ERISA Preemption of State Laws Requiring Employers to Report or Disclose Benefit Plan Information to Employees

Last December, the U.S. Supreme Court unanimously held that provisions of an Arkansas law that regulated the use by pharmacy benefit managers (“PBMs”) of maximum allowable cost programs to limit retail pharmacy reimbursement levels were not preempted by Section 514 of ERISA, which preempts all state laws that impermissibly “relate to” ERISA plans.  See, Rutledge v. Pharmaceutical Care Management Assn., 141 S. Ct. 474 (2020).

The ruling, which reversed an Eighth Circuit Court of Appeals decision finding the law preempted, confirmed the viability of more than 45 state laws enacted over the past few years that increase state level regulation of how PBMs, third party administrators, and health insurers conduct their businesses.

One reaction to the Rutledge decision was a sense that the scope of ERISA preemption was perhaps narrower than once thought and a state’s ability to indirectly regulate ERISA plans perhaps broader than once thought.

This article will address whether that is an accurate assumption by applying the Court’s holdings in Rutledge and two if its other key ERISA preemption cases to determine whether the recently enacted Illinois Consumer Coverage Disclosure Act (Public Act 102-0630) may be preempted.

Illinois Consumer Coverage Disclosure Act

This new Illinois law requires employers in Illinois that provide group health coverage to employees to disclose to their employees who are eligible for such coverage (at the time of hire, thereafter annually, and otherwise upon request) a written list of covered benefits under the group health plan in a format that easily compares such covered benefits to the essential health insurance benefits required to be included in individual health insurance policies issued in Illinois.

The statute delegates enforcement authority with respect to these new disclosure obligations to the Illinois Department of Labor and authorizes the Illinois Department of Labor to impose civil financial penalties on employers who fail to comply with the disclosure requirements.

A list of frequently asked questions with respect to the new law issued by the Illinois Department of Labor makes clear that the Department views the new law as applying to both insured and self-funded ERISA group health plans.  The stated rationale for this conclusion is that the new law does not impose coverage requirements on employers, but only disclosure requirements.  Under the so-called “savings clause” in Section 514 of ERISA, states may impose coverage requirements on medical insurance policies issued in a state, but not on self-funded ERISA plans.  See, Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985).

The Department seems to assume that means the new law may be applied to both insured and self-funded plans.  However, as discussed below, the Department’s analysis ignores the fact that state laws like the Consumer Coverage Disclosure Act that impose reporting, disclosure, or recordkeeping requirements with respect to employer sponsored benefit plans are also preempted under Section 514 with respect to both insured and self-funded plans, as such laws do not fall under the savings clause.

The Current State of Preemption Analysis

The Supreme Court has issued more than thirty opinions addressing the scope of federal preemption of state laws under Section 514 of ERISA that impermissibly “relate to” ERISA plans. The mere existence of so many cases is clear evidence of how ambiguous the “relate to” standard in Section 514 of ERISA is and of how the Court struggled to establish a clear standard for measuring when a state law is preempted by ERISA.

Fortunately, this changed with the Court’s decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers, Ins. Co., 514 U.S. 645 (1995), in which the Court listed three types of state laws as having been identified in its prior preemption rulings as laws Congress intended to preempt; namely, laws that (i) mandate employee benefit structures, (ii) preclude uniform plan administration on a national basis, or (iii) provide plan members with alternative enforcement mechanisms to those available under ERISA.

The Travelers Court held that a New York law that required hospitals to collect surcharges from patients other than those insured by a Blue Cross or Blue Shield plan was not preempted by ERISA, as it did not fit into any of the three categories of law the Court had previously identified.  Rather, the law only increased the cost of medical services in some cases, which was an area of traditional state regulatory authority and not grounds for preemption.

Questions about the continued viability of the Travelers approach arose when the Court issued its opinion in Gobeille v. Liberty Mutual Ins. Co., 136 S.Ct. 936 (2016), which found that a Vermont law that required insurers and benefit plans to provide significant medical claims data to the state was preempted because it precluded uniform plan administration on a national basis and ignored the argument made by the Solicitor General of the United States in an amicus curiae brief that the specific data collection and reporting required under the Vermont law did not impact plan administration in an ERISA context at all.

The key findings cited in the majority opinion in Gobeille supporting the holding were (i) Congress intended the regulation of ERISA plans to be exclusively a federal concern, (ii) requiring plans to master the laws of 50 states would undermine the congressional goal of minimizing the administrative and financial burden on plan administrators (and make it more likely that employers would continue to maintain their plans), and (iii) ERISA reporting, disclosure, and recordkeeping requirements for ERISA welfare plans was already extensive and subject to further expansion by the U.S. Department of Labor (“DOL”) where necessary.

The DOL’s broad focus on reporting, disclosure, and recording keeping led the Court to conclude that plan reporting, disclosure, and recordkeeping “are central to, and an essential part of, the uniform system of plan administration contemplated by ERISA” and “an integral aspect of ERISA” that was subject to regulation exclusively by the federal government.  As a result, because the Vermont law intruded on such a central matter of plan administration and interfered with uniform national plan administration, preemption was required to prevent the states “from imposing novel, inconsistent and burdensome reporting requirements on plans”.

In short, the focus of the Court was not upon the nature and scope of the burden imposed by the Vermont law itself (which was actually not significant, as the state allowed the data to be provided in the format currently maintained by the plans or their administrator), but rather solely on the potential burden in the future from any non-conformity among requirements imposed by different states.  As such, some commentators suggested that Gobeille arguably represented a broadening of the scope of ERISA preemption, at least with respect to the Travelers’ uniform plan administration preemption prong.

The Court in Rutledge effectively reaffirms the analysis in Travelers and while clarifying what constitutes plan administration for purposes of ERISA preemption under Gobeille.  The opinion also expressly rejects the argument that a PBM’s management of its retail pharmacy network involved plan administration for ERISA preemption purposes, as opposed to management of its own business.  In other words, Gobeille did not broaden the scope of ERISA preemption or what constitutes plan administration under Travelers.  Rather, it clarified that reporting and disclosure were key elements of plan administration and a subject that is exclusively reserved for federal regulation.

The Illinois Law

While the Illinois Department of Labor is correct that the Illinois Consumer Coverage Disclosure law does not affect plan design or implicate the savings clause in Section 514, the focus in its FAQ on the law not mandating benefit structure fails to consider the impact of the new law on uniform national plan administration with respect to reporting and disclosure.

Again, Gobeille makes clear that reporting, disclosure, and recordkeeping are critical elements of plan administration and, as a result, an area of exclusive federal regulation.  In other words, ERISA precludes any state mandated reporting, disclosure, or recordkeeping requirements on ERISA plans or the employers who sponsor ERISA plans.  Moreover, under Gobeille, the fact that compliance with the state’s requirement is not difficult is not relevant to the preemption analysis.  The mere fact that an employer could have multiple reporting and disclosure obligations in different states is sufficient to result in federal preemption of state disclosure laws relating to ERISA plans under Gobeille.

Of course, where compliance is easy, as it may be under the Illinois law, there may be no need to challenge the Illinois law.  In fact, many employers may already make the disclosures required under ERISA about covered benefits that meet the technical requirements of the Illinois law.

However, compliance was also easy under the data reporting requirements addressed in Gobeille that the Court found were preempted.  Nevertheless, the plaintiff in Gobeille decided to challenge that law all the way to the Supreme Court apparently because of the risk that the next state law passed might not be so easy to comply with.  That would appear to be an option employers also have with respect to this new Illinois law.

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