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This is not a textual record. This is used as an
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Clinton Presidential Records
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Health Care Task Force
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FolderlD:
Folder Title:
Briefing Book on ERISA [Employee Retirement Income Security Act] Issues [1]
Stack:
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�PRESIDENTIAL TASK FORCE ON
NATIONAL HEALTH CARE REFORM
BRIEFING BOOK
ON
ERISA ISSUES
�BRIEFING ON ERISA ISSUES
I. BACKGROUND
A.
ERISA Provisions and Preemptions
1.
Most private employment-based health benefit plans are currently regulated
under the Employee Retirement Income Security Act of 1974 (ERISA).
2.
The provisions of ERISA are the following:
reporting and disclosure;
fiduciary requirements governing the administration of the health
benefits plans;
handling of plan assets and continuation of health benefit requirements;
comprehensive scheme of remedies for breach of fiduciary duty; and
some remedies for denial of benefit claims.
3.
B.
ERISA requirements are enforced by the Department of Labor. Fiduciaries,
participants and beneficiaries also can bring private actions under ERISA.
ERISA Provisions
1.
ERISA preempts all state laws relating to employee benefit plans, including
employer-sponsored health insurance arrangements. However, it does not
preempt state laws which regulate insurance. The practical result is that states
can regulate benefit plans that are funded through insurance but are preempted
from regulating certain benefit plans that are self-funded. This preemption
applies to benefit mandates, taxes and other forms of regulation.
�2.
ERISA preemption of state laws permits single employers to form self-funded
benefit plans and operate outside of the scope of state insurance laws. The
preemption provision also is specifically extended to two types of plans
involving multiple employers:
•
Multi-employer plans formed pursuant to collective bargaining ("TaftHartley plans")
•
Plans formed by rural telephone or electric cooperatives.
3.
Other multiple employer arrangements, often called MEWAs, are subject to
both federal law and state insurance laws. MEWAs are often formed by
business associations or trade groups. However, because of confusion by states
and courts, many MEWAs operate on a self-funded basis even though most
state laws prohibit it. While some MEWAs have provided reasonable coverage
to small employers, many have failed financially, leaving thousands of families
with unpaid medical bills. Manyfraudulentoperators also have used MEWAs
to cheat unsuspecting small businesses. These operators sell unauthorized
"insurance", claiming an ERISA exemption from state insurance laws.
4.
States feel that ERISA prevents them from reorganizing their health care
systems to expand coverage and more rationally allocate costs.
5.
Employers and (to a large extent) organized labor believe that ERISA shields
them from state excesses (such as benefit mandates) and permits them to
operate under one set of national rules rather than rules that vary state by state.
6.
ERISA provides the sole structure of remedies for benefit claim denials for
both insured and self-funded health plans. State law remedies that provide for
extra contractual or punitive damages in cases of bad faith claims practices are
preempted by ERISA.
7.
Advocates for claimants believe that the current rules are unfair and encourage
insurers and benefit administrators to delay or deny claims payments because
workers have no effective remedies.
8.
Employers and insurers believe that the current rules are fair and protect them
from unwarranted punitive damages awards that will increase system costs.
�9.
Unless ERISA is amended, most health care plans offered under the new
system to employees would be considered ERISA-covered plans, whether the
benefits were purchased through a health alliance or otherwise. Alliances also
could be subject to ERISA by virtue of receiving employer and employee
contributions toward premium payments and exercising discretion over and/or
management of such plan assets.
�II. ISSUES
A.
There are generally four main components of the "ERISA" issue that must be
addressed in the new system:
1.
2.
Standards that will apply to self-funded health plans formed by large
employers, Taft-Hartley plans and rural cooperative plans if they are permitted
to operate outside of the alliance system.
3.
The scope of ERISA preemption of state laws in the new system (i.e., what
states can do to large employers and how they get to do it).
4.
B.
Fiduciary and enforcement requirements for people handling other people's
funds (e.g., employers handling employee contributions; banks, alliances and
health plans handling employer and employee premiums).
Procedures to address benefit claims disputes (i.e., the Pilot Life issues).
Fiduciary standards within alliances
1.
Since the new health care system relies on private health insurance
arrangements to provide benefits, there is a need to assure that appropriate
fiduciary standards are in place for private parties handling funds in the new
system.
•
The existing fiduciary standards in ERISA are based on trust law and
are intended to govern the conduct of persons who exercise
discretionary authority or management over monies in the employee
benefit plans, including employer-sponsored health insurance
arrangements.
•
Fiduciary standards are needed in the new system for (a) employers
handling employee contributions; (b) banks and other intermediaries
acting as collection agents; (c) alliances; and (d) health plans.
�C.
Standards for employers operating plans outside of alliances.
Under some options for the new system, certain employers of at least a certain size
would be permitted to maintain coverage outside of the alliance ("non-alliance
employers"). Standards will be needed to govern their behavior.
1.
What standards are needed if non-alliance employers fail and cannot
continue to provide health insurance (or pay bills owed to providers)?
Under current law, if a self-funded employer is bankrupt, the plan enrollees are
left without coverage and health care providers are left as general creditors.
a.
b.
2.
What provisions are needed to protect enrollees in the case of a failure
of a non-alliance employer?
To what extent do health care providers deserve assurance of payment
in the new system? Providers may not be paid if a non-alliance
employer fails.
Should non-alliance employers be required to offer a choice of health
plans?
a.
If so, should they be required to offer the same choices as the alliance
or should the requirement be more limited?
b.
If not, could a non-alliance employer choose to offer only a staff model
HMO?
3.
What other requirements apply to non-alliance employers in the areas of
insurance reform, quality assurance, etc.?
4.
Are there groups, other than large employers, who should be permitted to
operate outside of alliances (e.g., Taft-Hartley plans, rural electric and
telephone cooperatives, MEWAs)?
�D.
ERISA Preemption
Under current law, ERISA broadly preempts state laws that "relate to" an employee
benefit plan.
1.
Given the changes in the new system, especially the contemplated breadth
of stateflexibility,to what extent should ERISA's preemption be modified:
•
•
E.
for coverage provided through the alliance?
for coverage provided by non-allinace employers?
Standards for beneflt and claims disputes
There are questions under current ERISA law about whether claimants are adequately
protected in the case of bad faith practices by ERISA-covered benefit plans (both
insured and self-funded).
1.
What rights should enrollees have in the case of benefit disputes?
2.
Should the same rights apply inside and outside of alliances?
3.
, Should a new system to adjudicate health beneflt claims be instituted?
�HI. RECOMMENDATIONS AND RATIONALE
A. Fiduciary standards
RECOMMENDATION:
Standards similar to existing ERISA fiduciary standards should be applied in the new
system, both inside and outside of alliances. A new title in ERISA would be created
for health benefits with standards for employers (who hold payroll deductions),
alliances, contractors and others. Current fiduciary rules would continue for nonalliance employers.
The standards would include requirements that:
•
A fiduciary must discharge his or her duties solely in the interest of plan
participants and beneficiaries and for the exclusive purpose of providing plan
benefits to them.
•
A fiduciary must act with skill and prudence under the circumstances that a
"prudent person" acting in a like capacity and familiar with such matters would
use in the conduct of a similar enterprise.
•
In order to prevent conflicts of interest and self-dealing, fiduciaries would be
barred from a number of transactions and activities. This will restrict the
manner in which fiduciaries may deal with the assets of a plan.
•
A fiduciary who breaches any responsibility or duty under ERISA may be
personally liable to make good any losses to the plan resulting from such a
breach and to restore to the plan any profits made through improper use of plan
assets. A fiduciary is also subject to such other equitable or remedial relief as
a court may deem appropriate, including removal.
RATIONALE:
ERISA currently has fiduciary standards that apply to most employer-sponsored health
insurance plans, both insured and self-funded. There is experience in applying the
standards and a method of enforcement currently in place. Extending those standards
to arrangements under the new system would not be a drastic departure for most
participants in the new system.
�B.
Standards for non-alliance employers and other arrangements.
1.
Non-alliance employers
RECOMMENDATION:
Non-alliance employers would be required to:
a)
Provide the comprehensive benefit package. If supplemental coverage is
provided, additional benefits and employee contributions should be shown
separately in employee benefit materials.
b)
Comply with national standards with respect to uniform claims forms, data
reporting, electronic billing, etc.
c)
Comply with financial standards to protect providers and enrollees in case of
employer failure:
•
•
The obligation could be met through letters of credit, bonds or other
appropriate security instead of establishing the trust.
•
d)
Self-funded employers or trusts would be required to establish a trust
fund which is maintained at a level equal to the incurred and reported
losses of the health plan (i.e., the estimated amount that the plan owes
providers at any given point in time). The plan would pay claims from
the trust, and special status in bankruptcy could be given to the trust
funds if the employer failed.
A national guaranty fund (or similar mechanism) would be established,
so that provider bills would be paid in the event of the failure of a nonalliance employer. The obligations would be funded through
assessments on other non-alliance employers.
Comply with insurance reform rules (i.e., provide coverage to all employees,
no preexisting condition exclusions or cancellations of coverage, no waivers or
restrictions on benefits).
Non-alliance employers would be permitted to self-fund or to purchase
experience-rated insurance contracts.
�RATIONALE:
The recommended provisions are intended to provide employees covered by nonalliance employers with the equivalent benefits and protection to that provided to
people covered through alliances.
The financial requirements are intended to protect health care providers in the case of
the failure of k non-alliance employer. The trust fund assures that sufficient funds
have been set aside to pay current obligations; the guaranty fund provides protection
both if the trust fund is insufficient or if services must be purchased after failure of a
large employer but before the workers are placed in a new health plan.
2.
Other non-alliance arrangements
RECOMMENDATION:
Groups that are currently exempt from state laws under ERISA — Collectively
bargained benefit plans and plans formed by rural electric and telephone cooperatives
— would be permitted to operate outside of alliances.
MEWAs — usually formed by associations of small employers — currently are
subject to state insurance laws. It is recommended that they be prohibited from
operating outside of alliances.
All requirements applicable to non-alliance employers would apply to these other
non-alliance arrangements.
RATIONALE:
Collectively bargained plans and rural cooperatives have been successfully operating
outside of state authority under ERISA for many years and few problems have arisen.
The same arguments that favor leaving some employers outside of alliances —
potential innovation, political considerations — apply in these instances as well.
MEWAs have been an area of extreme abuse and fraud and should not be permitted to
continue in operation. Permitting MEWAs to continue would seriously damage the
viability of alliances, because small employers could join MEWAs to escape
community rating within the alliance.
�C.
ERISA Preemption
RECOMMENDATION:
The ERISA preemption provision would be modified as follows:
1.
Title I of ERISA should be amended to exclude health insurance plans. This
will take them beyond the reach of current section 514 and the "relates to"
language that has proved so troublesome.
2.
All the rules regarding employer obligations (whether inside or outside of the
purchasing cooperative) should be placed in a new title of ERISA, which
would have its own preemption clause, based on the following principles:
a)
In general, no Federal preemption of state laws; all Federal standards
are presumed to be minimum standards upon which the states could
build. State standards less stringent than the federal standards would be
preempted.
b)
Exceptions, where preemption would occur:
•
in cases where Federal law explicitly precluded state discretion
or action (e.g., states may not change the benefit package,
impose greater contribution obligations on employers, employees
or individuals that are provided for in Federal law, or require
that supplemental benefits be provided by employers).
•
current ERISA preemption rules would apply for non-alliance
employers (i.e., states may not impose requirements on
employers or plans and may not deem self-insured plans to be
insurance companies for purposes of state regulation).
RATIONALE:
With universal coverage through the new health care system, ERISA preemption issues
should be much less contentious. The recommended preemption provisions would
give states free reign with respect to alliance health plans while permitting nonalliance employers to relative freedom from differing state requirements.
10
�D.
Beneflt Claims Disputes
RECOMMENDATION:
New federal provisions governing claims disputes are recommended as follows:
•
Each health plan would be required to establish procedures to review claims
and resolve disputes and to provide notice of their availability to each covered
individual. The established procedure would have to meet certain minimum
federal standards.
•
Upon exhaustion of a health plan's internal review process, individuals could
bring complaints to a federal Health Benefits Claims Court.
•
If a plan were found liable, the individual would be awarded actual damages
(compensatory damages as well as the consequential damages proximately
caused by the failure to pay the claim or comply with the law).
•
Additional damages (up to treble damages) could be awarded in cases of fraud.
For alliance health plans, states would be free to provide for greater damages.
•
Reasonable attorneys' fees and court costs, including reasonable expert witness
fees, would be awarded to prevailing plaintiffs.
RATIONALE:
Current ERISA standards for benefit claim disputes are inadequate. Everyone is
entitled to a fair claims adjudication and dispute resolution process; a national process
was chosen to provide for uniformity of decisions across all jurisdictions.
11
�IV. QUESTIONS AND ANSWERS
1.
Why maintain ERISA; wouldn't it be better to start over with new rules for
employers and insurers in the new system?
Response: In a sense we are starting over, because the ERISA rules for health
insurance would be moved and rewritten to reflect the new system. At the same time,
ERISA provides an existing, coherent body of law and standards of conduct that can
provide a basis for the new rules. ERISA's fiduciary standards, which are based in
state trust law, provide a goodframeworkfor assuring that employer and employee
contributions are handled with prudence in the new system.
The most troublesome aspects of ERISA — the preemption doctrine and the remedies
for claims disputes — are being significantly modified.
2.
Why would there be any ERISA preemption of state law in the new system, given
the degree of stateflexibilityin the new system?
Response: For coverage purchased through alliances, there should be very little
preemption of state activity. States might be prohibited from applying less stringent
fiduciary standards, but generally they should be free to act as they see fit.
For coverage provided outside of alliances, some preemption of state laws would
remain so that non-alliance employers (as well as self-funded Taft-Hartley trusts and
rural cooperatives) can operate benefit plans without the need to conform to variances
within each state.
3.
Those who oppose meaningful new procedures or remedies for unfair claims
settlement practices argue that there is very little evidence of problems with the
current ERISA rules concerning beneflt claims disputes. Why do we need a new
process?
Response: The existing rules are unfair to workers. Although there has been no
systemic study of claims dispute data, anecdotal evidence points to a substantial
increase in the number of instances of unfair treatment of plan participants by
administrators and insurers.
12
�Under current Department of Labor regulations, insurance companies and self-funded
plans can take up to two years to process and pay a claim. Adverse claims decisions
can be challenged only by going to court. For small claims, this is impractical because
of the time and expense involved (attorney fee awards are discretionary, even if the
plaintiff prevails). Prevailing plaintiffs can collect no more than the benefits owed
under the contract plus reasonable attorney fees. Extra contractual or punitive
damages are not available, even in cases of egregious misconduct by employers,
administrators or insurers.
The proposed procedures and remedies provide a measured response to these problems
by assuring that plaintiffs can collect their actual damages in most cases and, in cases
of fraud, can collect additional damages (up to treble actual damages, awarded by the
judge).
4.
Won't the new procedures and remedies for benefit claim disputes lead to more
lawsuits against employers and health plans? Won't costs rise because of large
punitive damage awards?
Response: The proposal relies in large measure on alternative dispute resolution, so
we do not anticipate additional lawsuits from the new provisions.
The new remedies applicable to benefit claim disputes are fair but measured.
Claimants would be able to collect only their actual damages, plus reasonable attorney
fees, in most cases. Extra contractual damages would be available only in cases of
fraud and then, only if awarded by a judge.
5.
Why are new financial standards needed for non-alliance employers?
Response: Current ERISA rules are designed to enforce voluntary or contractual
promises to provide benefits. These promises can change. Under the new system,
non-alliance employers are providing a benefit that is the employee's right, and
therefore more security is needed.
In addition, one of the benefits to health care providers and to employers in the new
system is that uncompensated care will be eliminated — everyone will have coverage.
This promise cannot be kept if the amounts owed to health care providers are not paid
when a large, self-funded employer becomes bankrupt. The trust funds help assure
that there will be sufficient funds to pay what is owed to providers. The guaranty
fund will assure that providers will be paid if they treat the ex-workers of a failed
employer before the worker's enrollment in a new health plan.
13
�6.
Won't thesefinancialrequirements on non-alliance employers require them to set
aside large sums of money?
Response: The trust requirement will require large employers, Taft-Hartley trusts and
rural cooperatives with self-funded health plans to set aside amounts equal to their
accrued liability to health care providers at any given time. This could be as much as
two months of health care claims. The provision would be phased in so that they
would not be hit with a big reserve requirement all at once. To the extent that claims
are paid quickly, the amount held in trust could be decreased.
7.
Will association plans or MEWAs be able to operate in the new system?
Response: No; under the new system, all employers of under a certain size will be
required to participate in the alliance. This permits the broadest pooling of risk and
the maximum concentration of market power in the alliance. It also protects the
alliance from containing a disproportionate share of the poor and near poor. It returns
the system to one of broad pooling of risk, where a substantial share of the population
in each area would be in the same system.
If associations or insurers were permitted to form health plans outside of alliances, the
broad pooling of risk would be threatened because they might attract (or actively
select) a disproportionate share healthier lives. Requiring these plans to serve poorer
areas also is very difficult, because the plan will target its marketing to desirable areas
or restrict enrollment to members of an association.
14
�V. INTEREST GROUP POSITIONS
The working group met or communicated with the following interest groups regarding
ERISA issues:
•
The AFL-CIO
•
Actuaries and consultants from Martin Segal, Co., (who represent Taft-Hartley
plans)
•
The Self-Insurance Institute of America
•
The ERISA Industry Committee
•
Insurance industry representatives
•
Association of Private Pension and Welfare Plans (APPWP).
•
Society of Professional Benefit Administrators
Positions:
The AFL-CIO favors having everyone in alliances. While taking no position,
they did not appear to oppose the financial requirements that would be placed
on non-alliance employers or other non-alliance self-funded health plans.
Some of the trusts operated by the building and construction trade unions may
not want (or be able) to comply with the requirements.
The Self-Insurance Institute of America favors permitting associations of small
employers — MEWAs — to provide self-funded coverage. They would favor
employer-choice of benefit plan and the ability of MEWAs to offer coverage
outside of alliances. Their position statement is at Tab 3.
The ERISA Industry Committee met with us regarding the financial
requirements that might be placed on non-alliance employers. They were not
enthusiastic, but were more receptive than one would have thought.
The ERISA Industry Committee opposes the changes to the ERISA rules
related to benefit claims disputes.
15
�The insurance industry also opposes changes to the ERISA rules for benefit
claims disputes. They have a compromise proposal which would (1) shorten
the time for claims payment; provide for non-binding mediation; and (3)
establish civil penalties for administrators and fiduciaries that engage in a
pattern of unfair practices. Their position statement is at Tab 2.
The APPWP supports extending ERISA preemption to all employer-sponsored
plans so that state benefit mandates and other special requirements are
preempted. Their complete proposal is at Tab 3.
The Society of Professional Benefit Administrators supports permitting selffunded association plans operate outside of alliances.
16
�Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a tabbed divider. Given our
digitization capabilities, we are sometimes unable to adequately
scan such dividers. The title from the original document is
indicated below.
Divider Title:
�Tab 1
Fiduciary Responsibility
1. The Definition of a Fiduciary Under ERISA
�Article entitled, The Definition of a Fiduciary Under ERISA: Basic Principles, written by
Jane Kheel Stanley for the American Bar Association's Real Property Probate
and Trust Journal
This article is the first of a three-part series designed to provide a thorough survey of the
case and administrative law regarding the definition of afiduciaryunder ERISA. The article
presents an overview of the major rules, based on the purposes of ERISA and the language of
the statutory provisions, that have evolved from ERISA'sfiduciarydefinition in section 3(21).
The article examines the principles of construction of section 3(21),fiduciarystatus as a
result of title or position andfiduciarystatus as a result of function.
Main Point: Becausefiduciariesbear personal liability under ERISA, and because the
definition of afiduciaryis intended to be broadly construed, one must look closely at the
rules and case law when attempting to determine if the acts or title of a person would make
him or her a fiduciary under ERISA.
19
�gi:::
si:--
REAI
PROPERTY
PROBATE
ANCI TRUST
JOURNAI
Vol. 27, No. 2
Summer 1992
DRAFT REGUIATIONS ON SUCCESSIVE
INTERESTS UNDER § 2032A
T I I E DEFINITION OF A FIDUCIARY
UNDER ERISA: BASIC PRINCIPLES
RECOGNIZING LENDERS' RENTS INTERESTS
IN BANKRUPTCY
T I I E UPC AND TIIE NEW DURABLE POWERS
Section of Real Property, Probate
and Trust Law/American Bar Association
�'A
•
THE DEFINITION OF A FIDUCIARY UNDER ERISA:
BASIC PRINCIPLES
Jane Kheel Stanley*
Editors' Synopsis: Althoutfi basic to the operation and interpretation of the Employee Retirement Income and Security Aa
(ERISA), the definition of fiduciary under ERISA has been
construed piecemeal by courts and commentators. In the first in a
series of articles, the author discusses the applicable standards for
defining a fiduciary and examines rwo grounds for qualification as
a fiduciary, resulting from title or position and from function.
I.
II.
