Is a Self-Funded Health Plan with Stop-Loss Insurance Exempt From State Regulation Under ERISA?
The Employee Retirement Income Security Act of 1974 (ERISA) was adopted by Congress to protect the interests of participants in employee benefit plans. Among its safeguards are eligibility, funding, reporting and vesting requirements. ERISA also imposes strict obligations on a plan’s fiduciary.
In addition, one of its most important features is that ERISA preempts state laws. Section 1144(a) of ERISA provides that:
. . . the provisions of this subchapter and subchapter III shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . .
This means that a participant in an ERISA plan may not seek redress for alleged wrongs under state statutory or common law.
Are There Exceptions to ERISA Preemption?
ERISA preemption does not apply across the board. In what is known as the “savings clause”, a state retains the right to regulate the business of insurance. Section 1144(b)(2)(A) provides that:
Except as provided in subparagraph (B), nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.
However, the savings clause is also not unlimited. Section 1144(b)(2)(B), which is known as the “deemer clause” provides that:
Neither an employee benefit plan . . . nor any trust established under such a plan, shall be deemed to be an insurance company or other insurer, bank, trust company, investment company, or to be engaged in the business of insurance or banking for purposes of any law of any State purporting to regulate insurance companies, insurance contracts, banks, trust companies, or investment companies.
The deemer clause prevents a state from regulating an employee benefit plan by claiming that the plan provides benefits similar to insurance.
Why Does This Matter?
The reason this matters is that an aggrieved participant in an employee benefit plan often prefers to bring an action under state law rather than ERISA. The relief available under ERISA is limited. A participant generally may only recover lost benefits. State law, on the other hand, may provide multiple causes of action, such as negligence or fraud, as well as non-compensatory damages, such as punitive or treble damages and legal fees.
As a result, in many cases involving employee benefit plans, the threshold issue is whether the plan is an ERISA plan, exempt from state regulation.
That was the issue in a recent case decided by the United State District Court for the District of New Jersey in a Memorandum Opinion.
Hua v Board of Trustees
The name of the case is Eddie Hua v The Board of Trustees, et al (Civil Action No. 20-748). The plaintiff, Eddie Hua, was a participant in the United Food and Commercial Workers Union Local 1262 and ShopRite Welfare Fund (Fund), which provides medical benefits to the union employees of employers party to the union’s collective bargaining agreement. The Defendants were the Trustees of the Fund.
The facts of the case were straightforward. Hua was injured in a car accident. The Fund paid his medical expenses. Shortly thereafter, the plaintiff filed a lawsuit against the driver who was responsible for the accident. The Trustees, claiming a right to subrogation, filed an equitable lien against any recovery to be obtained by Hua in the amount of the medical expenses paid by the Fund.
Hua was not happy. The Fund’s subrogation claim would reduce any recovery that he might obtain. Fortunately for Hua, there is a New Jersey state insurance regulation that renders such “equitable liens unenforceable”.
So, Hua sued the Trustees in New Jersey state court seeking the dismissal of the lien. Unfortunately for Hua, the Trustees removed his case to federal court and sought a declaration that the New Jersey state insurance regulation was preempted by ERISA.
Is the Fund a Self-Funded Health Plan?
The issue in the case was whether the Fund is a self-funded health plan or a fully-insured plan. A self-funded health plan is an ERISA plan and exempt from the New Jersey state regulation prohibiting equitable liens. Conversely, an insured plan is subject to state regulation under ERISA’s “savings clause”. As a result, the New Jersey regulation prohibiting equitable liens would be enforceable, and the Trustee’s subrogation claim would fail.
In its opinion, the court provided a one-sentence definition of a self-funded health plan:
A plan is self-funded if it does not purchase an insurance policy from any insurance company in order to satisfy its obligations to its participants.
This is in line with the general understanding that there are two types of employer-provided medical benefit plans – (1) fully-insured and (2) self-funded. However, Hua sought a third category of medical benefit plans – an insured plan. Hua claimed that, because the Fund purchased stop-loss insurance, it was no longer a self-funded plan, but an insured plan subject to state regulation under ERISA’s “savings clause”.
Does Stop-Loss Insurance Convert a Self-Funded Plan to an Insured Plan?
The court’s answer to this question was a resounding “no”. A self-funded plan is not converted to a fully-insured plan simply because the plan sponsor buys stop-loss insurance. The purpose of stop-loss insurance is to protect the plan sponsor, not the plan participants. Stop-loss insurance premiums are paid from the general assets of the plan sponsor. They are not paid by the participants.
In addition, claims under a stop-loss policy are paid to the plan sponsor as reimbursement for expenses paid by the plan sponsor. They are not paid to the participants or to medical providers. Most importantly, stop-loss insurance does not relieve the plan sponsor from its obligation to pay medical expenses incurred by the plan’s participants.
The result of the case is that the Fund is protected by ERISA’s “deemer clause”. The state may not deem the Fund to be engaged in the business of insurance simply because it purchased stop-loss insurance. As a result, the state regulation prohibiting equitable liens was unenforceable, and Hua will have to share his recovery in his lawsuit against the negligent driver with the Fund.
