Guest Article

(From the July 3, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

District Court Reviewing Maryland "Play or Pay" Health Mandate Law

A federal district court on June 23, 2006 heard oral arguments in a case challenging the validity of a new Maryland law that will require certain employers to provide minimum health benefits to employees or pay a tax. Maryland is one of three states to enact "play or pay" mandates this year, but similar proposals are pending in at least 13 other states.

Background

The Retail Industry Leaders Association (RILA) filed the case after the Maryland legislature on January 12, 2006, enacted, over Governor Robert Ehrlich's veto, the Fair Share Health Care Fund Act ("Act"). In general, the Act requires private employers with at least 10,000 employees (full or part-time) in Maryland to provide a certain level of health benefits to those employees or make a contribution to the Maryland Fair Share Health Care Fund ("Fund"). Those employers must spend at least eight percent of wages (six percent in the case of nonprofit organizations) paid to their Maryland employees on health benefits for such employees.

Any private employer with 10,000 or more Maryland employees that does not meet the eight percent (or six percent, if applicable) threshold will have to pay the difference to the Fund. The Fund will be used to support Maryland's Medicaid program. A $250,000 civil penalty will be imposed against any employer that fails to make a required payment to the Fund. The Act, which does not apply to the federal government or to any state or local government employers, is scheduled to become effective on January 1, 2007.

Two other states have enacted "play or pay" mandates this year. The Massachusetts Health Care Access and Affordability Act requires employers with at least 11 full-time employees to make a "Fair Share Contribution" unless they offer health insurance for their employees and make a "fair and reasonable premium contribution," which will be defined by regulation. The Fair Share Contribution will be based on the state's cost for "free care" provided to uninsured workers, but will not exceed $295 per full time employee per year. The Massachusetts Act also imposes a Free Rider surcharge on employers who do not provide health insurance. Vermont also has enacted a "play or pay" mandate that will apply to employers with more than four employees.

ERISA Preemption Claim

The RILA lawsuit asserts the Maryland Act is preempted by ERISA. RILA also is challenging a Suffolk County, New York law on ERISA preemption grounds. The Suffolk County Act requires large retail grocery stores in Suffolk County to spend at least $3 per hour worked on health care benefits for every non-management employee, including part-time and seasonal workers.

ERISA expressly preempts "any and all State laws insofar as they ... relate to any employee benefit plan ..." ERISA § 514(a). This would seem to preclude the Suffolk County law, which requires certain employers to provide health benefits to employees. But the Maryland Act -- like the new Massachusetts law and Vermont law -- is slightly more circumspect in that it gives covered employers a "choice" between providing a minimum level of health benefits to employees or paying a tax.

The June 23 hearing before the United States District Court for the District of Maryland dealt only with the Maryland Act. However, the case is being closely watched by employers and other states that have enacted, or are considering "play or pay" laws. The District Court heard arguments on RILA's motion for summary judgment, which courts may grant when no material issues of fact are in dispute and the moving party is entitled to judgment as a matter of law. The District Court has not set a timeline for issuing a ruling on RILA's motion.