INTRODUCTION
PRINCIPLES OF CONSTRUCTION
A. Broad Construction
B. Functional and Formal Approach
C. Objective Standard
III.
FIDUCIARY STATUS AS A RESULT OF TITLE OR POSITION
A. Appointment to Plan Office
B. Resignation or Removal from Plan Office
IV.
FIDUCIARY STATUS AS A RESULT OF FUNCTION
A. Persons with Limited Authority
1. Lack of Final Authority
2. Limits on Scope of Authority
3. lUegalfy or Improperly Atiamed Power
4. Indirect Exercise of Control
B. Status Limited by Function
V.
CONCLUSION
" Attorney, Washington D.C; B.A., 1972, Radcliffe; J.D., 1977, Columbia
University Law School; LLM. 1978, Georgetown Law Center. Two additional
articles, one entitled The Definition of a Fiduciary Under ERISA: Functions Covered
Under Sections 3(21)(A)(i), (A)(u), and (A)(ui), and the other, The Definition of a
Fiduciary Under ERISA: Particular Persons and Entities, are scheduled for publication
in subsequent issues of the Journal. These Articles are adapted from chapters in a
book on ERISA which is to be published by Little Brown & Company. The author
wishes to extend special thanks to librarian Jose Garcia for his fine assistance in
assembling the materials for the articles.
�238
27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
I. INTRODUCTION
1
The Employee Retirement Income Security Act (ERISA),
enacted in 1974, is a landmark federal statute designed to regulate
the nation's private pension and welfare plans. These plans contain
several billion dollars in assets that secure retirement and other
benefits for millions of working Americans. Although ERISA
regulates numerous aspects of such plans, the core provisions of the
statute deal withfiduciariesand their obligations. Sections 401-414
of the Act contain the fiduciary provisions. However, section 3(21)
defines the term "fiduciary." The definition is critical to determining
the scope of the section 401-414 provisions.
2
1
Employee Retiremeni Income Securuy Act of 1974 (ERISA), Pub. L No. 93406, 88 Stat. 829 (codified as amended at 29 U.S.C. §§ 1001-1461 (1988 & Supp. 1
1989)).
Section 3(21) defines a fiduciary as follows:
(A) Except as otherwise provided in subparagraph (B), a
person is a fiduciary with respect to a plan to the extent (i) he
exercises any discretionary authority or discretionary control
respeaing management of such plan or exercises any authority or
control respecting management or disposition of its assets, (ii) he
renders investment advice for a fee or other compensation, direct
or indirect, with respect to any moneys or other property of such
plan, or has any authority or responsibility to do so, or (iii) he has
any discretionary authority or discretionaryresponsibilityin the
administration of such plan. Such term includes any person
designated under section 1105(cXl)(B) of this title.
(B) If any money or other propeny of an employee benefit
plan is invested in securities issued by an investment company
registered under the Investment Company Act of 1940 [15 U.S.C.A.
§ 80a-l et seq.], such investment shall not by itself cause such
investment company or such investment company's investment
adviser or principal underwriter to be deemed to be a fiduciary or
a party in interest as those terms are defined in this subchapter,
except insofar as such investment company or its investment adviser
or principal underwriter acts in connection with an employee
benefit plan covering employees of the investment company, the
investment adviser, or its principal underwriter. Nothing contained
in this subparagraph shall limit the duties imposed on such
investment company, investment adviser, or principal underwriter
by any other law.
ERISA § 3(21), 29 U.S.C. § 1002(21).
2
�S U M M E R 1992
The Defmaion of a Fiduc'mry Under ERISA 239
The definition of a fiduciary in section 3(21) is unique because
it is not drawn from common law nor is it patterned after any
statutory definition. This uniqueness, in itself, creates some confusion. In addition, the definition is vague, loosely written, and
extremely broad in scope. Soon after ERISA's passage, these
characteristics created considerable speculation regarding how far
section 3(21) reached.
As a result of the confusion, a number of panels were assembled and articles were written to address the question of who is an
ERISA fiduciary. After this initial flurry of commentary, the forum
for debate shifted to the courts and the Department of Labor.
Consequently, a considerable body of law has developed that
discusses the reach of section 3(21). However, no summary currently
exists that comprehensively analyzes this important body of law.
3
4
5
3
See Panel Discussion, Insulating the Board of Directors, 31 Bus. LAW. 201, 20405 (1975); Panel Discussion, Special Problems of Banks, 31 Bus. LAW. 241, 241-45
(1975) ; Panel Discussion, Special Problems of Insurance Companies, 31 Bus. LAW.
257,261,264-67 (1975); Panel Discussion, Special Problems of ihe Securiiies Industry,
31 Bus. LAW. 269, 270-72 (1975); Panel Discussion, Who Are Fiduciaries?, 31 Bus.
LAW. 83 (1975).
See Fred N. Gerard & Paul S. Schreibcr, Secuniies Investments Under ERISA,
35 INST. ON FED. T A X ' N . 65, 6S-75 (ERISA Supp. 1977); James F. Jorden, Special
Insurance Company Problems in the Marketing and Adtninistration of Pension and
Healih and Welfare Plans, 11 FORUM 1054,1060-63 (1976); Daniel C. Knickerbocker,
Fiduciary Responsibility Under tlie Pension Refonn Act, 10 REAL PROP. PROB. & TR.
J. 495, 496, 500-06 (1975); Harry V . Lamon, Jr., Professional Money Managers:
Fiduciary Responsibihty Under ERISA, 11 REAL PROP. PROB. & TR. J. 519, 550-56
(1976) ; H. Stennis Little, Jr. & Larry T. Thrailkill, Fiduciaries Under ERISA: A
Narrow Path to Tread, 30 V A N D . L REV. 1, 4-10 (1977).
Some articles have briefly dealt with the case law and administrative law on
§ 3(21) as oan of an overview of ERISA. See, e.g., Robert N. Eccles, Fiduciary
Litigation Under ERISA, 23 R E A L PROP. PROB. & TR. J. 679, 680-84 (1988); ERISA
and the Investment Management and Brokerage Industries: Five Years Later, 35 Bus.
LAW. 189,199-208 (1979); Marc Genner, ERISA in Retrospect, 10 J. PENSION PLAN.
6 COMPUANCE 275, 276-78 (1984); Mayer Siegel & Linda Parker, The Rising Tide
of Suits Ch-erthe Responsibilities and Liabilities of Plan Administrators and Fiduciaries,
33 INST. ON FED. TAX'N. § 12.02[2] (ERISA Supp. 1981). In addition, a few articles,
or portions of articles, have discussed the case law and administrative law as applied
to particular persons or entities. See, e.g., Bernard Dobranski, 77ie Arbitrator as a
Fiduciary Under the Employee Retirement Income Secunty Act of 1974: A Misguided
4
5
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
240
This article is the first of a three-part series that will help fill
the gap in the literature. The purpose of the series is to provide a
thorough survey of the case law and administrative law that has
evolved over the last eighteen years regarding the ERISA definition
of afiduciary.This first article formulates some principles of general
application under section 3(21).
II. PRINCIPLES OF CONSTRUCTION
A.
Broad Construction
It is universally recognized that the definition offiduciaryin
section 3(21) is broad and should be broadly construed. This
6
Approach, 32 AM. U. L REV. 65 (1982); Richard G. Mandel, Must Claims Denials Be
Upheld Unless Arbitrary and Capricious?, 19 FORUM 457, 458-60 (1984); David L
Campbell, Note, Attorney's Liabilities—What Standard of Review Applies to Group
Policies Issued to ERISA Plans Under ERISA, 82 W. VA. L. REV. 129,135-46 (1979).
Consolidated Beef Indus., Inc. v. New York Life Ins. Co., 949 F.2d 960, 964
(8th Cir. 1991), cen. denied, 112 S. Ct. 1670 (1992); Farm King Supply, Inc.
Integrated Profit Sharing Plan & Trust v. Edward D. Jones & Co., 884 F.2d 288,29192 (7th Or. 1989); American Fed'n of Unions Local 102 Health & Welfare Fund v.
Equitable Life Assurance Soc'y, 841 F.2d 658, 662 (5th Cir. 1988); Brock v.
Hendershott, 840 F.2d 339, 342 (6th Or. 1988); Mutual Life Ins. Co. v. Yampol, 840
F.2d 421, 425 (7th Cir. 1988); Yeseta v. Baima, 837 F.2d 380, 385 (9ih Cir. 1988);
Blatt v. Marshall & Lassman, 812 F.2d 810, 812 (2d Cir. 1987); Donovan v. Mercer,
747 F.2d 304, 308 (5th Or. 1984); UAW v. Greyhound Lines, 701 F^d 1181, 1187
(6th Cir. 1983); Chicago Bd. Options Exch. v. Connecticut Gen. Life Ins. Co., 713
F.2d 254, 260 (7th Cir. 1983); Bouton v. Thompson, 764 F. Supp. 20, 22 (D. Conn.
1991); Chapman v. Klemick, 750 F. Supp. 520, 522 (S.D. Fla. 1990); Coleman v.
Nationwide Life Ins. Co., 748 F. Supp. 429, 431 (E.D. Va. 1990); Successor Trust
Comm. of Permian Distrib., Inc. v. First State Bank, 735 F. Supp. 708, 715 (W.D.
Tex. 1990); Procacci v. Drexel Burnham Lambert, Inc., Civ. A. No. 89-0555, 1989
U.S. Dist. LEXIS 12208, at '12-13 (E.D. Pa. Oct. 16,1989) (mem.); Buehler Ltd. v.
Home Life Ins. Co., 722 F. Supp. 1554, 1562 (N.D. III. 1989); Vogel v. Independence Fed. Sav. Bank, 692 F. Supp. 587, 593 (D. Md. 1988); In re Benefit Management Corp., 10 Employee Benefits Cas. (BNA) 1651,1656 (Bankr. W.D. Wis. 1988);
Galgay v. Gangloff, 677 F. Supp. 295, 302 (M.D. Pa. 1987); Brock v. Self, 632 F.
Supp. 1509, 1521 (W.D. La. 1986); Stanton v. Shearson Lehman/Am. Express, Inc.,
631 F. Supp. 100, 104-05 (N.D. Ga.); Eaton v. D'Amato, 581 F. Supp. 743, 746
(D.D.C. 1980); Brink v. DaLesio. 496 F. Supp. 1350,1375 (D. Md. 1980), aff d in pan
6
lllliiliB
�S U M M E R 1992
The Definiiion of a Fiduciary Under ERISA 241
principle is cited in a wide variety of cases, involving diverse classes
of people such as alleged trustees, insurance companies, insurance
consultants, contract service providers, brokerage firms and
investment counselors,
employers, union officials, attorneys, banks, and a state insurance director. The principle is
also noted in cases holding that companies and individuals affiliated
with those companies are, or may be, liable as fiduciaries, and in
cases holding parent companies subject to liability as fiduciaries for
the conduct of their affiliates."
7
8
9
10
11
14
15
12
13
16
17
One justification for broadly construing section 3(21) is that
Congress enacted ERISA as a remedial statute, and, therefore, the
and rev'd m pan, 667 F.2d 420 (4ih Cir. 1981).
E.g., Donovan v. Mercer, 747 F.2d 304 (5ih Cir. 1984).
E.g., Chicago Bd. Options Exch. v. Connecticut Gen. Life Ins. Co., 713 F.2d
254, 258-60 (7th Cir. 1983).
E.g., Vogel v. Independence Fed. Sav. Bank, 692 F. Supp. 587,590, 593-94 (D.
Md. 1988); Brink v. DaLesio, 496 F. Supp. 1350, 1374-76 (D. Md. 1980), a f f d in pan
and rev'd in pan, 667 F.2d 420 (4th Cir. 1981).
E.g., In re Benefit Management Corp., 10 Employee Benefits Cas. (BNA)
1651, 1652-53, 1655-60 (Bankr. W.D. Wis. 1988); Brock v. Self, 632 F. Supp. 1509,
1520-22 (W.D. La. 1986); Eaton v. D'Amato, 581 F. Supp. 743, 745-47 (D.D.C.
1980).
Eg., Procacci v. Drexel Bumham Lambert, Inc., Civ. A. No. 89-0555, 1989
MS. Dist. LEXIS 12208, at • 12-13 (E.D. Pa. Oct. 16, 1989) (mem.); Stanton v.
Shearson Lehman/American Express, Inc., 631 F. Supp. 100,104-05 (N.D. Ga. 1986).
E.g., Blatt v. Marshall & Lassman, 812 F.2d 810 (2d Cir. 1987); Galgay v.
Gangloff, 677 F. Supp. 295 (M.D. Pa. 1987).
E.g., Brock v. Hendershott, 840 F.2d 339, 342 (6th Cir. 1988).
E.g., Chapman v. Klemick, 750 F. Supp. 520 (S.D. Fla. 1990).
E.g., Successor Trust Comm. of Permian Distrib., Inc. v. First State Bank, 735
F. Supp. 708, 715 (W.D. Tex. 1990).
E.g., Mutual Life Ins. Co. v. Yampol, 840 F.2d 421 (7th Cir. 1988).
£.g.. Brock v. Self, 632 F. Supp. 1509,1520-21,1523 (W.D. La. 1986); Stanton
v. Shearson Lehman/American Express, Inc., 631 F. Supp. 100, 104-05 (N.D. Ga.
1986); Eaton v. D'Amato, 581 F. Supp. 743, 745-47 (D.D.C. 1980).
E.g., Eaton v. D'Amato, 581 F. Supp. 743, 747 n.ll (D.D.C. 1980); see abo
infra note 150.
7
8
9
1 0
1 1
1 2
1 3
14
1 5
1 6
1 7
1 8
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
242
19
entire statute warrants liberal construction. In addition, many
courts have held that section 3(21), in particular, should be broadly
construed. The Courts of Appeals for the Second, Fifth, Sixth, and
Seventh Circuits have adopted this view based on the legislative
history of section 3(21 ).
20
Although sparse, the legislative history of the provision suggests
that Congress intended the definition of fiduciary under ERISA to be
far-reaching. The Committee on Labor and Public Welfare noted
that "[i]t was the purpose of the Committee to include within the
definition offiduciarya broad range of persons dealing with these
funds." The Committee also stated that "[it had] adopted the view
that the definition offiduciaryis of necessity broad and it intends to
21
19
Batchelor v. Oak Hill Medical Group, 870 F.2d 1446, 1449 (9ih Cir. 1989)
fERISA is remedial legislation that should be liberally constmcd in favor of
protecting [plan] participants."); American Fed'n of Unions Local 102 Health &
Welfare Fund v. Equitable Life Assurance Soc'y, 841 F.2d 658, 662 (5th Or. 1988)
(This Court gives the term fiduciary a liberal construction in keeping with the
remedial purpose of ERISA."); UAW v. Greyhound Lines, 701 F.2d 1181,1187 (6th
Cir. 1983) f Congress purposefully defined 'fiduciary* broadly in order to effectuate
thc ERISA policy by providing comprehensive protection for employees' benefit
plans."); Successor Trust Comm. of Permian Distrib., Inc. v. First State Bank, 735 F.
Supp. 708, 715 (W.D. Tex. 1990) ("A liberal construction of the term 'fiduciary'
comports with the broad, remedial purpose of ERISA."); Procacci v. Drexel
Bumham Lambert, Inc., No. 89-0555,1989 U.S. Dist. LEXIS 12208, at •12-13 (E.D.
Pa. Oct. 16,1989) (mem.) (stating that liberal construction of the term "fiduciary" is
consistent with the remedial purposes of ERISA); Brock v. Self, 632 F. Supp. 1509,
1520 (W.D. La. 1986) f Because Congress enacted ERISA as a comprehensive
remedial statute, a liberal construction of this provision is warranted in order to
effect ERISA's remedial purposes."); see abo Stanton v. Shearson Lehman/Am.
Express, Inc, 631 F. Supp. 100,104-05 (N.D. Ga. 1986) (relying heavily on the broad
protective purposes of ERISA to hold a brokerage firm responsible as a fiduciary).
Brock v. Hendershott, 840 F.2d 339, 342 (6ih Cir. 1988); Blatt v. Marshall &
Lassman, 812 F.2d 810, 812 (2d Cir. 1987); Donovan v. Mercer, 747 F.2d 304, 308
(5th Cir. 1984); Chicago Bd. Options Exch. v. Connecticut Gen. Life Ins. Co., 713
F.2d 254, 260 (7th Cir. 1983); Galgay v. Gangloff, 677 F. Supp. 295, 302 (M.D. Pa.
1987).
120 CONG. REC. 3977, 3983 (1974), Employee Benefit Security Act of 1974:
Material Explaining H.R. 12906 Together With Supplemental Views [To accompany
20
21
H.R. 2], reprinted in SENATE COMM. ON LADOR AND PUDUC WELFARE, 94TH
CONG, 2D SESS., LEGISLATIVE HISTORY OF
ERISA 3293, 3309 (Comm. Print 1976).
�The Definition of a Fiduciary Under ERISA 243
SUMMER 1992
impose strict duties on those whose activities bring them within the
definition."
22
Other legislative commentary also emphasizes the expansive
aspects of the definition of fiduciary. For example, Congress noted
that the definition of fiduciary is not limited to persons who have
direct access to plan assets. It is not limited to persons who hold
a particular title. Neither is it limited to persons who formally
acknowledge their status, in writing or otherwise.
Finally, the
definition includes various classes of persons, such as plan consultants
with special expertise, who ordinarily would not be viewed as fiduciaries. These comments support the view that "Congress's intention
was to spread a broad protective net of fiduciary responsibility."
23
24
25
26
27
Although the liberal construction of section 3(21) is generally
accepted, the courts nevertheless find reasons to restrict the reach of
the definition in some circumstances. For example, some courts
refuse to construe section 3(21) to cover persons who are within the
literal scope of the definition on the grounds that a broad construction would result in too many other persons being held responsible as
fiduciaries. Numerous courts have followed this "close the flood28
22
u
24
H.R. CONF. REP. No. 1280, 93d Cong., 2d Sess. 323 (1974), reprinted in
SENATE C O M M . ON LABOR
AND PUBUC
WELFARE, 94TH CONG., 2 D SESS.,
LEGISLATIVE HISTORY OF ERISA 4518, 4590 (Comm. Print 1976).
120 Cong. Rec. 3977, 3983 (1974), Employee Benefit Security Act of 1974:
Material Explaining H.R. 12906 Together With Supplemental Views (To accompany
H.R. 2], reprinted in SENATE COMM. ON LABOR AND PUBUC WELFARE, 94TH
CONG, 2D SESS, LEGISLATIVE HISTORY OF ERISA 3293, 3309 (Comm. Print 1976).
H.R. CONF. REP. NO. 1280, 93d Cong, 2d Sess. 323 (1974), reprinted in
25
26
SENATE C O M M .
ON LABOR A N D P U B U C
WELFARE, 94TH
C O N G , 2 D SESS,
LEGISLATIVE HISTORY OF ERISA 4518, 4590 (Comm. Print 1976).
District 65, UAW v. Harper & Row, Publishers, 670 F. Supp. 550, 555
(S.D.N.Y. 1987).
See Useden v. Acker, 947 F.2d 1563, 1573-75,1577-78 ( l l t h Cir. 1991); Nieto
v. Ecker, 845 F. 2d 868, 870-71 (9th Cir. 1988); Thonen v. McNeil-Akron, Inc., 661
F. Supp. 1252, 1264 (N.D. Oh. 1986); see aiso Burroughs v. Marr, 559 F. Supp. 141,
146 (N.D. Cal. 1982), vacated as moot, 742 F.2d 509 (9ih Cir. 1984) (holding that
27
28
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
244
gate" approach, primarily in cases that potentially implicate the
second clause of section 3(21)(A)(i). Some courts, however, have
refused to construe narrowly section 3(21), even when their decisions
had far-reaching implications.
29
30
In another area, authorities have carved out an exception to
section 3(21) for certain activities of the plan sponsor. The Department of Labor refers to these activities as "settlor" functions. The
courts usually refer to the excepted activities as "business" functions
or use other terminology. Although the case law relating to the
fiduciary status of plan sponsors when they perform settlor activities
or business functions is beyond the scope of this article, it is
31
32
union member bad "virlually no likelihood of prevailing" on the argument lhat the
commingling of the union and plan assets rendered the union and all of its members
fiduciaries within the meaning of the Act).
The second clause of § 3(21)(AXi) is especially broad in its reach because, by
its terms, it appears to cover (1) functions that are not discretionary, see Blatt v.
Marshall & Lassman, 812 F.2d 810, 812-13 (2d Or. 1987); District 65, UAW v.
Harper & Row, Publishers, 670 F. Supp. 550, 555-56 (S.D.N.Y. 1987), and (2)
unauthorized activities, see discussion infra part IV.A.3.
See Stanton v. Shearson Lehman/Am. Express, Inc, 631 F. Supp. 100, 104-05
(N.D. Ga. 1986). The Stanton court ruled lhat a brokerage firm was a fiduciary
because it exercised authority or control over the broker assigned to the ERISA
account. Id. at 105. The court refused to limit its decision even though it recognized
that every brokerage firm retained to handle ERISA funds automatically would
become an ERISA fiduciary under its rationale. Id. The court believed that this
holding would promote ERISA's broad protective purposes. Id.
