Is Washington’s New Long Term Care Insurance Law Preempted by ERISA?

Washington State recently passed the Long Term Care Trust Act. The Act, approved by the legislature in 2019, sets up a state fund to pay for future long term care expenses like home nursing care, memory care, transportation, etc. The legislature passed the act to try to stave off a future crisis in which elderly or disabled folks in Washington won’t be able to afford these services. Currently, uninsured folks needing long term care typically fall back on state Medicaid benefits. There is concern that this will become unsustainable, particularly as more and more elderly folks need this care but can’t afford it.

The Long Term Care Act tries to cushion this blow by providing an employee-funded benefit to pay for future long term care. Starting January 1, 2022, employees in Washington State will pay a .58% payroll tax into the state long term care fund. Employers will be responsible for processing the tax and remitting the money to the fund.

This will probably lead to lawsuits challenging the Act as preempted by ERISA. ERISA generally prevents states from making their own laws regarding employee benefit plans. Whether this provision–known as “preemption”–applies to the Long Term Care Act will likely be whether the Act requires enough involvement by employers for courts to treat it as an employee benefit plan.

The Act’s critics say it obviously does. It can’t be disputed that long-term care insurance is an employee benefit that can be subject to ERISA if provided through an employee benefit plan. How, the critics say, could a law requiring employers to process payroll deductions for the purpose of providing benefits the employees only get because they’re working be anything but an employee benefit plan?

The answer might not be so simple. The U.S. Supreme Court has repeatedly held that ERISA does not preempt state laws requiring employers to provide benefits to their workers unless the law requires the employer to operate a so-called “administrative scheme.” For example, in the 1987 case Fort Halifax Packing Co. v. Coyne, the Supreme Court ruled that a Maine law mandating severance pay for workers fired during plant closures was not preempted by ERISA because it didn’t require the employer to do much more than write a check in an amount determined by the state. That decision explains that Congress’ purpose in stopping states from passing laws regulating employee benefit plans is to protect employers from burdensome state-law requirements that might discourage them from offering benefit plans to their employees. The Maine law didn’t do this because it didn’t require the employer to set up any kind of “administrative” scheme for the severance benefit but simply write a check when laying off workers: “To do little more than write a check hardly constitutes the operation of a benefit plan.”

If writing a check to your employee for an amount the state tells you isn’t an administrative scheme, it wouldn’t be hard for a court to rule that deducting money from their paychecks in an amount determined by the state isn’t one either.

It’s been a while since the U.S. Supreme Court has weighed in on a similar issue, so the Ninth Circuit Court of Appeals (the federal appellate court where any challenge to the Long Term Care Act is likely to wind up), will probably follow the Fort Halifax case. That’s what the Ninth Circuit did in deciding challenges to similar laws over the last few years.

For instance, in 2008, the Ninth Circuit found ERISA did not preempt a San Francisco ordinance requiring employers to pay for employee health care in Golden Gate Restaurant Association v. City and County of San Francisco. The court relied on the Fort Halifax case to determine the ordinance did not require employers to create an employee benefit plan. The court emphasized that an ERISA plan is not created by legislation that merely requires employers to pay money based on the number of hours worked by their employees.

More recently, earlier in 2021, the Ninth Circuit applied the same reasoning to hold a Seattle ordinance requiring employers to pay for employee health care was not preempted by ERISA in ERISA Industry Committee v. City of Seattle. The court relied on Fort Halifax as well as Golden Gate Restaurant Association. That decision was short, terse, and unpublished (meaning it lacks precedential value, an indication the court considered the issue largely settled by prior caselaw and not deserving of significant thought).

This suggests the courts will probably consider the Washington Long Term Care Trust Act along similar lines. Applying the Fort Halifax and Golden Gate Restaurant Association tests may make challenges to the Act difficult. After all, these cases arguably say Washington State could require employers to pay directly for employee benefits so long as the state is doing the math on the amount of the contributions. The main difference between these laws and the Act is that it’s the employees paying for the benefits provided by the Act rather than the employers. Since the employers just have to collect the money from their employees, it will be easy for a court to apply the Supreme Court’s reasoning from the Fort Halifax case that “To do little more than write a check hardly constitutes the operation of a benefit plan.”

How do I know if the insurance policy I got through my employer is subject to ERISA?

ERISA governs most insurance employees receive through their employers. But there are exceptions. Determining whether insurance a person gets through their employer is governed by ERISA can be complicated.

This is important because whether ERISA applies to an insurance policy determines the insured’s rights and the insurer’s obligations. If ERISA applies, the insurer must follow specific rules requiring the insurer to promptly decide claims, fairly consider all the evidence, perform a reasonable investigation, and communicate transparently with the claimant. Similarly, ERISA imposes important duties on the claimant, including the obligation to go through the insurer’s informal administrative process before bringing a lawsuit to recover insurance benefits if a claim is denied.

