plans

Two ERISA features determine the extent to which ERISA exempts state tax laws.

First, the ERISA preemption section declares that state tax laws are subject to the general ERISA preemption rule. Thus, ERISA preempts some state tax laws. Before the 1983 enactment of this declaration, the Supreme Court had affirmed the holding by the Ninth Circuit that ERISA preempted a Hawaii law that characterized a required employer healthcare plan premium as a tax. The declaration was enacted in concert with an exemption of parts of the same Hawaii law from ERISA preemption.

Second, ERISA contains no section exempting ERISA plans from state taxation. Thus, ERISA permits some state taxation of plans. In contrast, federal tax law, which ERISA amended, exempts certain pension plans from federal income tax. In particular, Section 501(a) of the Internal Revenue Code of 1986, as amended exempts from income tax a trust used to fund pension plan benefits, if that trust and the plan meet the requirements of Code Section 401(a). These requirements include non-discrimination and minimum distribution requirements.

The De Buono Supreme Court decision that permitted state tax laws on gross patient receipts from specified health facilities to apply to those operated by an ERISA plan, is consistent with the two ERISA features. The Court, like the Sixth Circuit's SIIA reaffirmation, began its analysis with the presumption that an ERISA does not preempt state tax laws. The Court observed that the law did not mandate that an ERISA plan provide or not provide certain benefits, and does not refer to ERISA or ERISA plans. The Court described the law as one of general applicability. The Court then observed that by taxing all operators of covered facilities in the same way, the state was not encouraging or discouraging ERISA plans from providing benefits directly. The Court observed that subjecting those benefits to a tax increased the cost of those benefits. However, this cost increase was not, in practice, a mandate to eliminate those benefits. Thus, logically ERISA must permit reporting and record-keeping requirements needed to enforce the statute. The Court, however, did not address this issue.

The same argument mutatis mutandis could be made for the Michigan one-percent claims tax. The tax was imposed on the benefit payments, whether done by a plan, a third-party administrator or an insurer. Thus, no benefit payment form was favored. There was no assertion that the one-percent tax was so burdensome as to prevent the provision of the plan benefits. Thus, ERISA did not preempt the tax.

The Sixth Circuit found that ERISA did not preempt the reporting and record-keeping requirements used to enforce the law. The court held that the only burden of the reporting and record-keeping requirements was a cost burden and the requirements worked independent of ERISA's core functions. Thus, there seems to be no reason for ERISA to preempt the reporting and record-keeping requirements.

However, if the Mackey/ DC Board of Trade reference argument had not been waived previously, it could have been used to attack the tax because the law expressly includes benefit payments by ERISA plans. Such an argument may have not been successful in the Sixth Circuit because the Sixth Circuit had previously rejected the applicability of that argument to state tax laws. ERISA should preempt only those state laws that have adverse effects on some ERISA qualities, regardless of the presence or absence of a reference to the ERISA plan at issue. Although Gobeille reaffirmed the reference test, the test does not withstand much critical analysis, Moreover, the statute could have been rewritten to cover payments by ERISA plans by omitting the explicit reference to ERISA plans.

The same argument mutatis mutandis could also be made for a Florida tax on loans to plan participants from ERISA plans. The Florida documentary-stamp tax applies to all promissory notes with a sufficient Florida connection. The statute has no explicit inclusion or exclusion of loans by ERISA plans. On July 3, 2000, the Florida Department of Revenue, however, declared that Florida law “imposes documentary stamp tax on written obligations to pay money that are made, executed, or delivered in Florida, including promissory notes made in connection with pension plan loans, 401K plan loans, …” Most pension 401k plans and pension plans are ERISA plans. Those whose only participants are owner-employees and their spouses, are not ERISA plans. The tax of 35 cents on each $100 or fraction thereof of the indebtedness does not appear to be so burdensome as to prevent the provision of the plan loan benefits. Thus, it again does not constitute a benefit mandate to cease plan loans. The tax form requirements do not appear to be particularly burdensome. There is no indication that the law affects in any manner the way ERISA plan loans are made, such as requiring that a stamp be affixed to pension plan loan documents. Thus, there seems to be no reason for ERISA to preempt the tax reporting and record-keeping requirements used to enforce the law.