See Letter from Dennis M. Kass, Assistant Secretary, Dept. of Labor, to John
N. Erlenborn, Chairman, Advisory Council on Employee Welfare and Pension
Benefit Plans (Mar. 13, 1986), reprinted in 13 Pens. Rep. (BNA) No. 11, at 472
(Mar. 17, 1986) [hereinafter Kass-Erlenborn Letter].
Hozier v. Midwest Fasteners, Inc, 908 F.2d 1155, 1158-62 (3d Cir. 1990);
Hlinka v. Bethlehem Steel Corp., 863 F.2d 279, 285-86 (3d Cir. 1988); Musto v.
American Gen. Corp, 861 F.2d 897, 910-12 (6th Cir. 1988), cert, denied, 490 U.S.
1020 (1989); Hickman v. Tosco Corp, 840 F.2d 564, 566-67 (8th Cir. 1988); Trenton
v. Scott Paper Co, 832 F.2d 806, 808-09 (3d Or. 1987), cen. denied, 485 U.S. 1022
(1988); Local Union 2134, UMW v. Powhatan Fuel, Inc, 828 F.2d 710, 714 (llth
Cir. 1987); Cunha v. Ward Foods, Inc, 804 F.2d 1418, 1432-33 (9ih Or. 1986);
Amato v. Western Union Int'l, Inc, 773 F.2d 1402, 1416-17 (2d Cir. 1985), cen.
dismissed, 474 U.S. 1113 (1986); United Indep. Flight Officers v. United Air Lines,
756 F.2d 1262, 1266-69 (7th Cir. 1985).
2 9
30
31
3 2
�SUMMER 1992
The Definiiion of a Fiduciary Under ERISA 245
important to recognize that in many cases involving plan sponsors,
the activities in question appear to come within the literal scope of
section 3(21). Nonetheless, some courts find that the fiduciary
provisions of ERISA do not cover these activities, which effectively
carves out an implied exception to section 3(21) or an implied
exception to the rule that section 3(21) should be broadly construed. This exception undoubtedly is based on concerns about
the possible ramifications of holding sponsors liable as fiduciaries
when they perform settlor functions or act in a business capacity.
33
34
In addition, the courts occasionally apply a final limiting
doctrine under section 3(21) in situations involving conflicts of
interest. In particular, some courts have held that a person should
not be deemed a fiduciary if it would place the person in a position
with significant, conflicting obligations.
However, in a wellreasoned decision, the Seventh Circuit concluded that courts should
35
3 3
See Kass-Erlenborn Letter, supra note 31 (suggesting that settlor activities
relate to the "formauon" rather than the "management" of a plan, and thus do not
come within the literal terms of § 3(21)). This interpretation gives a narrow reading
of the term "management," which might not prevail absent the considerations noted
below. See infra note 34.
See Kass-Erlenborn Letter, supra note 31 (stating that § 3(21), by its wording,
suggests that "the voluntary nature" of the private pension system would be compromised if sponsors had to make decisions about the creation, design, and termination
of their plans solely in the interest of plan panicipants.); see also Hozier v. Midwest
Fasteners, Inc., 908 F.2d 1155,1159-61 (3rd Cir. 1990) (holding that it would nullify
the voluntary nature of benefit plans and the carefully delimited requirements of
ERISA's participation and vesting provisions, if a person were deemed a fiduciary
when making plan amendment decisions).
See. e.g., Useden v. Acker, 947 F.2d 1563, 1575 (llth Cir. 1991) (bank acting
as commercial lender to a plan has obligations to its own shareholders and
depositors that are at odds with the function of a plan fiduciary); Painters Dist.
Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146,1149-50 (3d Cir.
1989) (stating that the role of an independent accounting firm under ERISA § 103
conflicts fundamentally with the obligations imposed on an ERISA fiduciary under
§ 3(21)); United Indep. Flight Officers, Inc. v. United Air Lines, 756 F.2d 1262,126768 (7ih Cir. 1985) (holding a union negotiating terms of future pension benefits was
not a fiduciary, because the demands of negotiation and collective bargaining are
inconsistent with fiduciary status under ERISA); Brandt v. Grounds, 687 F.2d 895,
898 (7ih Cir. 1982) (bank had a contractual obligation that was deemed irreconcilable with fiduciary status).
3 4
35
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
246
not determine whether a person is an ERISAfiduciarybased solely
on whether the potential for a conflict of interest exists, particularly
when no specific proof of an "unmanageable conflict" is adduced.
34
B.
Functional and Formal Approach
Most agree that the definition of afiduciaryin section 3(21) is
a "functional" definition. For example, some courts have stated
that the definition is concerned with "functional realities" or "realities" rather than "mere formalities." The primary significance of
the "functional approach" is that a person need not hold a particular
office, title, or position to be a fiduciary within the meaning of
37
38
39
40
3 4
Mutual Life Ins. Co. v. Yampol, 840 F.2d 421, 425-26 (7th Or. 1988); see also
Schoenholtz v. Doniger, 628 F. Supp. 1420, 1422-30 (S.D.N.Y. 1986). The
Schoenhohz court held that a plan's trustees acted as fiduciaries when, in their
capacity as shareholders and directors of a company, they failed to issue company
stock and authorize its sale to the plan, which prevented the plan from carrying out
its mission of investing in company stock. Id. at 1430. The court concluded that the
defendants were fiduciaries under § 3(21), because they exercised direct control over
the disposition of plan assets. Id. The court did not discuss the fact that its holding
creates a poiential for a conflict of interest.
See Useden v. Acker, 947 F.2d 1563, 1574, 1577 (llth Cir. 1991); Fisher v.
Metropolitan Life Ins. Co, 895 F^d 1073,1076 (5ih Or. 1990); Blatt v. Marshall &
Lassman, 812 F.2d 810, 812 (2d Cir. 1987); Bouton v. Thompson, 764 F. Supp. 20,
22 (D. Conn. 1991); Associates in Adolescent Psychiatry v. Home Life Ins. Co, 729
F. Supp. 1162, 1179 (N.D. I1L 1989), affd, 941 F.2d 561 (7th Or. 1991); Vogel v.
Independence Fed. Sav. Bank, 692 F. Supp. 587, 593 (D. Md. 1988); District 65,
UAW v. Harper & Row, Publishers, 670 F. Supp. 550, 555 (S.D.N.Y. 1987); Miller
v. Lay Trucking Co, 606 F. Supp. 1326, 1334-35 (N.D. Ind. 1985); Donovan v.
Porter, 584 F. Supp. 202, 209 (D. Md. 1984); Donovan v. Williams, 4 Employee
Benefits Cas. (BNA) 1237, 1244 (N.D. Oh. 1983); Brink v. DaLesio, 496 F. Supp.
1350, 1374 (D. Md. 1980), affd in relevant pan, 667 F.2d 420 (4th Cir. 1981); Dep't
of Labor Op. No. 88-06A, 1988 ERISA LEXIS 5 (1988); see also Donovan v.
Mercer, 747 F^d 304,308 (5th Or. 1984) (" 'fiduciary' should be defined not only by
reference to particular titles, such as 'trustee', but also by considering the authority
which a particular person has or exercises over an employee benefit plan.").
3 7
3 8
Donovan v. Williams, 4 Employee Benefits Cas. (BNA) 1237,1244 (N.D. Oh.
1983).
3 9
40
Fulk v. Bagley, 88 F.R.D. 153, 162 (M.D.N.C. 1980).
Id.
�The Definiiion o f a Fiduciary Under ERISA 247
SUMMER 1992
41
section 3(21 ). Because section 3(21) defines the term fiduciary by
reference to a person's authority, control, or responsibility over a
plan, no special formalities are necessary to be a fiduciary. Indeed,
a person may be a fiduciary despite a formal agreement with the
plan sponsor providing that the person does not hold a fiduciary
position over the plan, if the person nevertheless performs the
function of a fiduciary.
42
The functional nature of the definition of fiduciary has proved
important Before the passage of ERISA, the only persons who
43
4 1
See Consolidated Beef Indus, Inc. v. New York Life Ins. Co, 949 F.2d 960,
964 (8ih Cir. 1991), cert, denied, 112 S. Ct. 1670 (1992); Landry v. Air Line Pilots
Ass'n, 892 F.2d 1238, 1252 (5th Cir.), modified and reh'g denied, 901 F.2d 404 (5th
Cir. 1990); Anderson v. CIBA-GEIGY Corp, 759 F.2d 1518, 1522 ( l l t h Cir. 1985),
cen. denied, 474 U.S. 995 (1985); Coleman v. Nationwide Life Ins. Co, 748 F. Supp
429, 431-32 (E.D. Va. 1990); Vogel v. Independence Fed. Sav. Bank, 692 F. Supp
587, 593 n.2 (D. Md. 1988); Galgay v. Gangloff, 677 F. Supp. 295, 302 (M.D. Pa
1987); McNeese v. Health Plan Mktg, Inc, 647 F. Supp. 981, 984-85 (N.D. Ala
1986); Bower v. Bunker Hill Co, 114 F.R.D. 587, 590-91 (E.D. Wash. 1986);
Rheingold Breweries Pension Plan v. Pepsico, Inc, 2 Employee Benefits Cas. (BNA)
2406, 2409-10 (S.D.N.Y. 1981); Fulk v. Bagley, 88 F.R.D. 153, 162 (M.D.N.C. 1980).
For relevant legislative history, see supra notes 24-25 and accompanying text.
5ee, e.g., Jones v. O'Higgins, 11 Employee Benefits Cas. (BNA) 1660,1662-64
(N.D.N.Y. 1989) (ruling that an investment adviser who exercised discretion over thc
investment of certain assets was a fiduciary with respect to those assets, even though
the relevant agreement expressly prohibited him from investing them); In re Benefit
Management Corp, 10 Employee Benefits Cas. (BNA) 1651, 1659 (Bankr. W.D.
Wis. 1988) (deciding that an agreement between the plan sponsors and a third-party
administrator did not prevent the third-pany administrator from being characterized
as a fiduciary although the agreement unequivocally stated that the third-pany
administrator was not the administrator of the plan for ERISA purposes).
4 2
4 3
The Welfare and Pension Plans Disclosure Act (WPPDA), Pub. L. No. 85836, 72 Stat. 997 (1958) (codified as amended at 29 U.S.C. §§ 301-09 (1970)), which
was repealed by ERISA, placed ceriain reporting obligations on the plan administrator, who was defined by reference to both position and function. However, in
contrast to the strict fiduciary obligations imposed on trustees or ERISA fiduciaries,
the obligations of the plan administrator under the WPPDA were extremely
restricied. The definition of plan administrator was also limited to persons who had
responsibilities with respect to plan assets. Thus, an administrator was defined under
the WPPDA as:
(1) the person or persons designated by the terms of the plan or the
collective bargaining agreement with responsibility for thc ultimate
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
248
had fiduciary responsibilities over employee benefit plans were plan
trustees, who were accountable as fiduciaries under state law and had
certain limited responsibilities under the Taft-Hartley Act*
However, many employee benefit plans were not created as trusts.
Even when plans were created in trust form, persons other than the
plan trustees often had significant responsibilities over plan affairs.
Thus, under prior law, many officials associated with plans were not
subject to anyfiduciaryresponsibilities. In contrast. Congress did
not limit the section 3(21) definition offiduciaryto persons holding
the position of plan trustee. Consequently, ERISA potentially holds
liable persons affiliated with nontrusteed plans and persons affiliated
with trusteed plans who hold positions other than trustee.
4
45
Although a person can be afiduciarywithout being formally
appointed to a specific position, formal titles are also important
under section 3(21). A person may be deemed afiduciarysolely
46
control, disposition, or management of the money received or
contributed; or
(2) in the absence of such designation, the person or persons actually
responsible for the control, disposition, or management of the money
received or contributed, irrespective of wheiher such control, disposition, or management is exercised directly or through an agent or trustee
designated by such person or persons.
WPPDA § 5(b).
Labor Management Relations Act (Taft-Hartley) Pub. L No. 80-101,61 Stat.
136, 29 U.S.C. §§ 141-87 (1992).
120 CONG. REC. 3977, 3983 (1974) (Employee Benefit Security Acl of 1974:
Maierial Explaining H.R. 12906 Together With Supplemental Views [To accompany
4 4
4 5
H . R . 2], reprinted m SENATE COMM. ON LABOR AND PUBUC WELFARE, 94TH
CONG., 2D SESS., LEGISLATIVE HISTORY OF ERISA, 3293,3308 (Comm. Prim 1976);
see also Stephen E. Dawson, Proposed Amendments to the Welfare and Pension Plans
Disclosure Act, 4 U. MICH. J.L REFORM 267, 271 (1970).
But cf. Blatt v. Marshall & Lassman, 812 F.2d 810, 812 (2d Or. 1987);
Fechtcr v. Connecticut Gen. Life Ins. Co, No. 87-0506, 1991 U.S. Dist. LEXIS
14607, at •!<! (E.D. Pa. Oct. 9, 1991); District 65, UAW v. Harper & Row,
Publishers, 670 F. Supp. 550, 555 (S.D.N.Y. 1987); Fulk v. Bagley, 88 F.R.D. 153,162
(M.D.N.C. 1980) (mem ).
4 6
�1
S U M M E R 1992
The Definiiion of a Fiduciary Under ERISA 249
47
because of a formal appointment.
Most courts, as well as the
Department of Labor, take the position that plan trustees and
administrators are per se fiduciaries. In addition, courts generally
48
4 7
For example, a Depanment of Labor Interpretive Bulletin sutes:
D-3 Q: Does a person automatically become a fiduciary with respect
to a plan by reason of holding certain positions in the administration of
such plan?
A: Some offices or positions of an employee benefit plan by their very
nature require persons who hold them to perform one or more of the
functions described in section 3(21 )(A) of the Act. For example, a plan
administrator or a trustee of a plan must, be [sic] the very nature of his
position, have "discretionary authority or discretionary responsibility in
the administration" of the plan within the meaning of section
3(21)(A)(iii) of the Act. Persons who hold such positions will therefore
be fiduciaries.
29 C.F.R. § 2509.75-8 at D-3 (1991).
See, e.g.. United States Steel Mining Co. v. District 17, UMW, 897 F.2d 149,
152 (4th Cir. 1990) (administrator); Reilly v. Blue Cross & Blue Shield United, 846
F2d 416, 419 (7th Cir.) (administrator), cen. denied, 488 U.S. 856 (1988); Jung v.
FMC Corp, 755 F.2d 708, 710 (9th Cir. 1985) (administrator); Evans v. Bexley, 750
F.2d 1498, 1499 n.2 ( l l t h Cir. 1985) (trustee); Donovan v. Mazzola, 716 F.2d 1226,
1228 (9th Cir. 1983), cen. denied, 464 U.S. 1040 (1984) (trustee); West v. Butler, 621
F.2d 240, 243 (6th Cir. 1980) (trustee); Martin v. Valley Nat'l Bank, No. 89 Civ.
8361, 1991 U.S. Dist. LEXIS 18444, at "83 (S.D.N.Y. Dec. 23, 1991) (trustee);
Kendal Corp. v. Inter-County Hospitalization Plan, Inc, 771 F. Supp. 681, 684 (E.D.
Pa. 1991) (administrator); Dole v. Formica, No. C87-2955, 1991 U.S. Dist. LEXIS
19743, at ' 4 (N.D. Ohio Sept. 30, 1991) (administrator); National Benefit Adm'rs,
Inc. v. Mississippi Methodist Hosp. & Rehabilitation Ctr., Inc, 748 F. Supp. 459,462
n.2 (S.D. Miss. 1990) (administrator); Vogel v. Independence Fed. Sav. Bank, 728 F.
Supp. 1210,1229 (D. Md. 1990) (mem.) (administrator); McConnell v. Texaco, Inc,
727 F. Supp. 751, 756 (D. Mass. 1990) (mem.) (administrator); Successor Trust
Comm. v. First State Bank, 735 F. Supp. 708, 715 (W.D. Tex. 1990) (trustee); Guisti
v. General Elec. Co, 733 F. Supp. 141,145 (N.D.N.Y. 1990) (mem.) (administrator);
Anderson v. Monell, 722 F. Supp. 462, 468 (N.D. III. 1989) (trustee); Plisco v. Pee
Wee Molding Corp, Civ. No. 89-1713, 1989 U.S. Dist. LEXIS 11770, at ' 6 (D.NJ.
Sept. 19, 1989) (trustee); Keel v. Group Hospitalization Medical Serv, Inc, 695 F.
Supp. 223, 228 n.18 (E.D. Va. 1988) (administrator); Whitfield v. Tomasso, 682 F.
Supp. 1287, 1300 (E.D.N.Y. 1988) (trustee); Haytcher v. ABS Indus, No. C85-3181,
1988 U.S. Dist. LEXIS 12336, at ' 6 (N.D. Ohio, July 28, 1988) (trustee), a f f d ux pan,
rev'd on other gmtinds, 889 F.2d 64 (6lh Cir. 1989); Osier v. Tri Corp, Civ. A. No.
85-7001, 1988 U.S. Dist. LEXIS 6563, at ' 6 (E.D. Pa. July 1, 1988) (trustee); Diffay
v. American Tel. & Tel. Co, No. 87 C 6404, 1988 U.S. Dist. LEXIS 4681, at "33
(N.D. 111. May 13, 1988) (administrator); Chambers v. Kaleidoscope, Inc. Profit
4 8
�250
27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
49
presume the positions of named fiduciary and investment manager arefiduciaryin nature.
50
The rule that some positions automatically confer fiduciary
status is puzzling initially. Under the literal terms of section 3(21),
fiduciary status does not depend on whether the person holds a
specific office, title, or position. Despite the definition, there are
good reasons for treating a person who holds a critical office with the
plan as a fiduciary. The primary basis is the statute, which expressly
or impliedly identifies certain positions as inherently fiduciary.
51
Sharing Plan & Trust, 650 F. Supp. 359, 375 (N.D. Ga. 1986) (trustee and
administrator); Eaton v. D'Amato, 581 F. Supp. 743, 747 (D.D.C. 1980) (dictum)
(administrator); Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629, 635 (W.D. Wis.
1979) (trustees and administrator); M & R Inv. Co. v. Fitzsimmons, 484 F. Supp.
1041,1054 (D. Nev. 1980) (trustees), aff'd, 685 F.2d 283 (9ih Or. 1982); Fremont v.
McGraw-Edison Co, 460 F. Supp. 599 (N.D. Ill 1978) (mem.) (trustee), aff'd in pan,
rev'd in pan, 606 F.2d 752 (7th Cir. 1979), cen. denied, 445 U.S. 951 (1980); Marshall
v. Snyder, 430 F. Supp. 1224,1230-31 (E.D.N.Y. 1977) (mem.) (trustees), aff'd in pan
and remanded on other grounds, 572 F.2d 894 (2d Or. 1978); 29 C.F.R. § 2509.75-8
at D-3 (1991).
* See Thomas v. Tru-Tech, Inc, 12 Employee Benefits Cas. (BNA) 1304,130607 (4th Cir. 1990); Yeseta v. Baima, 837 F.2d 380, 384 (9ih Or. 1988); Russo v.
Unger, No. 86 0v. 9741,1991 U.S. Dist. LEXIS 16774, at • 17-18 (S.D.N.Y. Nov. 20,
1991); Arakelian v. National W. Life Ins. Co, 680 F. Supp. 400, 404 (D.D.C 1987)
(mem.), reh'g denied, 724 F. Supp. 1033 (D.D.C 1989) (mem.); Dasler v. E.F. Hutton
& Co, 694 F. Supp. 624,628 (D. Minn. 1988); Chambers v. Kaleidoscope, Inc. Profit
Sharing Plan & Trust, 650 F. Supp. 359, 375 (N.D. Ga. 1986); Czyz v. General
Pension Bd, Bethlehem Steel Corp, 578 F. Supp. 126,129 (W.D. Pa. 1983); see also
Birmingham v. Sogen-Swiss Int'l Corp. Retirement Plan, 718 F.2d 515, 522 (2d Cir.
1983) (holding the plan document would not be interpreted to limit the named
fiduciary's statutory authority).
See Lowen v. Tower Asset Management, Inc, 829 F.2d 1209, 1218 (2d Or.
1987) (deciding that a company appointed under ERISA § 401(c)(3) as an ERISA
§ 3(38)(A) investment manager is an ERISA fiduciary); GIW Indus, v. Trevor,
Stewart, Burton & Jacobson, Inc, 10 Employee Benefits Cas. (BNA) 2290, 2299
(S.D. Ga. 1989) (holding that a plan's investment manager was a fiduciary "as
contemplated by § 3(38) of ERISA"), aff'd, 895 F.2d 729 (llth Cir. 1990).
See ERISA § 3(14), 29 U.S.C. § 1002(14) (definition of party in interest
assumes administrators and trustees are fiduciaries); ERISA § 3(38), 29 U.S.C.