In general, ERISA applies to insurance an employer provides for its employees through an employee benefit plan. Factors that might show the insurance is part of an ERISA plan include: the employer pays for the benefits, the employer investigates claims, the employer decides which claims to pay, or the employer requires all employees to participate.

But employers often arrange for their employees to obtain insurance outside of an ERISA plan. This exception to ERISA coverage exists because, in passing ERISA, Congress wanted employers to be free to offer their employees insurance without creating an ERISA plan and subjecting themselves to ERISA’s complicated rules. One of the goals of ERISA is to increase the benefits available to employees by making it easier to offer employees benefits.

Accordingly, ERISA allows employers to offer their employees attractive insurance coverage without making the insurance part of an ERISA plan as long as the employer limits its involvement in the policy. Congress reasoned that if the employer’s involvement is limited, ERISA’s concern with protecting employee benefits from employers’ mismanagement or embezzlement is not in play.

Insurance that falls within this exception often has these attributes:

  • the insurance is advertised separately from the employer’s benefit plan;
  • the employee pays for the insurance (often through deductions from their paycheck);
  • the employer leaves it up to the employee to decide whether to buy the insurance;
  • the employee can take the coverage with them when they leave the employer; and
  • the employer isn’t involved in claims under the policy.

As with everything insurance-related, whether ERISA applies to a particular policy is complicated and depends on the details. Consult a qualified attorney if you have questions about whether specific benefits are governed by ERISA.

ERISA Plan Administrators Can Be Sued Under State Law Where Performing Non-Fiduciary Functions Says Ninth Circuit

Suppose a person is ready to retire but wants to make sure they’ll be financially secure in their retirement before they stop working. Calculating their pension benefits is confusing and arcane. Luckily, their employer’s pension plan website has a benefit calculator. This person plugs in their information and is told they’ll receive $2,000 a month in pension benefits if they retire tomorrow. They retire, depending on this income, only to be told later that the website was faulty and they’ll only receive $800 a month.

Does our hypothetical retiree have recourse when the rug is pulled out from under them like this? Yes, according to the Ninth Circuit Court of Appeals (the federal appellate court with jurisdiction over Washington and other Western states).

In Bafford v. Northrop Grumman Corporation, et al, the Ninth Circuit recently ruled that employees harmed by misrepresentations about their benefits have relief under state law even when ERISA provides no recourse.

Bafford worked for Northrop Grumman and participated in Northrop’s pension plan. Anticipating retirement, he requested pension benefit estimates from the pension plan’s website. The website was run by a third party company named Hewitt, who had been hired by the pension plan to perform administrative services.

Hewitt sent Bafford statements representing he would receive about $2,000 per month in retirement benefits. After he retired and began receiving monthly benefits, Hewitt discovered it had made a mistake in calculating the $2,000 monthly amount. Hewitt notified Bafford that his benefits were really only about $800 per month.

Bafford sued Hewitt, Northrop, and other entities involved in the mistake, asserting several different legal theories. The federal District Court dismissed the entire action, and Bafford appealed.

The Ninth Circuit reversed the District Court and ruled that Bafford had at least some recourse for Hewitt’s misstatement of the amount of his retirement benefits. The Ninth Circuit looked at Bafford’s claims under two different avenues: first, whether Bafford could sue under ERISA, and, second, whether he could sue under state law.

The Court of Appeals found that ERISA provided Bafford no relief. Bafford could not bring ERISA claims against Northrop, Hewitt and the other entities involved in administering the benefit plan because they were not acting as “fiduciaries” under ERISA. An ERISA “fiduciary” owes a serious duty to employees participating in the benefit plan, and has to keep the employee/participants’ interests upmost in mind when making decisions about the benefit plan. But the court found that Northrop, Hewitt, and their associates were not acting as “fiduciaries” as ERISA uses that term; they merely applied benefit calculation formulas without exercising any discretion. In other words, they acted as little more than calculators.

But the appellate court found that state law provided Bafford relief. ERISA normally pre-empts state laws regarding employee benefits, meaning employees typically cannot bring state law claims in disputes about pensions and other benefits. But having determined that ERISA provided Bafford no relief from pension calculation errors that harmed him and were clearly the Plan’s fault, the Ninth Circuit found that the normal pre-emption rule did not apply:

Holding both that Hewitt’s calculations were not a fiduciary function and that state-law claims are preempted would deprive Plaintiffs of a remedy for the wrong they allege without examination of the merits of their claim. Broadly, this would be inconsistent with ERISA’s purpose.

Since Hewitt’s calculation of Bafford’s benefits was not a fiduciary function under ERISA, he was allowed to seek relief under state law.