Similar arguments may be made in favor of state-law taxes laws imposed on property owned or the income of an ERISA plan. In either case, if the tax rates and the costs of compliance are so high as to preclude plan operations, ERISA would preempt the tax. However, as with the De Buono tax, by choosing to tax certain property or income, but not other property or income, the state is discouraging an ERISA plan from holding such property or earning such income. The Second Circuit held, in Hattem v. Schwarzenegger, that ERISA did not preempt the application of the California unrelated business tax that was based on the federal unrelated business tax, to an ERISA pension plan. The court therein dismissed the argument that the tax constituted an investment mandate, when it stated “[A]lthough this law may have an indirect effect on choices, it does not force trust fiduciaries to act in a certain manner.” One commentator has argued that such taxes may constitute an investment mandate which is preempted because it conflicts with the ERISA fiduciary investment responsibilities?

There are serious questions whether ERISA permits state tax laws to apply more favorably to ERISA plans than to other entities engaged in the same activities. In Mackey, the Supreme Court unanimously held that ERISA preempts Georgia from exempting ERISA plans from generally applicable garnishment laws. The holding was based upon the more favorable treatment given by the statute to ERISA plans under the state exemption. There was no discussion of the value or the effect of such favorable treatment to sponsors that may consider whether to establish and operate such plans. Under the Mackey analysis, ERISA would similarly preempt all state-law tax exemptions for ERISA plans. On the other hand, no one seems to have federal standing to challenge such state tax exemptions.

If, notwithstanding Mackey, exemptions may be provided to ERISA plans, questions may still be raised about whether state tax laws may provide exemptions from property or income taxes only to those ERISA plans that qualify for favorable federal income tax treatment. Such laws encourage ERISA plans to include the non-discrimination and minimum-distribution provisions needed to obtain such treatment. The same preemption analysis of state tax impositions may, discussed above, be applied to state tax exemptions as with tax liabilities.

I have proposed a more general framework for determining whether ERISA preempts state tax laws and the reporting and record-keeping requirements enforcing those laws may be presented that addresses the questions that remain unanswered by the Gobeille/SIIA analysis. ERISA only preempts a state tax law to the extent it is a benefit mandate, a funding mandate, a fiduciary duty mandate, or an enforcement mandate. ERISA only preempts the reporting and record-keeping requirements to enforce such a law if those requirements impose undue burdens. It is irrelevant under this proposed analysis whether (1) the tax, and/or the reporting and record-keeping requirements refer explicitly to ERISA; (2) the tax, and/or the reporting and record-keeping requirements are part of a generally applicable law; or (3) the tax, and/or the reporting and record-keeping requirements are imposed on an ERISA plan, the plan's insurer, or the plan's third-party administrator. In contrast, the Gobeille/SIIA analysis only preempts a tax law to the extent it is a mandate from a more limited set of choices, and asks whether (1) the law intrudes upon relations among the traditional ERISA plan entities, and (2) the reporting and record-keeping requirements impose incidental burdens.

VII. Conclusions

If the Sixth Circuit interpretation of the Gobeille/De Buono analysis is followed, ERISA will not preempt most state tax laws on ERISA plans, their insurers or their administrators, nor the incidental reporting and record-keeping requirements to enforce those taxes. Further, ERISA will only preempt tax laws that impose tax liabilities on ERISA plans or grant tax exemptions to ERISA plans, if those impositions or grants mandate a benefit structure, substantive coverage, or choice of insurer. Further, ERISA will preempt reporting and record-keeping requirements that are incidental to such tax laws if the requirements intrude upon relations among the traditional ERISA plan entities, including the principals, the employer, the plan, the plan fiduciaries, and the beneficiaries.

Absent a prohibited reference or effect, ERISA permits states to tax, and to require reports and record-keeping to enforce taxes upon or grant tax exemptions for

(1) all or some of the gross receipts of an ERISA plan, as in De Buono;

(2) all or some of the gross benefit payments of an ERISA plan, as in SIIA;

(3) all or some of the participant loans from an ERISA plan, as with the cited Florida statute;

(4) all or some of the net income of an ERISA plan, as in Hattem, although it is unclear whether ERISA plans may be taxed more favorably than other income earners; and

(5) all or some of property owned by an ERISA plan, although it is unclear whether ERISA plans may be taxed more favorably than other property holders.

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