§ 1002(38) (investment manager defined as any fiduciary, "other than a trustee," who
meets certain requirements); ERISA § 402(a)(1), 29 U.S.C. § 1102(a)(1) (named
fiduciary defined, in terms comparable to § 3(21), as having authority to control and
9
m
5 0
51
�The Definition of a Fiduciary Under ERISA 251
SUMMER 1992
Furthermore, some positions routinely require the performance of
fiduciary duties. Finally, policy reasons exist for a rule identifying
particular positions as presumptively fiduciary. Specifically, presumingfiduciarystatus furthers one of the statute's recognized purposes,
that of clearly establishing legal responsibility for the management of
plans.
52
53
Although there are good reasons for conferringfiduciarystatus
on persons holding critical positions, courts have refused to deem
some plan administrators and trustees to be fiduciaries, and the
54
55
manage the operation and administration of a plan); ERISA § 402(a)(2), 29 U.S.C
§ 1102(a)(2) (namedfiduciarydefined as a fiduciary named in the plan or identified
pursuant to a procedure set forth in the plan); ERISA § 403(a), 29 U.S.C. § 1103(a)
(trustees generally required to have "authority and discretion to manage and control
the plan's assets," a requirement which effectively brings them within the scope of
§ 3(21XAXi)).
See Robert N. Eccles, Fiduciary Litigation Under ERISA : 1975-88, 23 REAL
PROP. PROB. & TR. J. 679, 680 (1988) (named fiduciaries and investment managers
havefiduciarystatus by their "very nature").
See infra notes 63-69 and accompanying text.
See, e.g., Pohl v. National Benefits Consultants, Inc., 956 F.2d 126, 129 (7ih
Cir. 1992); Baxter v. CA. Muer Corp, 941 F.2d 451, 452, 454-55 (6th Cir. 1991) (per
curiam); Howard v. Parisian, Inc, 807 F.2d 1560,1564 (11th Cir. 1987) (stating that
plan administrator who merely processes claims is not a fiduciary); Estate of
Sheppard v. Caterpillar, Inc., 658 F. Supp. 729, 734 (CD. III. 1987) (holding that
employer-administrator could not institute a civil action because it was not an ERISA
fiduciary); see also Doe v. Guardian Life Ins. Co. of America, No. 89 C 7955,1992
U.S. Dist. LEXIS 3214, at 'Sl (N.D. III. Mar. 19,1992) (noting that ERISA does not
impose fiduciary liability on nonfiduciary plan administrators). In some cases, courts
have examined the actual functions performed before deeming an administrator a
fiduciary. See, e.g., Ashenbaugh v. Crucible Inc., 1975 Salaried Retirement Plan, 854
F.2d 1516, 1519 n.2 (3d Cir. 1988), cert, denied, 490 U.S. 1105 (1989); American
Fed'n of Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance
Soc'y, 841 F.2d 658, 662-63 (5th Or. 1988); Central Fin. Control v. Roberts, Civ. No.
90-2698,1991 U.S. Dist. LEXIS 11536, at -3, 7-9 (E.D. La. Aug. 9,1991); NARDA,
Inc. v. Rhode Island Hosp. Trust Nat'l Bank, 12 Employee Benefits Cas. (BNA)
2551, 2561 (D. Md. 1990); In re Benefit Management Corp, 10 Employee Benefits
Cas. (BNA) 1651,1652-53,1655-60 (Bankr. W.D. Wis. 1988); Northern Group Serv,
Inc. v. State Farm Mut. Auto Ins. Co, 644 F. Supp. 535, 537 (E.D. Mich. 1986), rev'd
on other grounds sub nom. Northern Group Serv, Inc. v. Auto Owners Ins. Co, 833
F.2d 85 (6th Cir. 1987), cert, denied, 486 U.S. 1017 (1988); Davidson v. Cook, 567 F.
Supp. 225, 230, 238-39 (E.D. Va. 1983), a f f d , 734 F.2d 10 (4ih Cir.), cert, denied sub
5 2
53
54
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
252
Department of Labor has also occasionally deviated from a per se
approach in such cases. In most cases, however, a person holding
one of these positions will be deemed a fiduciary.
54
57
C.
Objective Standard
58
The section 3(21) definition of fiduciary is objective. If a
person satisfies the statutory critena, the person is a fiduciary
whether or not the person considers himself or herself a fiduciary.
59
nom. Zahn v. Davidson, 469 U.S. 899 (1984); Eaton v. D'Amato, 581 F. Supp. 743,
746-47 (D.D.C. 1980) (mem.). These cases fail to clarify whether the administrator
in question is an administrator as defined in ERISA § 3(16).
See Pension Fund—Mid Jersey Trucking Indus.—Local 701 v. Omni Funding
Group, 731 F. Supp. 161, 173-75 (D.NJ. 1990); Richardson v. U.S. News & World
Repon, Inc, 623 F. Supp. 350, 351-52 (D.D.C 1985) (mem.); Bradshaw v. Jenkins,
5 Employee Benefits Cas. (BNA) 2754, 2759-60 (W.D. Wash. 1984). Each of these
cases involve so-called "directed trustees."
See Dep't of Labor Info. U r , Wash. Serv. Bureau 84-063 (Dec. 13,1984); 45
Fed. Reg. 73,189, 73,193 prefatory cmt. (1980); 44 Fed. Reg. 44,286, 44,288-89 at n.
5 prefatory cmt. (1979); Priv. Ltr. Rul. 79-07-091 (Nov. 17, 1978) (concurrence by
Dep't of Labor), reprinted in 228 Pens. Rep. (BNA), at J-4 (Feb. 26, 1979); Dep't of
Labor Info. Ltr, Wash. Serv. Bureau 79-91 (Aug. 23, 1979).
Although the authorities do not offer any explanation for these occasional
exceptions to the per se approach, it seems likely that the same considerations that
explain the per se rule also explain its exceptions. In most circumstances, the statute
does not conclusively establish that plan trustees and plan administrators are
fiduciaries. It merely indicates that Congress perceived them as fiduciaries. As a
resull, the rationale for adopting a per se approach for plan trustees or administrators is grounded primarily on practice and policy. In specific cases in which ihe
evidence conclusively establishes a lack of authority, control, and responsibility, it
may be equitable to deviate from the per se rule.
See Farm King Supply, Inc. Integrated Profit Sharing Plan & Trust v. Edward
D. Jones & Co, 884 F.2d 288,292 (7ih Cir. 1989); Dardaganis v. Grace Capital, Inc,
664 F. Supp. 105,112 (S.D.N.Y. 1987), aff'd in relevant pan, 889 F2d 1237 (2d Cir.
1989); Donovan v. Williams, 4 Employee Benefits Cas. (BNA) 1237, 1244 (N.D.
Ohio 1983); Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629, 635 (W.D. Wis.
1979).
Farm King Supply, Inc. Integrated Profit Sharing Plan & Trust v. Edward D.
Jones & Co, 884 F.2d 288, 292 (7th Cir. 1989); Russo v. Unger, No. 86 Civ. 9741,
1991 U.S. Dist. LEXIS 16774, at '3, 16 (S.D.N.Y. Nov. 20, 1991); Successor Trust
Comm. v. First State Bank, 735 F. Supp. 708, 716 (W.D. Tex. 1990); McNeese v.
5 5
5 6
5 7
5 8
5 9
�The Definiiion of a.Fiducmry Under ERISA 253
SUMMER 1992
For example, one court treated as a fiduciary an individual who
mistakenly signed plan documents as trustee but who intended to sign
them in a different capacity. Another court deemed as a fiduciary
a person who believed his limited control over plan assets precluded
fiduciary status. In another case, a New York federal court held
that when a party was "repeatedly named by others in a fiduciary
capacity and so identifiefd] himself in numerous documents, [he was]
a fiduciary, even though he did not bother to learn the meaning of
the titles he assumed or read the pertinent provisions of the Plan."
60
61
62
Tne terms of ERISA clearly support the view that Congress
intended the definition of a fiduciary to be based on objective facts
rather than subjective beliefs. Furthermore, public policy justifies
this approach. Because of the involvement of third parties with
plans, reliance on an objective standard provides certainty in
determining who has responsibility for plan affairs. Numerous
section 3(21) cases have recognized the imporiance of being able to
identify fiduciaries with certainty, and this policy is often cited as
a basis for adopting an objective definition of the term fiduciary. For
example, in Donovan v. Mercer, * the Fifth Circuit noted that an
important objective of ERISA is to provide plan participants and
63
6
Health Plan Mktg, Inc, 647 F. Supp. 981, 985 (N.D. Ala. 1986); Freund v. Marshall
& Ilsley Bank, 485 F. Supp. 629, 635 (W.D. Wis. 1979); see also Free v. Bnody, 732
F.2d 1331,1334 (7th Or. 1984) (holding lhat individual cannot rely on misrepresentation that he was not a trustee to defeat his status as a fiduciary); Donovan v.
Williams, 4 Employee Benefits Cas. (BNA) 1237, 1244 (N.D. Ohio 1983) ("wheiher
a person is a fiduciary is to be determined according to an objective standard,
regardless of the person's subjective belief as io whether he is a fiduciary");
Rheingold Breweries Pension Plan v. Pepsico, Inc, 2 Employee Bcnefils Cas. (BNA)
2406, 2409 (S.D.N.Y. 1981) f subjective beliefs are not the test" for § 3(21) fiduciary
status).
Donovan v. Mercer, 747 F.2d 304, 308 n.4 (5ih Cir. 1984).
McNeese v. Health Plan Mktg, Inc, 647 F. Supp. 981,985 (N.D. Ala. 1986).
PBGC v. Solmsen, 671 F. Supp. 938, 944 (E.D.N.Y. 1987).
See Lowen v. Tower Asset Management, Inc, 829 F.2d 1209,1218-19 (2d Cir.
1987); Donovan v. Mercer, 747 F.2d 304, 309 (5ih Cir. 1984); Birmingham v. SogenSwiss Int'l Corp. Retirement Plan, 718 F.2d 515, 522 (2d Cir. 1983); Freund v.
Marshall & Ilsley Bank, 485 F. Supp. 629, 635 (W.D. Wis. 1979).
747 F.2d 304 (5th Cir. 1984).
6 0
61
WW
6 2
6 3
64
�\
254
27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
beneficiaries with plan infonnation, especially the identity of those
with fiduciary responsibilities. The court stated that an objective
definition of fiduciary furthers this purpose. The district court in
Freund v. Marshall & Ilsley Bank also recognized this policy
objective. In Freund the defendants were genuinely confused about
whether they had any fiduciary responsibilities, because they
apparently believed in good faith that they had been relieved of their
fiduciary responsibilities. Despite the defendants' confusion, the
court held them liable as fiduciaries. * In holding them responsible,
the court explained: "The Court is persuaded that the development
of effective fiduciary standards . . . is best achieved through an
objective standard which can be consistently applied in all cases."
65
66
67
6
69
Conversely, although the standard under section 3(21) is
generally described as objective, the subjective beliefs of others may
also be important. Thus, a person publicly identified as holding a
critical plan position such as trustee or administrator can be deemed
a fiduciary, even though that person was never appointed to such a
position.
The same policy that underlies the rule favoring an
objective interpretation of section 3(21) also provides a basis for a
70
65
Id. at 308-09.
485 F. Supp. 629 (W.D. Wis. 1979).
Id. at 635.
"Id.
Id.
See, e.g., Donovan v. Mercer, 747 F.2d 304, 309 (5th Cir. 1984) (person not
appointed to the position of trustee "clearly represented as being a trustee"); PBGC
v. Solmsen, 671 F. Supp. 938,943-44 (E.D.N.Y. 1987) (person who signed documents
as trustee and plan administrator was a fiduciary).
In other cases, the courts consider a person's use of a fiduciary title as a factor
weighing in favor of a finding that the person is a fiduciary. See Income Sec. Corp.
v. Louisiana Oilfield Conuactors Ass'n, 9 Employee Benefits Cas. (BNA) 1701,1713
(W.D. La. 1987) (person identified as a fiduciary on form 5500s filed with the
Internal Revenue Service); Miller v. Lay Trucking Co, 606 F. Supp. 1326, 1334-35
(N.D. Ind. 1985) (person listed as plan administrator on documents submitted to
PBGC); Eaton v. D'Amato, 581 F. Supp. 743, 746-47 (D.D.C. 1980) (mem.) (entity
listed by name in the fiduciary liability insurance policy purchased by the trustees);
Eversolc v. Metropolitan Life Ins. Co, 500 F. Supp. 1162, 1165 (CD. Cal. 1980)
(insurance company named as a fiduciary in summary plan description).
6 6
67
mum
69
7 0
�The Definition of a Fiduciary Under ERISA 255
SUMMER 1992
subjective approach in these limited circumstances: both interpretations further the goal of readily identifying plan fiduciaries and
holding them responsible.
71
III.
F I D U C I A R Y STATUS AS A R E S U L T O F T I T L E
OR POSITION
Because a person can acquire fiduciary status by holding a
formal title or position like plan administrator or plan trustee, it is
important to know which formalities are needed to make an appointment effective, and when and how a person may relinquish fiduciary
status. Case law has developed several principles that address these
issues.
A.
Appointment to Plan Office
Under trust law, the trust instrument can specify a method for
appointing trustees. Similarly, under ERISA the plan or trust
instrument often determines the method of appointing a person to a
specified plan office. Unless the provisions of the instrument are
inconsistent with ERISA they should be followed.
72
73
A fiduciary's appointment may become effective before the plan
becomes fully operative if, for example, the plan's operation is
contingent on qualification under the Internal Revenue Code. In
that case, the fiduciary may have responsibilities regardless of
whether the plan has been approved by the IRS. Some plans
provide that a fiduciary shall not be liable for any act or omission
occurring before the appointment begins. Notwithstanding such
provisions, a fiduciary may have obligations concerning matters that
74
71
See supra notes 63-69.
I I AUSTIN w. Scorr, THE LAW OF TRUSTS, § 108.3 (4th ed. 1987).
Blackmar v. Lichtenstein, 603 F.2d 1306,1309 (8ih Cir. 1979) (following the
common law rule by deciding the power to appoint a trustee is determined by the
terms of the trust; ERISA does not modify the common law).
Free v. Briody, 732 F.2d 1331, 1334 (7th Cir. 1984).
7 2
73
74
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
256
arise before the appointment period.
75
16
In Blackmar v. Lichtenstein, the Eighth Circuit addressed the
effect of an appointment made in breach of a fiduciary duty. In
Blackmar the administrator appointed a trustee in compliance with
the plan's governing documents.
The trustee subsequently
asserted a claim against the administrator. The administrator, in
compliance with the governing documents, thereupon removed the
trustee and replaced him with another trustee. The first trustee
brought an action against the administrator for breach of fiduciary
duty. The court held that the second trustee, who was appointed
in accordance with the governing documents, was validly appointed,
even though the act of appointing him possibly constituted a breach
of fiduciary duty by the appointing officials.
Because section
404(a)(1)(D) forbids a fiduciary from following plan provisions
that are inconsistent with the law, this case seems wrongly decided.
77
78
79
80
81
82
Specific statutory provisions of ERISA address the manner of
appointment for certain fiduciaries, particularly named fiduciaries,
investment managers, trustees, and plan administrators.
If a
83
75
See Marshall v. Craft, 463 F. Supp. 493, 495, 497 (N.D. Ga. 1978).
603 F.2d 1306 (1979).
Id. at 1308.
Id.
"Id.
I ± at 1309.
Id.
ERISA § 404(a)(1)(D); 29 U.S.C. § 1104(a)(1)(D).
Id. § 402(a)(2), 29 U.S.C § 1102(a)(2), provides that a named fiduciary is:
[A] fiduciary who is named in the plan instrument, or who, pursuant to
a procedure specified in thc plan, is identified as afiduciary(A) by a
person who is an employer or employee organization with respect to
the plan or (B) by such an employer and such an employee organization acting jointly.
ERISA § 403(a), 29 U.S.C § 1103(a), provides lhat a "trustee or trustees shall be
either named in the trust instrument or in thc plan instrument described in section
1102(a) of this title or appointed by a person who is a named fiduciary . . . ." ERISA
§ 3(38), 29 U.S.C. § 1002(38), provides that an invesiment manager is (with two
exceptions) "anyfiduciary"who satisfies certain criteria and who "has acknowledged
74
77
78
n
81
82
8 3
�S U M M E R 1992
The Definition o f a Fiduciary Under ERISA 257
person is formally appointed to one of these positions in the manner
provided under the statute, the appointee probably becomes a
fiduciary automatically. However, because of the functional nature
of the definition of fiduciary, a person who occupies one of these
positions will likely qualify as a fiduciary under the Act, even if that
person was not properly appointed pursuant to the statute.
84
B.
Resignation or Removal from Plan Office
Numerous cases have addressed the question of whether and
when a resignation or termination of formal fiduciary status becomes
effective under ERISA These cases make clear that, particularly in
the case of plan trustees, it is easier under ERISA to assume
fiduciary status than to shed it.
For example, one court held that a defendant's role as trustee
and administrator did not end when he resigned his position as vice
president of the company, when the company filed for involuntary
bankruptcy, or when the company terminated him as an employee.
In another case, two trustees were found not to have effectively
resigned even though they tendered resignation letters to their cotrustees. In a third case, the defendants effectively terminated
85
86
in writing that he is a fiduciary with respect to the plan." Finally, ERISA § 3(16)(A),
29 U.S.C. § 1002(16)(A), provides that an administrator is:
(i) the person specifically so designated by the terms of the instrument under which the plan is operated;
(ii) if an administrator is not so designated, the plan sponsor; or
(iii) in thc case of a plan for which an administrator is not designated
and a plan sponsor cannot be identified, such other person as the
Secretary may by regulation prescribe.
See supra notes 37^5, 70 and accompanying text. But see Aslanian v. Weltz,
1 Employee Benefits Cas. (BNA) 1448, 1450 (S.D.N.Y. 1977) (stating that a person
cannoi be forced to be a trustee because a trustee's authority arises only upon
voluntary acceptance of the position, as provided in ERISA § 403).
See Chambers v. Kaleidoscope, Inc. Profit Sharing Plan & Trust, 650 F. Supp.
359, 368-69 (N.D. Ga. 1986).
PBGC v. Greene, 570 F. Supp. 1483. 1497-98 (W.D. Pa. 1983), a j f d , 727 F.2d
1100 (3d Cir.), cen. denied sub nom. Allen v. PBGC, 469 U.S. 820 (1984).
8 4
Wmm
8 5
8 6
�258
27 R E A L PROPERTY, PROBATE A N D T R U S T J O U R N A L
their status as trustees, yet the court held on a motion to dismiss that
they might still be fiduciaries because of their continuing functional
relationship with the plan.
87
Several principles emerge from these cases concerning the
measures a fiduciary must take to effectively abandon a fiduciary
post. First, fiduciary status cannot be informally terminated. A
person appointed as afiduciarypursuant to a written agreement does
not cease to be a fiduciary merely by orally modifying the agreement
or by undertaking a course of conduct in derogation of the agreement.* Rather, the person must "cease to serve in that position
and terminate in writing all contracts or arrangements with the plan
concerning that position."
8
89
90
Second, the termination must be clear and unequivocal. This
standard can be strict. For example, in a case in which two trustees
tendered resignation letters to the remaining trustees, the court
found, among other things, that the trustees had not satisfied this
high standard. In particular, the trustees failed to provide written
notice of their resignation to the company, as required in the trust
agreement, they failed to give notice of their resignation to the
institutions that handled the various trust accounts, they retained all
checkbooks, passbooks, and other documents, and the company did
not appoint new trustees. In another case, the court found that
91
92
8 7
See Conway v. Marshall & Ilsley Trust Co, No. 87 C 20379,1988 U.S. Dist.
LEXIS 13469, at -5 (N.D. 111. Nov. 1, 1988).
See Lowen v. Tower Asset Management, Inc, 829 F.2d 1209,1218-20 (2d Cir.
1987).
Jd. at 1219.
See PBGC v. Greene, 570 F. Supp. 1483, 1497-98 (W.D. Pa. 1983) C[A]
trustee must be held to have continued in a fiduciary status absent [among other
things] a clear resignation
"), afpd, 727 F.2d 1100 (3d Or.), cen. denied sub nom.
Allen v. PBGC, 469 U.S. 820 (1984); Freund v. Marshall & Ilsley Bank, 485 F. Supp.
629, 635 (W.D. Wis. 1979) fabsent . . . a clear resignation or removal under
permissible circumstances, these trustees must be held to have continued in their
fiduciary status.").
PBGC v. Greene, 570 F. Supp. 1483,1497-98 (W.D. Pa. 1983), ajpd, 727 F.2d
1100 (3d Cir.), cen. dented sub nom. Allen v. PBGC, 469 U.S. 820 (1984).
Id.
8 8
8 9
9 0
WW
9 1
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�S U M M E R 1992
The Definiiion of afiduciary
Under ERISA
259
certain trustees had not unequivocally resigned their status as fiduciaries, even though some of the trustees' companies had discontinued
iheir business affiliation with the plan sponsor and the companies'
employees had dropped out of ihe plan.
93
A third principle that has developed from case law is that unless
the removal provisions of a plan violate ERISA, appointed
fiduciaries can be removed only in the manner specified in the plan
documents. If a fiduciary is not removed in the manner set forth
in the governing documents, the attempted removal may be ineffective. For instance, in Burud v. Acme Electric Co., a court held that a
resolution by the board of trustees of a plan removing a trustee was
ineffective because the plan specified that the employer was the
entity responsible for removing trustees. * The same rule applies to
the resignation of an appointed fiduciary. If the fiduciary fails to
resign in accordance with the applicable plan provisions, the
fiduciary's obligations continue.