Ninth Circuit Confirms ERISA Plans Cannot Assert New Rationales for Denying Benefits After They Get Sued

I’ve previously blogged about cases in which insurers were limited from raising new reasons to deny coverage after the fact. Whether an insurer can do so is a complex question that depends on the facts of the specific case. It also depends on what law applies. A recent ruling from the Ninth Circuit Court of Appeals confirms that, if ERISA applies, the rule is clear: ERISA-governed benefit plans cannot raise new reasons for denying benefits after they get sued.

In Beverly Oaks v. Blue Cross & Blue Shield, doctors at the Beverly Oaks clinic sued Blue Cross & Blue Shield (BCBS) claiming that BCBS should have paid for the treatment of certain patients of the clinic who had health insurance coverage from BCBS under their ERISA plans. The doctors relied on agreements the patients signed promising that the doctors could sue the insurance plan directly to pay their treatment bills. These agreements are known as an “assignment of benefits.’

No one disputed that the ERISA plans at issue banned the patients from signing the “assignment of benefits” forms. The plan documents repeatedly stated that benefits could not be assigned to third parties like the doctors.

But BCBS failed to invoke the assignment ban in response to the doctors’ claims. Instead, BCBS processed the claims on the merits, mostly denying them for reasons unrelated to the assignment of benefits. At the end of the day, BCBS paid the doctors only $130,000 out of $1.4 million in medical bills.

BCBS raised the ban on assigning benefits only after the doctors filed a lawsuit under ERISA seeking to overturn BCBS’ denial of the claims on the merits. BCBS told the federal District Court that the doctors had no right to sue on behalf of their patients because the assignment of benefits agreements were not allowed under the terms of the ERISA plans. The District Court agreed and dismissed the case.

But the Ninth Circuit reversed and allowed the doctors’ suit to proceed. That court emphasized that ERISA requires employee benefit plans (including their agents like BCBS) to state all of the reasons for denying a claim in the first instance. Allowing plan administrators to keep arguments for denying claims in their proverbial “back pockets” until litigation invites abuses and cuts against claimants’ right to respond to the basis for any claim denials:

“ERISA and its implementing regulations are undermined where plan administrators have available sufficient information to assert a basis for denial of benefits, but choose to hold that basis in reserve rather than communicate it to the beneficiary.”

The Court of Appeals also relied on the fact that BCBS representatives repeatedly told the doctors that they could seek reimbursement for medical bills on their patients’ behalf–before the doctors provided treatment–without mentioning the ban on assignments of benefits.

Court Ruling Illustrates The Limits ERISA Places On Insurers’ Discretion To Decide Claims

Many ERISA plans give the claims administrator (often an insurance company) discretionary authority to interpret the evidence and the terms of the employee benefit plan in deciding claims. This discretionary authority makes it difficult for claimants to overturn claim denials because court defer to decisions made using this authority.

But ERISA recognizes that claims administrators have an incentive to abuse this discretionary authority and limits it in important ways. Where the facts of a particular claim suggest the insurance company or other claims administrator is abusing its authority, courts are required to view the administrator’s handling of the claim with skepticism.

The Ninth Circuit Court of Appeals’ recent decision in Gary v. Unum is a reminder of the importance that this skepticism has in ERISA disputes. Allison Gary had a medical condition called Ehlers-Danlos Syndrome (EDS). She had disability insurance through Unum as part of her employer’s benefit plan and made a claim. Unum denied her claim and she filed a lawsuit seeking benefits under ERISA.

The lower court sided with Unum and upheld the denial. The Ninth Circuit Court of Appeals reversed.

The Ninth Circuit determined the lower court failed to properly scrutinize Unum’s evaluation of the medical evidence about Gary’s condition. The ERISA plan at issue gave Unum discretion to interpret this evidence. But the Ninth Circuit emphasized that, even where ERISA plan administrators have that discretion, it is checked by common-sense limitations that prevent insurers like Unum from denying claims out of self interest.

The Ninth Circuit held that the facts of Unum’s handling of the claim should have led the lower court to view Unum’s exercise of its discretionary authority to interpret the evidence with skepticism. First and foremost, the Ninth Circuit emphasized that an insurer who, like Unum, is responsible for paying disability claims as well as investigating the claimant’s entitlement to benefits has a perverse incentive to save itself money by looking for evidence to deny claims while ignoring evidence that would support paying benefits. The court emphasized this structural conflict of interest should have been considered.

Second, the appellate court was concerned by Unum’s practice of “cherry picking” certain observations from medical records, i.e., ignoring evidence of Allen’s disability while focusing on evidence that would support denying her claim.

Third, Unum failed to have Gary examined by an EDS specialist. Fourth, Unum cut off Gary’s benefits after exactly six months, an arbitrary measure that was disconnected from the medical evidence.

The Gary decision is unpublished, meaning it is not binding authority but may be relied on at the discretion of lower courts to the extent a judge believes the ruling is helpful.