Moreover, the fiduciary must
precisely comply with the terms of the plan to resign effectively. In
the case in which two trustees tendered resignation letters to the
remaining trustees of the plans, the court found that they had failed
to provide written notice of their resignation to the company as
required in the trust agreement. The court cited the trustees'
noncompliance with the agreement as one reason for holding that the
trustees had not effectively resigned their positions."
94
95
9
97
98
9 3
Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629, 635 (W.D. Wis. 1979).
See Mobile, Ala—Pensacola, Fla. Bldg. Trades Council v. Daugherty, 684 F.
Supp. 270, 277-80 (S.D. Ala. 1988) (making provision for lifetime tenure of trustees
absent incapacity, resignation, or removal for misconduct violates ERISA's fiduciary
standards); Dep't of Labor Op. No. 85-41 A, 1985 ERISA LEXIS 3 (1985).
See, e.g., Burud v. Acme Elec. Co, 591 F. Supp. 238, 243 (D. Alaska 1984).
Id.
See Chambers v. KaleidoscSpe, Inc. Profit Sharing Plan & Trust, 650 F. Supp.
359, 369 (N.D. Ga. 1986); PBGC v. Greene, 570 F. Supp. 1483, 1497-98 (W.D. Pa.
1983), a f f d , 727 F.2d 1100 (3d Cir.), cen. denied sub nom. Allen v. PBGC, 469 U.S.
820 (1984).
PBGC v. Greene, 570 F. Supp. 1483, 1497-98 (W.D. Pa. 1983), affd, 727 F.2d
1100 (3d Cir.), cen. denied sub nom. Allen v. PBGC, 469 U.S. 820 (1984).
Id. at 1497-98.
94
9 5
9 6
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9 7
9 8
99
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
260
Even if a fiduciary resigns according to plan provisions, the
resignation will be ineffective if the fiduciary fails to make adequate
arrangements for the "continued management" or the "continued
prudent management" of the plan.
The courts have adopted
rigorous standards to determine what constitutes adequate provision
for the continued prudent management of the plan. For example, in
Freund v. Marshall & Ilsley Bank, certain trustees made provisions
for the future conduct of plan affairs and received representations
from the purchaser of the company that he would continue the plan
and would appoint successor trustees. However, the court held the
trustees liable as fiduciaries, explaining that receiving representations
from the purchaser did not allow the trustees "to simply walk away
from the Plan prior to the appointment of successors." Further,
the courts have assumed that providing for the continued prudent
management of a plan requires ensuring the successor is aware of
matters concerning the operation of the plan and its proper
handling.
However, this duty does not extend to unforeseeable
events.
100
101
102
103
104
105
100
See Chambers v. Kaleidoscope, Inc. Profit Sharing Plan & Trust, 650 F.
Supp. 359, 369 (N.D. Ga. 1986) f [A] plan trustee's obligations are extinguished only
when he or she . . . makes arrangements—e.g, ihrough the appoinimcnt of a
successor— for the continued management of the plan. [Thc] courts reasoned that
the very purpose of imposing a fiduciary duly upon plan trustees and administrators
is defeated if a fiduciary may abandon his or her duties . . . without ensuring that the
fiduciary obligations will be met." (citations omiucd)).
See PBGC v. Greene, 570 F. Supp. 1483, 1497-98 (W.D. Pa. 1983), a j f d , 727
F.2d 1100 (3d Cir.), cen. denied sub nom. Allen v. PBGC, 469 U.S. 820 (1984);
Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629, 635 (W.D. Wis. 1979).
485 F. Supp. 629 (W.D. Wis. 1979).
Id. at 635.
Coleman Clinic, Ltd. v. Massachusetts Mut. Life Ins. Co, 698 F. Supp. 740,
746^7 ( C D . 111. 1988).
Id. ai 747.
101
1 0 2
1 0 3
104
105
�S U M M E R 1992
IV.
The Definition of a Fiduciary Under ERISA 261
FIDUCIARY STATUS AS A RESULT OF FUNCTION
The issues addressed in the previous section are primarily
relevant when the basis for fiduciary status is appointment to a
particular office. Different issues arise when fiduciary status is based
on function. Specifically, questions arise as to whether persons are
fiduciaries when they have only limited authority over plan affairs
and whether persons who perform only limited functions are
fiduciaries with respect to all of the plan's operations. Several
principles have emerged regarding these issues.
A.
Persons with Limited Authority
106
107
Under section 3(21), any authority, control or responsibility over certain matters, and any discretionary authority,
discretionary control,
or discretionary responsibility
over
certain other matters can render a person a fiduciary. An important
principle under section 3(21) is that fiduciary status may result even
though the person has only limited authority, control, or responsibility, or has only limited discretionary authority, discretionary control, or
discretionary responsibility.
108
110
111
112
1 0 6
ERISA, § 3(21XA)(i), (ii), 29 U.S.C § 1002(A)(i), (n).
Id. (i), 29 U.S.C § 1002(A)(i).
Id. (ii), 29 U.S.C § 1002(A)(ii).
I d (i), (iii), 29 U.S.C § 1002(A)(i), (ii).
I d (i), 29 U.S.C. § 1002(A)(i).
Id. (iii), 29 U.S.C. § 1002(A)(iii).
See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 113 (1989) (stating
that certain provisions of ERISA, including § 3(21), "do not characterize a fiduciary
as one who exercises entirely discretionary authority or control. Rather, one is a
fiduciary to the extent he exercises any discretionary authority or control.");
American Fed'n of Unions Local 102 Health & Welfare Fund v. Equitable Life
Assurance Soc'y, 841 F.2d 658, 662-63 (5th Cir. 1988); Mutual Life Ins. Co. v.
Yampol, 840 F.2d 421,424-25 (7th Cir. 1988); Blatt v. Marshall & Lassman, 812 F.2d
810, 812 (2d Cir. 1987); Coleman v. Nationwide Life Ins. Co, 748 F. Supp. 429, 43132 (E.D. Va. 1990); NARDA, Inc. v. Rhode Island Hosp. Trust Nat'l Bank, 744 F.
Supp. 685, 698-95 (D. Md. 1990); Buehler Ltd. v. Home Life Ins. Co, 722 F. Supp.
1554, 1562 (N.D. III. 1989); In re Benefit Management Corp., 10 Employee Benefits
1 0 7
1 0 8
mmm
1 0 9
1 . 0
1 . 1
1 1 2
•ill
5 -•
�27 R E A L PROPERTY, PROBATE A N D TRUST J O U R N A L
262
Although many authorities recognize that limited authority,
control, or responsibility are sufficient to render a person a fiduciary
under section 3(21), few cases address the statutory basis for this
rule. When courts do refer to the statute, they generally rely on the
word "any," which qualifies each of the terms in the definition. Occasionally, courts cite other phrases in section 3(21)
or other provisions of ERISA for additional support, but the
main basis for the rule that makes a person with only limited
authority, control, or responsibility a fiduciary clearly is the word
"any."
113
114
11S
114
The use of the word "any" throughout section 3(21) suggests
that even the slightest degree of authority, control, or responsibility
or the slightest degree of discretion will make a person a fiduciary.
The courts, however, have established some limits. For example,
when a person's function is substantially restricted, courts sometimes
Cas. (BNA) 1651, 1658 (Bankr. W.D. Wis. 1988); John Morrell & Co. v. John
Hancock Mut. Life Ins. Co, No. 85 C 9166,1988 U.S. Dist. LEXIS 5103, at '8 (N.D.
III. May 31,1988); Northern Group Serv, Inc. v. Siaie Farm Mut. Auto Ins. Co, 644
F. Supp. 535, 537 (E.D. Mich. 1986), rev'd on other grounds sub nom. Northern
Group Serv, Inc. v. Auto Owners Ins. Co, 833 F.2d 85 (6ih Cir. 1987), cen. denied,
486 U.S. 1017 (1988); Sixty-Five Sec. Plan v. Blue Cross & Blue Shield, 583 F. Supp.
380, 386-87 (S.D.N.Y. 1984); Eaton v. D'Amato, 581 F. Supp. 743, 746 (D.D.C.
1980).
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 113 (1989); In re
Benefit Management Corp, 10 Employee Benefits Cas. (BNA) 1651,1657 (Bankr.
W.D. Wis. 1988); Sixty-Five Sec Plan v. Blue Cross & Blue Shield, 583 F. Supp. 380,
386-87 (S.D.N.Y. 1984); Eaton v. D'Amato, 581 F. Supp. 743, 746 (D.D.C. 1980).
Thus, a person is a fiduciary under § 3(21)(A)(i) if the person exercises "anydiscretionary authority or control over the management of the plan or "any" discretionary control over the management or disposition of its assets. A person is a
fiduciary under § 3(21)(A)(ii) if the person exercises "any" authority or responsibility
to render the advice described in that subparagraph. Finally, a person is a fiduciary
under § 3(21)(A)(iii) if the person has "any" discretionary authority or responsibility
in the administration of the plan. ERISA, § 3(21), 29 U.S.C. § 1002 (1988).
E.g., In re Benefit Management Corp, 10 Employee Benefits Cas. (BNA)
1651, 1658 (Bankr. W.D. Wis. 1988) (relying in part on the phrase "to the extent"
appearing in the introductory ponion of § 3(21)).
E.g., Sixty-Five Sec. Plan v. Blue Cross & Blue Shield, 583 F. Supp. 380, 38687 (S.D.N.Y. 1984) (citing § 405(c)( 1), 29 U.S.C. § 1105(c)( 1), which provides for the
allocation of fiduciary responsibilities in certain circumstances).
1 1 3
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1 1 4
1 1 5
1 1 4
1 -
�The Definiiion of a fiduciary Under ERISA
S U M M E R 1992
263
find that the person should not be deemed a fiduciary even though
the person arguably comes •within the literal terms of the statute.
117
Nevertheless, courts have deemed a person with limited authority"* a fiduciary in at least four important situations: (l)when the
person's powers are not final, (2) when the powers are limited in
scope, (3) when the powers are illegally or improperly attained, and
(4) when the powers are indirectly exercised.
The following
discussion analyzes all four of these situations.
1.
Lack
of Final
Aulhoruy
A plan may restrict a person's authority, control, or responsibility over plan affairs by preventing the person f r o m making final
1 1 7
See, e.g.. Trustees of Laborers' Local No 72 Pension Fund v. Nationwide
Life Ins. Co, 783 F. Supp. 899, 908 (D. NJ. 1992) (holding an insurance company
was not a fiduciary when it exercised no "significant" discretionary authority with
respect to purchasing its own annuities, amending the contract, or crediting earnings
to the fund); Anoka Orthopaedic Assocs, P.A. v. Mutschler, 709 F. Supp. 1475,
1484-86 (D. Minn. 1989) (deciding that attorney's and plan service provider's role in
performing cenain services for a plan constituted "limiied" authority over the
administration of the plan, which was insufficieni to make these persons fiduciaries
under the Act), aff'd on other grounds sub nom. Anoka Orthopaedic Assocs, P_A. v.
Lechncr, 910 F.2d 514 (8th Cir. 1990); Hartness v. Printing & Graphic Arts Union
No. 3, No. 86 C 7932,1988 V S . Dist. LEXIS 12007, at *7-8 (N.D. III. Oct. 24,1988)
(deciding that when 150 employers helped select a committee thai arbitrated
grievances involving the denial of benefits, ihc role of one of these employers was
too marginal to constiiute the exercise of discrciionary control over plan administration); Quigley v. Unum Life Ins. Co, 688 F. Supp. 80 (D. Mass. 1988), aff'd, 887
F.2d 258 (1st Cir. 1989) (holding that insurer's provision of contractual benefits did
not create fiduciary obligations when the insurer exercised "little or no" discretion);
Munoz v. Prudential Ins. Co, 633 F. Supp. 564, 568 (D. Colo. 1986) (deciding that,
although clerical duties involve exercising discretion, they do not alone give rise to
fiduciary status); infra note 151 and accompanying text. Cf. Mutual Life Ins. Co. v.
Yampol, 840 F.2d 421, 425 (7ih Cir. 1988) (ruling that state insurance official acting
as court-appointed liquidator of a trust was a plan fiduciary because he had a
"significant" degree of control, authority, and responsibility over ihe managemenl of
the trust and the disposition of its assets).
1 1 8
The term "authority" occasionally will be used below to refer io discreiionary
and nondiscreiionary authority, control, or responsibililv.
�27 R E A L PROPERTY, PROBATE A N D T R U S T J O U R N A L
264
decisions for the plan. A person who does not have the power to
make final decisions for a plan may, nevertheless, qualify as a
fiduciary. For example, in American Federation of Unions Local 102
Health & Welfare Fund v. Equitable Life Assurance Society, the
Fifth Circuit held that the administrator of a plan who had initial
authority "to grant or deny claims, to manage and disburse fund
assets and to maintain claims files" was a fiduciary even though the
trustees had reserved for themselves the final authority to grant and
deny claims and to approve investments.
Noting that "the term
fiduciary includes those to whom some discretionary authority has
been delegated," the court ruled that this reservation of powers did
not prevent the administrator from exercising discretionary authority
wilhin the meaning of the statute.
Other entities whose authority
was similarly restricted also have been deemed fiduciaries.
119
120
121
122
An important category of persons who may be fiduciaries, even
though they lack final decision-making authority, are consultants and
advisers who have special expertise. Congress has specifically
recognized the fiduciary status of expert consultants and advisers. In
particular, the ERISA Conference Report states that "consultants and
advisers may because of their special expertise, in effect, [exercise]
discretionary authority or control wiih respect to the management or
administration of [a] plan or some authority or control regarding its
assets."
Courts also generally have recognized that consultants
123
1 1 9
841 F 3 d 658 (5th Or. 1988).
Jd. at 662-63.
Id. at 663.
See Mutual Ufc Ins. Co. v. Yampol, S40 F.2d 421, 424-25 (7ih Cir. 1988)
(state insurance official acting as court-appointed liquidator of a trust deemed a
fiduciary although his powers over the trust were "subject to" court approval).
H.R. CONF. REP. No. 1280, 93d Cong., 2d Sess. 323 (1974), reprirued in
120
121
122
123
SENATE C O M M . ON LABOR
AND P U B U C
WELFARE, 94TH
C O N G , 2 D SESS.,
LEGISLATIVE HISTORY OF ERISA 4518, 4590 (Comm. Print 1976). The passage
states:
The term 'fiduciary'.. . includes any person who renders investment advice for a fee and includes persons to whom 'discretionary'
duties have been delegated by named fiduciaries.
While the ordinary functions of consultants and advisers to
employee benefit plans (other than investment advisers) may not be
�S U M M E R 1992
The Definiiion of a Fiduciary Under ERJSA 265
and advisers w i l h special expertise may be
they lack final decision-making a u t h o r i t y .
fiduciaries,
even though
124
considered as fiduciary functions, it must be recognized that there will
be situations where such consultants and advisers may because of iheir
special expertise, in eflect, be exercising discreuonary authority or
control with respect to the management or administrauon of such plan
or some authority or control regarding its assets. In such cases, they are
to be regarded as having assumed fiduciary obligations within the
meaning of the applicable definition.
Id.
1 2 4
See, e.g.. Income Sec. Corp. v. Louisiana Oilfield Contractors Ass'n, 9
Employee Benefits Cas. (BNA) 1701, 1704-05, 1712 (W.D. La. 1987) (contract
provider of adminisiraiive claims services and insurance company with expertise in
formulating and marketing plans); McNeese v. Mcalth Plan Mktg, Inc, 647 F. Supp.
981, 985 (N.D. Ala. 1986) (president of coniraci service provider who furnished
managemenl, administrative, and invesiment services to employee bencfn plans),
Brock v. Self, 632 F. Supp. 1509, 1520-21 (W.D. La. 19S6) (pension plan service
company and its principals); Stanton v. Shearson Lehman/Am. Express, Inc, 631 F.
Supp. 100, 103-04 (N.D. Ga. 1986) (securiiies broker); Miller v. Lay Trucking Co,
606 F. Supp. 1326, 1334-35 (N.D. Ind. 1985) (insurance agent who formulated
insurance specifications, provided advice, and helped prepare reports); Associated
Gen. Contractors Retirement Fund v. Hcbets, 5 Employee Benefits Cas. (BNA)
2121, 2122, 2124-26 (S.D. Cal. 1984) (insurance brokers and company lhat helped
obtain suitable insurance coverage for various plans); Sixty-Five Sec. Plan v. Blue
Cross & Blue Shield, 583 F. Supp. 380, 387 (S.D.N.Y. 1984) (Blue Cross and Blue
Shield); Eaion v. D'Amato, 581 F. Supp. 743, 746 (D.D.C. 1980) (company and key
officials who provided administrative and management services for plans); Brink v.
DaLesio, 496 F. Supp. 1350, 1375 (D. Md. 1980), a f f d in relevani pan, 667 F.2d 420
(4ih Cir. 1981) (insurance consultant who helped selecl insurance carriers for plan
and advised the plan on financial matters); see aiso Useden v. Acker, 947 F.2d 1563,
1577-78 n.18 ( l l t h Cir. 1991) (recognizing that consultants may be fiduciaries as a
resull of their expenise, but suggesting this principle should apply differently to
different types of consultants); Pappas v. Buck Consultants, Inc, 923 F.2d 531, 538
(7ih Cir. 1991) (dictum) (stating lhat consuliams with an unusual degree of influence
over a plan may become fiduciaries); NARDA, Inc. v. Rhode Island Hosp. Trust
Nat'l Bank, 744 F. Supp. 685, 692-93 (D. Md. 1990) (ruling that there was a question
of fact whether an insurer who allegedly provided guidelines for administration of
claims and assistance in pursuing claims was a fiduciary). Bia see Associates in
Adolescent Psychiatry v. Home Life Ins. Co, 941 F.2d 561, 569-70 (7ih Cir. 1991)
("Thai [various enumerated professionals] may render services to employers, plan
trustees, and plan beneficiaries does not give them any decision-making authority
over the plan or plan assets; the power io act for ihe plan is essential to status as a
fiduciary under ERISA."); Pappas v. Buck Consuliams, Inc, 923 F.2d 531, 535 (7th
Cir. 1991) (§ 1001(21)(A) speaks to "actual decision-making power raihcr than to ihe
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
266
Sometimes, courts do not delineate which factors are important
in determining whether a person without final authority over plan
affairs is a fiduciary. However, courts often find fiduciary status
when the final decision-maker essentially left the alleged fiduciary in
charge. This may occur out of negligence or because the final
decision-maker cannot feasibly control the range or type of services
provided by the consultant
Consultants and advisers may also
obtain a significant degree of effective authority or control over a
plan because of their expertise or the decision-maker's lack of
expertise.
125
126
127
128
influence lhat a professional may have over thc decisions made by ihe plan trustees
she advises").
See Brock v. Self, 632 F. Supp. 1509, 1524 (W.D. La. 1986).
See, e.g., Fechter v. Connecticut Gen. Life Ins. Co, No. 87-0506, 1991 U.S.
Dist. LEXIS 14607, at *14 (E.D. Pa. Oct. 9, 1991) (holding that a question of fact
existed whether an insurer's various plan activities gave it actual decision-making
authority over tbe management of the plan); Eaton v. D'Amato, 581 F. Supp. 743,
745-47 (D.D.C 1980) (mem.) (refusing to dismiss as a fiduciary a service provider
who was required, inter alia: (1) to collect contributions, (2) to administer the funds'
bank accounts, (3) to keep appropriate financial records, (4) to process and
adjudicate claims for medical care, (5) to supervise operation of the denial clinic, (6)
to summarize the status of the funds on a monthly basis and repon to the trustees,
and (7) to attend tmstee meetings and transcribe the minutes); see also supra notes
119-22 and accompanying text (discussing American Fed'n of Unions Local 102
Health & Welfare Fund v. Equitable Life Assurance Soc'y and Mutual Life Ins. Co.
v. Yampol).
See supra note 124.
Cf. Useden v. Acker, 947 F.2d 1563, 1577-78 (llth Cir. 1991) (holding that
an auomcy who commingled business observations with his advice was not a
fiduciary, "especially when this advice [was] proffered to businesspersons of some
sophistication"); Brown v. Roth, 729 F. Supp. 391, 396 (D.NJ. 1990) (ruling that
consultant was not a fiduciary merely because he made ceriain invesiment
recommendations to a plan trustee who had many years of business experience);
Stanton v. Shearson Lehman/Am. Express, Inc, 631 F. Supp. 100, 104 (N.D. Ga.
1986) (holding that there was a question of fact whether a broker who gave
investment advice was afiduciary,because the plan trustee had some knowledge and
experience in securities trading).
125
1 2 6
127
128
�SUMMER 1992
2
The Definition of a Fiduciary Under ERISA 267
Limns on Scope of Authority
A person's authority may also be limited by a set of rules,
regulations, or other similar restrictions. A person whose authority
is limited by this type of restriction may nevertheless qualify as a
fiduciary, depending on the nature of the Umitations. For example,
in Stay-Five Security Plan v. Blue Cross and Blue Shield, the court
held that Blue Cross was afiduciarybased on its authority to negotiate rates with hospitals on behalf of a plan. Even though the state
set limits on the rates that Blue Cross could negotiate, the court
concluded that Blue Cross possessed discretionary responsibility in
the administration ofthe plan, because the negotiations required the
exercise of discretionary authority and the rates were a crucial part
of the administration of the plan.
139
130
Although a person may be a fiduciary despite restraints such as
those imposed in Sixty-Five Secunty Plan v. Blue Cross and Blue
Shield, some restraints are so fundamental that they preclude a
finding that a person has authority, control, or responsibility, or that
a person has discretionary authority, control, or responsibility within
the meaning of section 3(21). The. Department of Labor has stated
that a person who "performs purely ministerial functions . . . for an
employee benefit plan within a framework of policies, interpretations,
rules, practices and procedures made by other persons" is not a
fiduciary.
Courts also have generally taken this position.
131
129
583 F. Supp. 380 (S.D.N.Y. 1984).
Id. at 387.
29 C.F.R. § 2509.75-8 at (D-2) (1991); see also 29 C.F.R. § 2510.3-21(d)
(establishing a comparable rule for securities brokers); Dep't of Labor Op. No. 8249A, 1982 ERISA LEXIS 20 (1982) (ruling that a futures commission merchant is
not a fiduciary within the meaning of § 3(21)(A)(i) merely because the merchant
executes commodity futures transactions for a plan, if the transactions are executed
pursuant to the instructions of a plan fiduciary who determines the fundamental
constraints within which the investment must be made (e.g, time frame, price range,
minimum and maximum quantity)).
See Pohl v. National Benefits Consultants, Inc, 956 F.2d 126, 129 (7th Cir.
1992); Useden v. Acker, 947 F.2d 1563, 1573-75 (llth Cir. 1991); Anoka Orthopaedic Assocs, P.A. v. Lechner, 910 F.2d 514, 517 (8th Cir. 1990); Painters Dist. Council
No. 21 Welfare Fund v. Price Waterhouse. S79 F.2d 1146, 1151 (3d Cir. 1989);
130
131
iiiiiliiliiii
132
132
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
268
Policy considerations undoubtedly provide a partial basis for this rule,
because the literal terms of the statute often encompass these
133
persons.
3.
Illegally or Improperly Attained Power
Persons who have little or no authority over a plan may become
fiduciaries under section 3(21)(A)(i) by wrongfully exercising control
over some aspect of the plan's operations.
To date, two courts
of appeals have held persons to befiduciariesin these circumstances.
The Ninth Circuit held that a man who was hired to manage a
company's business was a fiduciary when he withdrew funds from the
plan to lend to the company's owners and pay company expenses.
The Second Circuit held that an employer was a fiduciary
when the employer neglected to fill out the necessary forms for a
plan lo process a participant's claim, which prevented the plan from
paying the participant's benefits.
Numerous district courts also
have held persons to be fiduciaries when their conduct was improper.
Other authorities indirectly lend support to the same propo134
135
136
137
Gelardi v. Pertec Computer Corp, 761 F.2d 1323,1325 (9ih Cir. 1985) (per curiam);
Levy v. Lewis, 635 F.2d 960, 968 (2d Or. 1980); Associates in Adolescent Psychiatry
v. Home Life Ins. Co, 729 F. Supp. 1162, 1180-81 (N.D. 111. 1989), aff-d, 941 F.2d
561 (7ih Cir. 1991); Useden v. Acker, 721 F. Supp. 1233,1242-43 (S.D. Fla. 1989);
Munoz v. Prudential Ins. Co, 633 F. Supp. 564, 568-69 (D. Colo. 1986).
The second clause of § 3(21)(A)(i) could apply to ministerial functions. See
Blau v. Marshall & Lassman, 812 F.2d 810 (2d Or. 1987); District 65, UAW v.
Harper & Row, Publishers, 670 F. Supp. 550, 555-56 (S.D.N.Y. 1987).
Yeseia v. Baima, 837 F.2d 380, 381-82, 385-86 (9ih Cir. 1988); Blau v.
Marshall & Lassman, 812 F.2d 810, 813 (2d Or. 1987); Slyman v. Equitable Life
Assurance Soc'y, No. 87-CV-110,1987 U.S. Dist. LEXIS 8652, at '1,4-5 (N.D.N.Y.
July 29,1987); Mcizner v. D.H. Blair & Co, 663 F. Supp. 716, 720 (S.D.N.Y. 1987).
Yeseta v. Baima, 837 F.2d 380, 381-82, 385-86 (9th Or. 1988).
Blatt v. Marshall & Lassman, 812 F.2d 810, 813 (2d Cir. 1987).
See, e.g., Greenblatt v. Prescription Plan Semces Corp, 783 F. Supp. 814,
821 (S.D.N.Y. 1992) (third pany administrator who wrongfully retained a S 150,000
reserve fund belonging to the plan held liable as a fiduciary); Chapman v. Klemick,
750 F. Supp. 520, 522-24 (S.D. Fla. 1990) (attorney who improperly appropriated
settlement proceeds owed to a trust fund held to be a fiduciary); Metzner v. D.H.
Blair & Co, 663 F. Supp. 716, 720 (S.D.N.Y. 1987) (representatives of a brokerage
1 3 3
134
135
jiHiii
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�S U M M E R 1992
sition.
The Definition of a Fiduciary Under ERISA 269
13S
Several courts, however, have declined to hold that a person
may become a fiduciary by wrongfully exercising control over the
plan's operations. For example, in Nieto v. Ecker, the Ninth
Circuit rejected the argument that an attorney who was retained to
collect delinquent contributions "effectively" exercised control over
plan assets because the attorney failed to prosecute lawsuits to
collect the contributions. The court reasoned that the attorney
should not be deemed a fiduciary because, if he were, then anyone
would be a fiduciary "insofar as he exercised some control over trust
assets and through negligence or dishonesty jeopardized those
assets."
Similarly, the Third Circuit concluded in a case involving an actuary that plan consultants do not become fiduciaries when
139
140
141
firm who traded on the account withoui auihonzation and contrary to the
instructions given by the plan trustees deemed fiduciaries); Slyman v. Equitable Life
Assurance Soc'y, No. 87-CV-110, 1987 U.S. Dist. LEXIS 8652, at '1,4-5 (N.D.N.Y.
July 29,1987) (claims processor which had no discrciionary authority or responsibility
in thc administration of a plan nevertheless held to be a fiduciary, because it
exercised actual control over the management or disposiiion of plan assets by: (1)
withdrawing plan funds for its own benefit, which reduced the funds available to pay
claims of participants; and (2) delaying the return of several claims to the sponsor
upon termination of the agreement).
See Calhoun v. FDIC, 653 F. Supp. 1288,1290-92 (N.D. Tex. 1987) (deciding
FDIC not a plan fiduciary when it acted pursuant to an express grant of statutory
authority); Dep't of Labor Op. No. 82-49A, 1982 ERISA LEXIS 20 (1982) (ruling
that a futures commission merchant was not a fiduciary under thc facts described, "as
long as" the merchant acted according to applicable law and the governing
agreements).
845 F.2d 868 (9th Cir. 1988).
/d.at871.
' See id. The Nieto court discusses some aspects of its earlier decision in
Yeseia v. Baima, 837 F.2d 380 (9lh Or. 1988) but ignores the passage in Yeseia
dealing with an alleged fiduciary's lack of proper authority. One difference between
the two cases is that Yeseta involved a corporate insider, whereas Nieto involved an
outside professional. Courts often seem to apply different standards in determining
the fiduciary status of these different groups. See, e.g., Anoka Orthopaedic Assocs,
P.A. v. Lechner, 910 F.2d 514, 518 n.8 (8ih Cir. 1990) (holding cenain indcpendem
professionals not to be fiduciaries by distinguishing a case involving corporate
insiders)
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14
;
••)
.>
:;
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27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
142
they perform professional functions in a tortious manner.
Numerous district courts also have suggested that unauthorized
conduct should not give rise to fiduciary status.
143
4.
Indirect Exercise of Control
A person's authority, control, or responsibility may be limited
because it is indirect rather than immediate. This type of limiution
occurs, for example, when one person is in a position to influence or
control another person who, in turn, has authority, control, or
responsibility over plan affairs. A number of courts have indicated
that possessing indirect authority can render the first person a
fiduciary. For a person to become a fiduciary based on authority
over another, the evidence must sufficientlv show that the person had
influence or control over the other's conduct.
The power to
144
145
142
Pappas v. Buck Consuliams, Inc., 923 F.2d 531, 538 (7ih Cir. 1991).
See, e.g.. Pension Fund—Mid Jersey Trucking Indus.—Local 701 v. Omni
Funding Group, 731 F. Supp. 161, 175 (D.NJ. 1990) (failing to follow instructions is
not an exercise of discretion that creates fiduciary status); Useden v. Acker, 721 F.
Supp. 1233, 1243 n.13 (S.D. Fla. 1989) (dictum) (exceeding its contractual and
statutory rights when attempting to recover moneys loaned to a plan does not make
a bank a fiduciary), aff'd, 947 F.2d 1563 (1 llh Cir. 1991); Sixty-Five Sec. Plan v. Blue
Cross & Blue Shield, 583 F. Supp. 380, 386 n.9 (S.D.N.Y. 1984) f We are not
entirely convinced that an entity such as Blue Cross may be held a fiduciary solely
through the alleged violation of the powers granted to it ").
See Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan
Enter, 793 F.2d 1456, 1459-60 (5th Cir. 1986), cen. denied, 479 U.S. 1034, cen.
denied, 479 U.S. 1089 (1987); Leigh v. Engle, 727 F.2d 113, 134 n.33 (7th Or. 1984)
(dictum), aff'd, 858 F.2d 361 (7th Cir. 1988), cen. denied, 489 U.S. 1078 (1989);
Healy v. Axelrod Construction Co, No. 91 C 4969, 1992 U.S. Dist. LEXIS 3849, at
•14 (N.D. III. Mar. 24, 1992); Newton v. Van Ottcrloo, 756 F. Supp. 1121, 1131
(N.D. Ind. 1991); Hazel v. Curtiss-Wright Corp, 12 Employee Benefits Cas. (BNA)
1809 (S.D. Ind. 1990); Soule v. Retirement Income Plan for Salaried Employees, 723
F. Supp. 1138,1148-50 (W.D. N.C. 1989); Stanton v. Shearson Lehman/Am. Express,
Inc, 631 F. Supp. 100, 105 (N.D. Ga. 1986); Fulk v. Bagley, 88 F.R.D. 153, 157-62
(M.D.N.C. 1980); Eaton v. D'Amato, 581 F. Supp. 743, 747 n.ll (D.D.C. 1980).
See infra notes 146-50.
143
144
145
�S U M M E R 1992
The Definiiion of a Fiducinry Under ERJSA
271
1
appoint a person to a plan can provide some evidence, ** but a
power of appointment alone is not sufficient to establish influence or
control.
The existence of an employment relationship is also
relevant. Some cases have relied on the mere fact that a person
employs a plan fiduciary to render the employer a fiduciary. The
147
148
i4i
See Leigh v. Engle, 727 F^d 113, 134 n33 (7ih Cir. 1984) (dictum) (stating
that persons wbo help select plan administrators could have responsibility as
fiduciaries with respect to the investments made by those administrators, if the
evidence indicates that the appoinung officials had "real authority . . . over plan
investments by virtue of their having appointed (the] administrators"), aff'd, 858 F.2d
361 (7ih Cir. 1988), cen. denied, 489 U.S. 1078(1989); Fulk v. Bagley, 88 F.R.D. 153,
157-62 (M.D.N.C. 1980) (deciding that officers of the plan sponsor may be fiduciaries
of a plan bearing responsibility for thc misuse of plan assets when ii is alleged that
ihey have authority to select or participate in the scleciion of the plan's irusiccs, if
they use iheir amhority to indirectly influence the investment of plan assets).
Associates in Adolescent Psychiatry v. Home Life, 941 F.2d 561, 568-69 (7th
Cir. 1991), cen. denied, 112 S. Q. 1182 (1992); Sommers Drug Stores Co. Employee
Profit Sharing Trust v. Corrigan Enter, 793 F.2d 1456, 1459-60 (5th Cir. 19S6), cen.
demed, 479 U.S. 1034, cert, denied, 479 U.S. 1089 (1987); Geraldi v. Pertec Computer
Corp, 761 F-2d 1323 (9th Cir. 1985) (per curiam); Andradc v. Parsons Corp, 12
Employee Benefits Cas. 1954, 1959-60 (CD. Cal. 1990); Coleman Clinic, Ltd. v.
Massachusetts Mut. Life Ins. Co, 698 F. Supp. 740, 742^3 (CD. III. 1988); Holland
v. Bank of A m , 673 F. Supp. 1511, 1518 (S.D. Cal. 1987); Independent Ass'n of
Publishers' Employees v. Dow Jones & Co, 671 F. Supp. 1365, 1367 (S.D.N.Y.
.
1987); see also Candela v. Brown-Forman Corp, CIV. A. No. 89-51, 1989 U.S. Dist.
LEXIS 8947, at *4 (E.D. La. July 31, 1989) (deciding that a conclusory allegation
that employer appointed and thereby controlled plan administrator was insufficient
to establish that employer was a fiduciary for purposes of a benefits dispute), affd,
942 F.2d 787 (5th Or. 1991).
1 4 7
1 4 8
See Stanton v. Shearson Lehman/Am. Express, Inc., 631 F. Supp. 100,104-05
(N.D. Ga. 1986); Miller v. Lay Trucking Co, 606 F. Supp. 1326, 1337 (N.D. Ind.
1985); see also Adamo v. Anchor Hocking Corp, 720 F. Supp. 491, 497-98 (W.D. Pa.
1989) (holding, without mention of § 3(21), that a plan sponsor could be sued under
ERISA because it controlled and influenced the plan through its employment of the
plan administrator); American Fed'n of Unions Local 102 Health & Welfare Fund
v. Equitable Life Assurance Soc'y, 647 F. Supp. 947, 954 (M.D. La. 1985), a f f d in
relevant pan on other pounds, 841 F.2d 658 (5lh Cir. 1988) (implying that an
insurance company could be a plan fiduciary if its employee acted as plan
administrator, provided the employee's plan activities came within the scope of his
employment). But see Sommers Drug Stores Co. Employee Profit Sharing Trust v.
Corrigan Enter, 793 F.2d 1456, 1459-60 (5ih Cir. 1980), cen. denied, 479 U.S. 1034,
cert, denied, 479 U.S. 1089 (1987); Gelardi v. Pence Computer Corp, 761 F.2d 1323,
1325 (9th Or. 1985) [per curiam); Warren v. Oil. Chemical & Atomic Workers
�27 R E A L PROPERTY, PROBATE A N D T R U S T J O U R N A L
272
fact that a company owns a controlling interest in another company
is also evidence of influence and control, and may alone be
sufficient to permit suits against the parent company as a fiduciaISO
ry
149
A court's ruling on whether these or other factors establish
fiduciary status depends not only on the facts of the case, but also on
the degree of influence or control a person exerts. Most courts do
not specify what degree of influence or control is required. However,
the holdings suggest that total control is not necessary. A few cases,
however, require proof of substantial control.
151
B.
Status Limited by Function
A person may be a fiduciary over a plan for some purposes but
not f o r o t h e r s .
152
I n o t h e r words, under section 3(21),
fiduciary
Pension Fund, 729 F. Supp. 563, 566 (E.D. Mich. 1989); Holland v. Bank of A m ,
673 F. Supp. 1511, 1518 (S.D. Cal. 1987); Reynolds v. Beihlehcm Steel Corp, 619 F.
Supp. 919, 928-30 (D. Md. 1984) (decided under agency law rather than § 3(21)).
Hazel v. Cuniss-Wrighi Corp, 12 Employee Benefits Cas. (BNA) 1809,181415 (S.D. Ind. 1990).
Eaton v. D'Amato, 581 F. Supp. 743, 747 n . l l (D.D.C. 1980) (holding, on
motion for summary judgment, lhat parent company could be sued as a fiduciary
because its subsidiary was an alleged fiduciary). Contra Reily v. Axe-Houghion
Managemenl, Inc, No. 87 Civ. 2817 (SWK), 1988 VS. DISL LEXIS 2147, at *!, 11
(S.D.N.Y. Feb. 24, 1988) (dismissing parent company as a defendant because no
facts were alleged establishing that the parent exercised discreiionary control or
authority over the plan or its assets).
See Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan
Enter, 793 F.2d 1456, 1459-60 (5th Cir. 1986), cen. denied, 479 U.S. 1034, cen.
denied, 479 U.S. 1089 (1987); Andrade v. Parsons Corp, 12 Employee Benefits Cas.
1954, 1956-57 ( C D . Cal. 1990).
See, e.g., Ed Miniat, Inc. v. Globe Life Ins. Group, 805 F^d 732, 735-36 (7th
Cir. 1986), cen. denied, 482 U.S. 915 (1987); Leigh v. Engle, 727 F.2d 113,133-35
(7ih Cir. 1984), aff'd, 858 F.2d 361 (7lh Cir. 1988), cen. denied, 489 U.S. 1078 (1989);
Great Coastal Express, Inc. v. Blue Cross & Blue Shield, 91 CV 00623, 1992 U.S.
Dist. LEXIS 1794, ai '8-11 (E.D. Va. Feb. 5, 1992); P.l.A. Michigan City, Inc. v.
National Porges Radiator Corp, No. 91 C 4039, 1992 U.S. Dist. LEXIS 482, at ' 8
(N.D. III. Jan. 15,1992); Arakelian v. Nat'l W. Life Ins. Co, 680 F. Supp. 400,404-05
(D.D.C. 1987) (mem.), reh'g denied. 724 F. Supp. 1033 (D.D.C. 1989) (mem.); 29
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�S U M M E R 1992
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273
status may be limited by function. For example, fiduciary status may
be confined to certain aspects of the plan's operation or to certain
portions of the plan's assets.
Most cases confiningfiduciarystatus to particular aspects of the
plan's operation involve plan sponsors. The cases fall into two
groups. In the first group, two fiduciary functions are involved, but
the sponsor is responsible for only one of the functions. For
example, a plan sponsor may be a fiduciary to the extent the sponsor
is responsible for the appointment of planfiduciaries,but may not be
the fiduciary who is responsible for other plan functions.
In
cases of this type, sponsors who qualified as fiduciaries because they
appointed plan officials were not deemed fiduciaries over claims
decisions, the calculation of contributions owed to the plan,
the purchase of insurance for the plan. and investments made by
the persons appointed.
Similarly, courts have held that the
sponsor may be a fiduciary when it provides information to partici153
154
155
156
157
C.F.R. § 2509.75-8 at FR-16; see also infra notes 153-75. Bui see Davidson v. Cook,
567 F. Supp. 225, 238 n.21 (E.D. Va. 1983) (dictum) f T h c plain language of the
statute seems to suggest that when a person becomes a fiduciary with respect to a
plan in any capacity, the fiduciary responsibility exiends io all functions performed
for the plan, however ministerial or discretionary."), aff'd, 734 F.2d 10 (4th Cir.), cen.
denied, 469 U.S. 899 (1984).
5ee Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan
Enter, 793 F.2d 1456, 1459-60 (5th Or. 1986), cen. denied, 479 U.S. 1034, cen.
denied, 479 U.S. 1089 (1987); Gelardi v. Pertec Computer Corp, 761 F.2d 1323 (9th
Cir. 1985) (per ciaiam); Andrade v. Parsons Corp, 12 Employee Benefits Cas.
(BNA) 1954, 1959-60 (CD. Cal. 1990); Coleman Clinic, Ltd. v. Massachusetts Mut.
Life Ins. Co, 698 F. Supp. 740, 74243 (CD. III. 1988); Holland v. Bank of A m , 673
F. Supp. 1511, 1518 (S.D. Cal. 1987); Independent Ass'n of Publishers' Employees
v. Dow Jones & Co, 671 F. Supp. 1365, 1367 (S.D.N.Y. 1987).
Gelardi v. Pence Computer Corp, 761 F.2d 1323 ( 9th Cir. 1985) (per
cunam); Holland v. Bank of A m , 673 F. Supp. 1511, 1518 (S.D. Cal. 1987).
Independent Ass'n of Publishers' Employees v. Dow Jones & Co, 671 F.
Supp. 1365, 1367 (S.D.N.Y. 1987).
Coleman Clinic, Ltd. v. Massachuscits Mut. Life Ins. Co, 698 F. Supp. 740,
742-43 (CD. III. 1988).
Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enter,
793 F.2d 1456, 1459-60 (5th Cir. 1986), cen. denied. 479 U.S. 1034, cen. dented, 479
U.S. 1089 (1987).
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�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
274
pants concerning its employee benefit plan, but not be a fiduciary
with regard to the resolution of claims under the plan. *
15
In the second group of cases involving plan sponsors, the
sponsor is responsible for both functions in question, but one of the
functions is deemed to be nonfiduciary. For example, in Amato v.
Western Union International Inc., a plan sponsor serving as plan
administrator was not held liable as a plan fiduciary when it amended
the plan, a nonfiduciary function. In Local Union 2134, UAW v.
Powhatan Fuel, Inc.,™ the top official of the sponsor company was
found to be a fiduciary with respect to the plan, but was deemed not
to be acting as a plan fiduciary when he decided to pay the business
expenses of the company rather than the plan's health insurance
premiums.
Cases in which sponsors are found to be performing
"settlor" or "business" functions generally fall into this second
category, although these cases often fail to articulate the principle discussed here, that a person may be a fiduciary with respect to
159
140
142
163
154
Kreml v. Diamond Shamrock Corp, 701 F. Supp. 1400, 1404-05 (N.D. 1 1
1.
1988).
159
773 FJZd 1402 (2d Cir. 1985), cen. dismissed, 474 IhS. 1113 (1986).
Id. at 1416-17 (noting that "ERISA permits employers to wear 'two hats'.. .
[and when they serve as both the employer and the plan administrator) they assume
fiduciary status only when and to the extent that they funcuon in their capacity as
plan administrators, not when they conduct business that is not regulated by
ERISA").
828 F.2d 710 (llth Cir. 1987).
Id. at 713-14.
Adams v. LTV Steel Mining Co, 936 F.2d 368, 370 (8ih Or. 1991); Payonk
v. HMW Indus, 883 F.2d 221,224-29 (3d Cir. 1989); Cunha v. Ward Foods, Inc, 804
F.2d 1418,1432-33 (9th Cir. 1986); United Indep. Right Officers v. United Air Lines,
756 F2d 1262,1268-69 (7th Or. 1985); Moehle v. NL Indus, 646 F. Supp. 769, 77879 (ED. Mo. 1986), aff'd, 845 F.2d 1027 (8ih Cir. 1988); see also Berlin v. Michigan
Bell Tel. Co, 858 F.2d 1154, 1162-64 (6th Cir. 1988) (noting that plan sponsors are
not fiduciaries for certain purposes, but holding that the sponsor in that case was
acting in a fiduciary capacity); District 65, UAW v. Harper & Row, Publishers, Inc.,
670 F. Supp. 550,555-56 (S.D.N.Y. 1987) (same holding). See supra notes 31 -34 and
accompanying text regarding the exclusion of "settlor" or "business" functions from
the scope of § 3(21).
140
161
142
163
:
:
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�S U M M E R 1992
The Defuimon of a Fiduciary Under ERJSA
some activities but not others.
275
164
Numerous cases involving persons and entities other than the
plan sponsor also recognize that fiduciary status may be confined to
certain aspects of the plan's operation. For example, an insurance
company or similar organization may qualify as a fiduciary with
respect to claims processing, but not with respect to the selection of
a hospital service organization for the plan, its own compensation
as a provider of plan benefits, and the procedure for amending
the plan.
Further, an insurance company may qualify as a
fiduciary when amending its contract with the plan, but not when
carrying out other insurance functions.
Similarly, a bank or
consultant that renders investment advice to a plan may be a
fiduciary to the extent that it provides that advice, but not when it
performs other tasks relating to the plan's a s s e t s . A few cases
also suggest lhat plan trustees, who are generally plan fiduciaries,
may not be fiduciaries regarding some plan mailers.
165
166
167
168
170
1 6 4
Musto v. Amencan Gen. Corp, 861 F.2cJ 897, 910-12 (6th Qr. 1988), cen.
denied, 490 U.S. 1020 (1989); Hickman v. Tosco Corp, 840 F.2d 564, 566-67 (8ih Cir.
1988); West v. Greyhound Corp, 813 F.2d 951, 955-56 (9ih Or. 1987); Phillips v.
Amoco Oil Co, 799 F.2d 1464, 1471 ( l l i h Cir. 19S6), cen. denied, 481 U.S. 1016
(1987); Sutton v. Weirton Steel Div, 724 F.2d 406, 411 (4th Cir. 1983), cen. denied,
467 U.S. 1205 (1984).
Schulisi v. Blue Cross, 717 F.2d 1127, 1131-32 (7th Cir. 1983).
Id.
McBain v. Hills-McCanna Retirement Plan, Civ. No. 86-6250,1988 U.S. Dist.
LEXIS 14742, at * 18-19 (E.D. Pa. Dec. 28, 1988).
Associates in Adolescent Psychiatry v. Home Life Ins. Co, 941 F.2d 561, 569
(7th Cir. 1991), cen. denied, 112 S. Ct. 1182 (1992); Chicago Bd. Options Exch. v.
Connecticut Gen. Life Ins. Co, 713 F.2d 254, 259-60 (7ih Cir. 1983).
Brandt v. Grounds, 687 F.2d 895, 897-98 (7th Cir. 1982); In re Benefit
Management Corp, 10 Employee Benefits Cas. (BNA) 1651, 1660 (Bankr. W.D.
Wis. 1988).
See, e.g., Alfarone v. Bcrnic Wolff Constr. Corp, 788 F.2d 76, 79 n.l (2d
Cir.), cen. denied, 479 U.S. 915 (1986) (staling thai union-appointed trustees of a
plan may noi have exercised discreiionary power with respect io a plan when they
attempted io file a lawsuit to collect delinquent contributions because ihe plan
provided that approval by a majority of the irusiees was required to take such
action); Whitaker v. Texaco, Inc, 729 F. Supp. 845, 854 (N.D. Ga. 1989) (ruling lhat
a trustee was noi a fiduciary with respect io minisierial functions that trustees were
1 6 5
166
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�27 R E A L PROPERTY, PROBATE A N D T R U S T J O U R N A L
276
Fiduciary status may be confined to certain portions of the
plan's assets. For example, the Department of Labor has ruled that
a person acting as a plan investment manager or investment advisor
may be a fiduciary over one portion of the plan's assets, without
being deemed a fiduciary with respect to assets delivered to another
investment manager.
The Department has also stated that a
person may be a fiduciary with respect to certain plan assets because
the person executed transactions for the purchase or sale of
securities, but not be a fiduciary with respect to other assets of the
plan. The courts have similarly recognized that a person may be
a fiduciary with respect to some assets of the plan but not others.
171
172
173
required to perform under the plan); Crawford v. Marine Midland Bank, No. CfV87-777E, 1989 WL 29891, at M (W.D.N.Y. Mar. 27, 1989) (holding that a bank
trustee of a plan was not a fiduciary for calculating plan benefits); Arakelian v.
National W. Life Ins. Co, 680 F. Supp. 400, 404 (D.D.C. 1987) (mem.), reh'g denied,
724 F. Supp. 1033 (D.D.C. 1989) (mem.) (deciding that plan trustees were not
fiduciaries with respect to investment decisions and surrender charges on certain
annuity contracts, when thc plan instrument required that all funds be invested in
those contracts).
29 C.F.R. § 2510.3-21 (c)(2) (1991); see also Dep't of Labor Op. 81-20A, 1981
ERISA LEXIS 71 (1981) (determining lhat a bank that was the investmem manager
for one of several invesiment accounts maintained by a plan was not a fiduciary with
respect to the other investment accounts of thc plan); Dep'i of Labor Op. 77-69,
70A, 1977 ERISA LEXIS 18 (1977) (stating that an insurance company that served
as investment manager for one of several accounts was not a fiduciary with respect
io other accounts of thc plan).
29 CF.R. § 2510.3-21 (d)(2) (1991).
See, e.g.. Successor Trust Comm. v. First State Bank, 735 F. Supp. 708, 715
(W.D. Tex. 1990) (deeming a bank a fiduciary with respect to portion of a plan over
which thc bank exercised authority); NARDA, Inc. v. Rhode Island Hosp. Trust Nat'l
Bank, 744 F. Supp. 685, 690-91 (D. Md. 1990) (deeming a bank a fiduciary of funds
in a trust it administered, but not a fiduciary of funds in other trusts established
under the plan); Pension Fund—Mid Jersey Trucking Indus.—Local 701 v. Omni
Funding Group, 731 F. Supp. 161,173-75 (D.NJ. 1990) (deeming a bank a fiduciary
with respect to funds placed by it in short term investments pending investment in
real estate loans, but not a fiduciary with respect to the loans); Galgay v. Gangloff,
677 F. Supp. 295,300-02 (M.D. Pa. 1987) (deeming employer a fiduciary with respect
to contributions it owed the plan because ihe contributions were plan assets, but not
a fiduciary with respect to the plan's other asseis).
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�The Definiiion of a Fiduciary Under ERISA 277
SUMMER 1992
A statutory basis also exists for limiting fiduciary status to
certain plan operaiions or assets. Section 3(21 )(A) provides that a
person is a fiduciary "to the extern that" the person meets the
requirements of section 3(21)(A)(i), (ii), or ( i i i ) .
Courts have
interpreted this phrase to mean that a person is a fiduciary only "to
the extent" the person performs or is responsible for perfonning a
specific function.
174
175
The rule that a person may be a fiduciary for certain purposes,
but not others, is subject to some qualifications. First, the rule does
not limit the fiduciary's substantive obligations over areas lhat come
wilhin ihe scope of ihe fiduciary's duties. For example, under the
substantive fiduciary provisions of ERISA a person who is a fiduciary
over a particular aspect of plan operations may, in that capacity,
have obligations relating to other aspecls of the plan. Nothing in
section 3(21) limits this responsibility. Similarly, a person who is
a fiduciary wiih respect to particular assets of the plan cannot rely on
section 3(21) to escape responsibility for the management of any
176
1 , 4
Bm see I.R.C. § 4975(e)(3) (definiiion of fiduciary docs not include the
language "to ihe extent that."). Treasury Regulaiions, § 54.4975-(9)(d)(2) are
identical to the Department of Labor regulations under § 3(21) and do not reflect
the Code's omission.
See Loca] Union 2134, UMW v. Powhatan Fuel, Inc., 828 F.2d 710, 714 (1 llh
Qr. 1987); Sommers Drug Stores Co. Employee Profil Sharing Trust v. Corrigan
Enter, 793 F.2d 1456, 1459-60 (5th Cir. 1986), cen. denied, 479 U.S. 1034, cen.
denied, 479 U.S. 1089 (1987); Amaio v. Western Union Int'l, Inc, 773 F.2d 1402,
1416-17 (2d Cir. 1985), cen. dismissed, 474 U.S. 1113(1986); Leigh v. Engle, 727 F.2d
113, 133-35 (7th Cir. 1984), ajpd, 858 F.2d 361 (1988); Brandi v. Grounds, 687 F.2d
895, 897 (7th Cir. 1982); Whitaker v. Texaco, Inc., 729 F. Supp. 845 , 854 (N.D. Ga.
1989); Crawford v. Marine Midland Bank, No. CIV-S7-777E, 1989 WL 29891, ai '4
(W.D.N.Y. Mar. 27, 1989); Galgay v. Gangloff, 677 F. Supp. 295, 302 (M.D. Pa.
1987); Holland v. Bank of Am, 673 F. Supp. 1511, 1518 (S.D. Cal. 1987); District 65,
UAW v. Harper & Row, Publishers, 670 F. Supp. 550, 555 (S.D.N.Y. 1987).
See Leigh v. Engle, 727 F.2d 113, 133-35 (7ih Cir. 1984) (holding that
persons who select and retain plan fiduciaries arc onlyfiduciariesunder § 3(21) "with
respect to" this function, bul further holding that under §§ 404 and 405 of ERISA
the obligations of the appointing officials include a duty io monitor the conduct of
the appointee, which could render them liable for ihe appointee's misconduci);
Sandoval v. Simmons, 622 F. Supp. 1174, 1211 (CD. III. 1985) (following Leigh).
175
176
�27 REAL PROPERTY, PROBATE AND TRUST JOURNAL
278
177
assets that fall within the person's domain of responsibility.
Another limitation to the rule that a person may be a fiduciary for
some purposes but not others is that the rule does not relieve certain
fiduciaries. In particular, most authorities assert that a named
fiduciary holds fiduciary status under section 3(21) for all purposes. * A final qualification is that the rule does not apply to the
party-in-interest and co-fiduciary responsibility provisions of ERISA
For these purposes, a fiduciary has responsibility for all aspecls of
the plan's operation and all assets of the plan.
17
179
V.
CONCLUSION
This article presents an overview of the major rules that have
evolved under section 3(21) of ERISA The rules are based on the
purpose of thc Act and on the language of the statutory provision.
Although the rules set forth in the article do not alone determine
wheiher a given person is a fiduciary, a practitioner should refer to
these rules to begin the process of determining who is a fiduciary.
After considering these principles, the practitioner must consult the
1 7 7
Lowen v. Tower Asset Management, Inc, 829 F.2d 1209, 1218-20 (2d Qr.
1987) (holding that an investment manager appointed to manage cenain assets of
the plan was a fiduciary with respect to all of those assets, regardless of whether the
plan's trustees had compelled investments made with some of the asseis).
See 29 CF.R. § 2509.75-8 at FR-16 (1991); see also Associates in Adolescent
Psychiatry v. Home Life Ins. Co, 729 F. Supp. 1162, 1179 (N.D. III. 1989), affd, 941
F.2d 561 (7th Or. 1991) (noting that "functional" fiduciaries, in contrast to named
fiduciaries, are not fiduciaries for all purposes), affd, 941 F.2d 561 (7ih Cir. 1991);
Kreml v. Diamond Shamrock Corp, 701 F. Supp. 1400, 1405 n.l (N.D. 111. 1988);
Arakelian v. Nat'l W. Life Ins. Co, 680 F. Supp. 400, 404 (D.D.C. 1987) (mem.),
reh'g denied, 724 F. Supp. 1033 (D.D.C. 1989) (mem.).
Although a named fiduciary is a fiduciary under § 3(21) for all purposes, other
provisions of ERISA make it possible for named fiduciaries to allocate or delegate
cenain functions pursuant to a procedure established in the plan instrumem. 29
CF.R. § 2509.75-8 ai FR-13, FR-14; see aiso Kreml v. Diamond Shamrock Corp,
701 F. Supp. 1400, 1405 n.l (N.D. III. 1988) (holding that a named fiduciary can be
protected from liability by designating another person to undenake fiduciary
responsibility).
See 29 C.F.R. §§ 2510.3-21 (c)(2)(i), (ii); 29 C.F.R. §§ 2510.3-21 (d)(2)(i), (ii)
(1991).
1 7 8
1 7 9
�SUMMER 1992
The Definiiion of a Fiduciary Under ERJSA 279
specific terms of the statute to determine if the function or position
of the person in question is covered under section 3(21).
�Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a tabbed divider. Given our
digitization capabilities, we are sometimes unable to adequately
scan such dividers. The title from the original document is
indicated below.
Divider Title:
3-
�Tab 2
Preemption
Defining the Contours of ERISA Preemption of State Insurance
Regulation: Making Employee Benefit Plan Regulation an
Exclusively Federal Concern.
ERISA Preemption After FMC and McClendon "What's Left to
Decide."
The Role of Federal Standards in Health Systems Reform: How
Much Leash Should ERISA Give the States?
Taxing Choices: ERISA and State Health Care Financing
Strategies.
20
�Vanderbilt Law Review Article entitled, Defining the Contours of ERISA Preemption of
State Insurance Regulation: Making Employee Benefit Plan Regulation an Exclusively
Federal Concern
This law review article examines ERISA's preemption provision as it conflicts with state
efforts to regulate insurance. The article includes a brief history of federal regulation of
employee benefits prior to the enactment of ERISA and examines ERISA's legislative history
as it pertains to the preemption provision. In addition, it looks at the preemption provision in
detail and reviews significant court cases interpreting the preemptive scope of ERISA.
Main Point: Uncertainty about ERISA's preemption provisions could lead to judicial
decisions that would undermine Congress's original intentions when drafting ERISA. The
author advocates that Congress should clarifying any remaining interpretation problems and
pass legislation to correct court decisions that are inconsistent with such congressional intent.
Article entitled, ERISA Preemption After FMC and McClendon
DECIDE, written by Robert N. Eccles, O Melveny & Myers.
WHAT'S L E F T TO
This paper highlights recent ERISA cases involving the breadth of ERISA preemption. It
points to the conflict in the circuit courts over preemption of benefit claims and damage
claims against insurers. The paper also discusses preemption where a parallel federal claim
may exist and two legislative proposals which would have eliminated ERISA preemption as it
applies to insurers that decide benefit claims under ERISA plans.
Main Point: Despite recent Supreme Court decisions concerning ERISA's preemption
provisions, the scope of preemption in areas such as benefit claims and damage claims against
insurers has yet to be conclusively determined.
The George Washington University National Health Policy Forum Presentation entitled,
The Role of Federal Standards in Health Systems Reform: How Much Leash Should
ERISA Give the States?
Prepared for the National Health Policy Forum held on November 18, 1992, this paper
outlines the major issues concerning the role of federal regulation of private health benefits.
Intended to serve as an introduction to the topics discussed at the Forum, the paper briefly
reviews ERISA preemption, state proposals for health insurance reform, the conflict between
subsidizing insurance pools and ERISA's exclusive benefit rule, unilateral reduction of benefit
claims, and efforts by states to obtain waivers from ERISA, Medicaid and Medicare.
Main Point: As states seek to reform their health care systems, the federal govemment must
determine to what extent ERISA will continue to govern health benefit plans and what
protections it should offer to those covered under private health plans.
21
�White Paper entitled, Taxing Choices: ERISA and State Health Care Financing
Strategies, prepared by Patricia A. Butler for the National Academy for State Health
Policy's 5th Annual State Health Policy Conference
This paper examines the ERISA implications for states undertaking new health care financing
strategies. It reviews court decisions involving the preemption clause and the ERISA
implications of current state policy approaches tofinancecare for the uninsured: the "pay or
play" model, publicly funded programs, andrate-settingand provider taxes.
Main Point: Absent an amendment of ERISA by Congress to permit greater state flexibility,
ERISA's preemption provisions may be a obstacle for states seeking to reform health care by
adopting new health care access initiatives.
22
�>
1
[Vol. 42:579
r
9 ~r.:.
h- - secur>
he reifcvurity has
determinathe U.C.C.
type" comimonly recs issued."
^ight have
seated an
'he U.C.C.
>mmercial
1 to make
hold that
>se goals,
i more in
* of the
e such a
) govern
"sdiction
hese deC, that
its unhe
Defining the Contours of ERISA
Preemption of State Insurance
Regulation: Making Employee
Benefit Plan Regulation an
Exclusively Federal Concern
0
I.
IL
IIL
INTRODUCTION
PRE-ERISA REGULATION OF EMPLOYEE BENEFIT PLANS
GENESIS OF ERISA's PREEMPTION PROVISION
A.
B.
IV.
STATUTORY CONSTRUCTION AND CURRENT INTERPRETATION
PROBLEMS
A.
B.
iS
lend the
^owell
C.
V.
Legislative History
Judicial Interpretation: The Preemption Problem .
Preemption Clause
1. Background
2. Alessi and Shaw
Savings Clause
1. History and Purpose
2.
Wadsworth v. Whaland
3. Current Arguments
4. Metropolitan Life and Pilot Life
5. Present Inquiry: Business of Insurance
Deeme- Clause: Further Complications
1. Background
2. Recent Cases
CONCLUSION
t
607
610
613
613
614
615
615
615
618
620
620
621
622
624
629
633
633
634
638
I.
INTRODUCTION
Congress enacted the Employee Retirement Income Security Act
(ERISA) in 1974 to address problems in the area of employee pensions
and benefits, with which prior federal enactments and complementary
1
1. The Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 StaL 829
(1974) (codified at 29 U.S.C. §§ 1001-1381 (1982)) [hereinafter ERISA]. President Ford signed
ERISA into law on September 2. 1974. For a detailed guide to ERISA, see S GOLOBEKG. PENSION
PLANS UNDER ERISA (1976).
607
�1
608
VANDERBILT LAW REVIEW
[Vol. 42:607
state regulation had been unable to cope.* ERISA'established a comprehensive scheme that placed the regulation of qualified employee benefit
plans exclusively in federal hands. The drafters of ERISA also sought
to reserve to the states the power to regulate areas in which they traditionally had primacy—most notably, insurance, banking, and securities.* The drafters of ERISA thus attempted to carve out an area of
1
2. See infra notes 16-22 and accompanying text. In the introduction to the statute. Congress
stated:
[T]he growth in size, scope, and numbers of employee benefit plans in recent years has been
rapid and substantial; that the operational scope and economic impact of such plans is increasingly interstate; that the continued well-being and security of millions of employees and
their dependents are directly affected by these plans; that they are affected with a national
public interest; that they have become an important factor affecting the stability of employment and the successful development of industrial relations; that they have become an important factor in commerce because of the interstate character of their activities, and of the
activities of their participants, and the employers, employee organizations, and other entities
by which they are established or maintained; that a large volume of the activities of such
plans is carried on by means of the mails and instrumentalities of interstate commerce; that
owing to the lack of employee information and adequate safeguards concerning their operation, it is desirable in the interests of employees and their beneficiaries, and to provide for the
general welfare and the free flow of commerce, that disclosure be made and safeguards be
provided with respect to the establishment, operation, and administration of such plans; that
they substantially affect the revenues of the United States because they are afforded preferential Federal tax treatment; that despite the enormous growth in such plans many employees
with long years of employment are losing anticipated retirement benefits owing to the lack of
vesting provisions in such plans; that owing to the inadequacy of current minimum standards,
the soundness and stability of plans with respect to adequate funds to pay promised benefits
may be endangered; that owing to the termination of plans before requisite funds have been
accumulated, employees and their beneficiaries have been deprived of anticipated benefits;
and that is therefore desirable in the interests of employees and their beneficiaries, for the
protection of the revenue rf the United States, and to provide for the freeflowof commerce,
that minimum standards be provided assuring the equitable character of such plans and their
financial soundness.
ERISA! supra note 1, § 2(a), 29 U.S.C. § 1001(a) (1982).
3. See infra notes 24-29 and accompanying text. Congress declared:
[T]he policy of [ERISA is] to protect interstate commerce and the interests of participants in
employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to
participants and beneficiaries offinancialand other infonnation with respect thereto, by establishing standards of conduct, responsibility, and obligation forfiduciariesof employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to tbe
Federal courts.
ERISA, supra note 1, $ 2(b), 29 U.S.C. $ 1001(b) (1982). Congress further declared that ERISA is
meant to:
[P]rotect interstate commerce, the Federal taxing power, and the interests of participants in
private pension plans and their beneficiaries by improving the equitable character and the
soundness of such plans by requiring them to vest the accrued benefits of employees with
significant periods of service, to meet minimum standards of funding, and by requiring plan
termination insurance.
ERISA, supra note 1, § 2(c). 29 U.S.C. § 1001(c) (1982).
4. ERISA, supra note 1, § 514(b)(2)(A). 29 U.S.C. § n44(b>(2>(A> (1982); see also S.
GOLDBERG, supra note 1, at 151. The drafters of ERISA wanted the sutute to be consistent with
prior federal enactments that explicitly had established state regulation of these areas. In the field
�[Vol. 42:607
'hed a compreiployee benefit
SA also sought
ich they tradig, and securiJut an area of
ie statute. Congress
nt years has been
such plans is in" employees and
i with a national
'bility of employ'ecome an impor'ties, and of the
nd other entities
activities of such
i commerce; that
ning their operao provide for the
id safeguards be
^ M a n s ; that
W B p Prefer"^^mployees
•ng to the lack of
imum standards,
>romised benefits
funds have been
cipated benefits;
•ficiaries, for the
low of commerce,
h plans and their
f
a
m!
>{ participants in
and reporting to
•t thereto, by es>f employee beniy access to the
'red that ERISA is
f participants in
laracter and the
employees with
Y requiring plan
982); see also S.
bo consistent with
i the field
1989]
ERISA PREEMPTION
609
5
"exclusive federal concern," while preserving state regulation of tangential areas, so as not to create a regulatory void, nor to infringe on
state police powers.*
In an attempt to achieve this goal, the drafters of ERISA constructed an express preemption provision. Section 514 of ERISA delineates the scope of the statute's preemptive effect on state law. Section
514(a) states that ERISA supersedes any state laws* to the extent that
they "relate to any employee benefit plan described in section 4(a) and
not exempt under section 4(b)."* Section 514(a), known as the "preemption clause," is then qualified by a "savings clause," section
514(b)(2)(A), which states that ERISA is not to be construed as exempting or relieving any person from any state law that regulates insurance, banking, or securities. The scope of the preemption and savings
clauses is refined further by the "deemer clause," section 514(b)(2)(B),
which states that employee benefit plans, or any trusts established
under such plans, will not be considered as engaging in the business of
insurance or banking for purposes of any state's law "purporting to regulate insurance companies [or] insurance contracts." Thus, through
express legislative pronouncement, Congress attempted to define
ERISA's preemptive effect, giving the federal government broad regulatory authority over employee benefit plans, while reserving to the states
the power to regulate insurance.
7
10
11
12
of insurance regulation, the McCarran-Ferguson Act was the federal legislation that established
this congressional intent. See infra notes 78-83 and accompanying text.
5. See Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 524-25 (1981). One article has
observed that "[sjince state law had previously regulated many aspects of such plans, ERISA involved not only the creation of new law but the displacement of a large body of existing state law."
Hutchinson & Ifshin, Federal Preemption of State Law Under the Employee Retirement Income
Security Act of 1974, 46 U. CHI. L. REV. 23, 34 (1978).
6. See Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977) (stating that there is a presumption that Congress does not intend to preempt areas of traditional state regulation), cited in Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 740 (1985). For an important early article
that predicted many of the current interpretation problems and identified the complexities of emptoWNfbenefit plan regulation under ERISA, see Brummond, Federal Preemption of State Insurance Regulation Under ERISA, 62 IOWA L RKV. 57 (1976).
7. ERISA, supro note 1, § 514, 29 U.S.C. § 1144 (1982).
8. Id. § 514(c)(1), 29 U.S.C. § 1144(c)(1) (1982). "State law" includes "all laws, decisions,
rules, regulations, or other State action having the effect of law." Id.
9. Id. § 514(a), 29 U.S.C. § 1144(a) (1982).
10. Id. § 514(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A) (1982).
11. Id. § 514(b)(2)(B), 29 U.S.C. § 1144(b)(2)(B) (1982).
12. Although ERISA's preemption provision appears on its face to be crafted carefully,
courts have had enormous difficulty interpreting its language ever since its enactment. At least one
commentator has argued that ERISA's preemption provision needs clarification through amendment. See Manno, ERISA Preemption and the McCarran-Ferguson Act: The Need for Congressional Action, 52 TEMP. L.Q. 51, 51 (1979) (arguing that the result of the uncertainties existing with
regard to whether employee benefits are provided through self-insured plans or by the purchase of
group insurance policies could be the complete termination of such plans, which would clearly
�VANDERBILT LAW REVIEW
610
[Vol. 42:607
Despite congressional attempts to elucidate an ERISA preemption
standard, it has been the courts that have been called upon to interpret
ERISA's preemption provision. This has led to wide debate regarding
the intent of the drafters, the underlying purpose of the legislation, and
ultimately, the essence of federalism. This Note will explore the scope
of ERISA's preemption provision as it conflicts with state efforts to regulate insurance, especially in light of the recent United States Supreme
Court decisions in Pilot Life Insurance Co. v. Dedeaux and Metropolitan Life Insurance Co. v. Massachusetts." Part I I provides a brief history of employee benefit plan regulation by the federal government
before ERISA. Part I I I examines the legislative history of ERISA and
its drafters' attempt to construct an express preemption provision. Part
IV explores in detail the three parts of ERISA's preemption provision
and discusses several important cases interpreting the preemptive scope
of ERISA. Part V concludes that the Supreme Court has interpreted
fairly ERISA's preemption provision thus far, despite a lack of legislative guidance, by attempting to give meaning to all of its component
parts, while keeping in mind the fundamental purpose behind the legislation. In order to bring uniformity and certainty to the field of employee benefit plan regulation, courts should not find a state msurance
regulation saved from preemption unless it is directed at the msurance
industry and regulates the activities of insurance companies acting
uniquely as insurance companies, but not as administrators or underwriters of ERISA plans. This approach will maintain ERISA's integrity,
by following the plain language of the statute, while furthering Congress's goal in enacting ERISA: bringing uniformity to the regulation of
employee benefit plans by making them exclusively a federal concern.
13
14
II.
PRE-ERISA REGULATION OF EMPLOYEE BENEFIT PLANS
Prior to the enactment of ERISA, attempts at federal regulation of
administrative abuses of employee benefit plans had been largely unsuccessful. The common law of trusts was inadequate to cover the complexities of employee benefit plans. The initial federal statutory
18
frustrate congressional intent).
13. See, e.g.. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987); Me£ropo/ifan Life, 471 U.S.
724; Shaw v. Delta Air Lines, 463 U.S. 85 (1983).
14. 481 U.S. 41 (1987).
15. 471 U.S. 724 (1985).
16. See Hutchinson & Ifshin, supra note 5, at 25-26. The common law of trusts possesses
both strengths and weaknesses in handling pension problems. ERISA's prudent business judgment
rule, for example, is really a common law trust rule that has been incorporated into the federal
statute. See ERISA, supra note 1, § 404(a), 29 U.S.C. § 1104(a) (1982). The section provides, in
part, that an ERISAfiduciary"shall discharge his duties . . . solely in the interest of the participants and beneficiaries . . . with the care, skill, prudence, and diligence under the circumstances
�r
ol 42:607
I S A
Preemption
Pon to interpret
'ebate regarding
legislation, and
Plore the scope
~e efforts to regStates Supreme
' and Metropoli s a brief hisal government
of ERISA and
provision. Part
Ption provision
eemptive scope
ias interpreted
lack of legislaits component
hind the legisfield of emtate insurance
the insurance
' ' ^ j e s acting
W'
erSA s integrity,
rthering Conregulation of
'eral concern.
r
16
;
t L
und
1
' PLANS
regulation of
n largely un^ver the comraJ statutory
can Life, 471 U.S.
f trusts possesses
•usiness judgment
mto the federal
•tion provides, in
>st of the particihe circumstances
1
1989]
ERISA
PREEMPTION
611
response to employee benefit plan abuses was to regulate through the
use of the tax laws. Beginning in 1921, and culminating in section
401(a) of the Interned Revenue Code of 1954, Congress set forth a series
of requirements for plan qualification. This provision and others, however, could be avoided by employers who could afford to forego the tax
benefits of a "qualified" plan. The Labor-Management Relations Act
of 1947 (LMRA), although primarily concerned with labor-management
problems not directly related to pensions, set forth requirements that
affected employee benefit plans set up by unions. The LMRA's provi17
18
19
then prevailing that a prudent man acting in a like capacity and familiar with such matters would
use in the conduct of an enterprise of a like character." Id. The "prudent man" approach provides
flexibility, while holding an ERISA fiduciary to the highest standard of care. The common law of
trusts approach is inadequate on its own, however, due to its shortcomings. See Hutchinson &
Ifshin, supro note 5, at 25-26. For example, while ERISA provides that a participant or beneficiary
may bring a civil action for enforcement of the statute's fiduciary obligations, beneficiaries suing
under the common law of trusts often had difficulty establishing the requisite interest and injury
to accord them standing to sue for breach offiduciaryduty. See ERISA, supra note 1, § 502(a), 29
U.S.C. § 1132(a) (1982).
17. I.R.C. § 401(a) (1982) (repealed 1986); Hutchinson & Ifshin, supra note 5, at 26-27. From
1921 to 1942, Congress passed several pieces of legislation that deferred taxation of employer contributions to pension plans until benefits under the plan were finally distributed to its beneficiaries. Section 401(a) of the Internal Revenue Code of 1954 required that a "qualified" plan be
intended exclusively for the benefit of employees and their beneficiaries, that it not discriminate in
favor of shareholders, officers, or highly compensated employees, that it cover a minimum percentage of all employees, and that it meet minimum vesting and termination rules. Hutchinson &
Ifshin, supra note 5. at 26-27. A qualified plan entitled an employer to take immediate deductions
for contributions to it, while the recipient of benefits under the plan could defer taxation of the
plan's proceeds until they were actually received. Id. at 27; see aiso M. BERNSTEIN, THE FUTURE or
PRIVATE PENSIONS 197-223 (1964).
18. Hutchinson & Ifshin, supra note 5, at 27.
19. Labor-Management Relations Act of 1947, Pub. L. No. 80-101, § 302, 61 Stat. 136, 157
(codifietfat 29 U.S.C. § 186 (1982)) [hereinafter LMRA]; see also Hutchinson & Ifshin, supra note
5, at 27. The Act prohibited the payment of money, by an employer to a union or employee trust,
for the sole and exclusive benefit of the employees of such employer, and their families and
dependents [unless] such payments are held in trust for the purpose of paying, either from
principal or income or both, for the benefit of employees, their families and dependents, for
medical or hospital care, pensions on retirement or death of employees, compensation for
injuries or illness resulting from occupational activity or insurance to provide any of the foregoing, or unemployment benefits or life insurance, disability and sickness insurance, or accident insurance; (B) the detailed basis on which such paymente are to be made is specified in a
written agreement with the employer, and employees and employers are equally represented
in the administration of such fund, together with such neutral persons as the representatives
of the employers and the representatives of employees may agree upon and in the event the
employer and employee groups deadlock on the administration of such fund and there are no
neutral persons empowered to break such deadlock, such agreement provides that the two
groups shall agree on an impartial umpire to decide such dispute, or in event of their failure
to agree within a reasonable length of time, an impartial umpire to decide such dispute shall,
on petition of either group, be appointed by the district court of the United States for the
district where the trust fund has its principal office, and shall also contain provisions for an
annual audit of the trust fund, a statement of the results of which shall be available for
inspection by interested persons at the principal office of the trust fund and at such other
�VANDERBILT
612
LAW REVIEW
[Vol. 42:607
sions, however, only applied to plans set up by certain unionized industries. Neither the tax laws nor the LMRA had the breadth necessary to
enforce fiduciary obligations imposed on persons in control of the
plans.
Congress enacted the Welfare and Pension Plans Disclosure Act
(WPPDA) in IBSS, requiring employee benefit plan disclosure and filing information. States, however, maintained their dominance in the
regulation of pension plans, insurance, and trusts. Thus, the WPPDA
did not go far enough in placing the job of regulating employee benefit
plans into the hands of the federal government.
In 1974 Congress sought to remedy employee benefit plan abuses
through an extensive regulatory scheme, ERISA. The congressional
purpose behind the new law was to ensure that benefits from private
pension plans were distributed to participating employees in accordance
with their credited years of service with their employers. * ERISA protected participants in employee benefit plans by establishing fiduciary
standards, requiring reporting of financial information, imposing
minimum funding and vesting standards, requiring plan terminatiorr
20
21
22
2
24
28
28
places as may be designated in such written agreement; and (C) such payments as are intended to be used for the purpose of providing pensions or annuities for employees are made
to a separate trust which provides that the funds held therein cannot be used for any purpose
other than paying such pensions or annuities . . . .
LMRA, supra, § 302(c)(5), 29 U.S.C. § 186(c)(5) (1982).
20. Hutchinson & Ifshin, supra note 5, at 27.
21. Pub. L. No. 85-836. 72 Stat 997 (1958) (codified at 29 U.S.C. § 301 (1958) (repealed
1976)); see Hutchinson & Ifshin, supra note 5, at 27-30.
22. Hutchinson & Ifshin, supra note 5, at 28-29; see aiso M. BERNSTEIN, supra note 17, at 4748. Professor Bernstein n^ted that "[t]he diversion of funds by speculation, overly generous commissions to favored companies (some in collusion with plan administrators), and other such questionable activities were the evils to which the Act was directed." Id. at 47. Professor Bernstein
recognized, however, the shortcomings of the WPPDA:
[The WPPDA's] method was compulsory disclosure and, initially, policing of practices by
those interested in the plans. But even effective disclosure was difficult to achieve because of
limitations placed in the law by the House committee. After a few years of frustration,
amendments were enacted giving greater powers to the Secretary of Labor to compel disclosure and to check on the accuracy of the reports.. . . [T]he 1961 amendments added criminal
penalties for embezzlement, kickbacks, and conflicts of interest by plan administrators, who
must be bonded. However, the Act does not prescribe proper plan practices or provisions to
enhance the effectiveness of plans other than the protection afforded against criminal
conduct
Id.
23. Highlights of the New Pension Reform Law, Collective Bargaining Negot. & Cont
(BNA) No. 763, at 5 (Aug. 29, 1974). See generally M. BERNSTEIN, supra note 17 (a seminal treatise in which the author discusses the inadequacies of the pre-ERISA regime and proposes ways in
which its shortcomings could be addressed).
24. ERISA, supra note 1, §§ 401-414, 29 U.S.C. §§ 1101-1114 (1982); see aiso Brummond,
supra note 6, at 61-64 (discussing ERISA's provisions and summarizing their contents).
25. ERISA, supra note 1, §§ 101-111, 29 U.S.C. §§ 1021-1031 (1982).
26. Id. §§ 201-306, 29 U.S.C. §§ 1051-1086 (1982).
�ol. 42:607
nionized indus!th necessary to
control of the
Disclosure Act
closure and fiininance in the
s, the WPPDA
nployee benefit
ERISA
1989]
1
insurance,* and setting forth exclusive federal remedies for enforcement.** Because ERISA was the most far-reaching attempt at federal
regulation of employee benefit plans to date, and because the regulation
of employee benefit plans previously had been left largely to the states,
ERISA's enactment inevitably meant the displacement of a large body
of state law.
29
III.
GENESIS OF
A.
fit plan abuses
' congressional
s from private
»in accordance
ERISA pro'hing fiduciary
^n,** imposing
m termination
23
ments as are inP'
ve made
i
purpose
613
PREEMPTION
ERISA's
PREEMPTION PROVISION
Legislative History
Congress engaged in extensive debate over the scope of the preemptive effect ERISA should have on competing state regulation. The
Conference Committee, in its report, considered but ultimately rejected
a preemption provision narrower than section 514, expressly stating
that section 514(a) was drafted intentionally to have a broad preemptive scope. Proponents trumpeted ERISA's intended broad preemptive effect in both houses of Congress. Representative John H. Dent,
House sponsor of ERISA, stated that "the reservation to Federal authority the sole power to regulate thefieldof employee benefit plans" is
the statute's "crowning achievement."" Senator Harrison A. Williams,
Chairman of the Senate Labor & Public Welfare Committee, echoed
these sentiments, stating that ERISA's provisions were intended to preempt the entire field of employee benefit plans for federal regulation.
30
31
33
' I (1958) (repealed
'pro note 17, at 47erly generous com'd other such ques'rof
r Bernstein
of practices by
hieve because of
5 of frustration,
o compel disclo* added criminal
•inistrators, who
or provisions to
'gainst criminal
•' Negot & Cont
7 (a seminal trea' proposes ways in
also Brummond,
ontents).
27. Id. §§ 4001-4402, 29 U.S.C. §§ 1301-1461 (1982).
28. Id. §1 501-515, 29 U.S.C. §§ 1131-1145 (1982).
' 29. See Hutchinson &. Ifshin, supra note 5, at 30.
30. See supra text accompanying note 9. A more limited preemption provision stated:
It is hereby declared to be the express intent of Congress that . . . the provisions of this Act
or the [WPPDA) shall supersede any and all laws of the States . . . insofar as they may now
or hereafter relate to the subject matters regulated by this Act or the [WPPDA] . . . .
S. 4, 93d Cong., 1st Sess. § 609, 119 CONG. REC. 141-42 (1973) (emphasis added); see aiso H.R. REP.
No. 533, 93d Cong., 2d Sess., reprinted in 1974 U.S. CODE CONG. & ADMIN. NEWS 4639, 4666 (setting forth another early and more Umited preemption provision).
31.
H.R CONP. REP. No. 1280, 93d'Cong., 2d Sess.. reprinted
in 1974 U.S. CODE CONG. &
ADMIN. NEWS 5038, 5162. The Conference Committee report stated that "the provisions of title I
are to supersede all State laws that relate to any employee benefit plan that is established by an
employer engaged in or affecting interstate commerce or by an employee organization that represents employees engaged in or affecting interstate commerce." Id.
32. 120 CONG. REC. 29,197 (1974) (remarks of Rep. Dent) (emphasis added).
33. Id. at 29,933. Senator Williams stated:
It should be stressed that with the narrow exceptions specified in the bill, the substantive and
enforcement provisions of the conference substitute are intended to preempt the field for
Federal regulations, thus eliminating the threat of conflicting or inconsistent State and local
regulation of employee benefit plans. This principle is intended to apply in its broadest sense
to all actions of State or local governments, or any instrumentality thereof, which have the
force or effect of law.
Id. (emphasis added).
�VANDERBILT LAW REVIEW
614
[Vol. 42:607
The Conference Committee's report, however, merely paraphrased
the exceptions to ERISA's preemptive scope explicitly enumerated in
the text of section 514 itself,* stating that "[t]he preemption provisions
of title I are not to exempt any person from any State law that regulates insurance, banking or securities."* Thus, despite Senator Williams's characterization of these exceptions as "narrow,"* the report
provides little more guidance than already is present in the text of the
statute, which could account in part for the early confusion of courts
faced with the task of construing ERISA's preemption provision.*
4
8
8
7
B. Judicial Interpretation: The Preemption Problem
38
In light of the dearth of legislative guidance as to how the words
of section 514 should be read, courts could only look to the words of the
statute themselves.** Although Congress had expressed its intent in
making the area of employee benefits a federal concern, it also had been
unmistakably clear in stating that certain state laws were to be saved
from preemption. Thus, there were limits to the scope of preemption
already embodied in the statute.
The supremacy clause of the United States Constitution authorizes
federal preemption of conflicting state law. Courts inevitably fell back
on fundamental preemption principles embodied in this clause to develop a sounder doctrinal approach to ERISA preemption questions be40
41
34. Compare text accompanying note 9 with source cited supra note 20.
35.
H.R CONF. REP. NO. 1280, 93d Cong., 2d Sess., reprinted in 1974 US CODE CONG. &
ADMIN. NEWS 5038, 5162. The report goes on to paraphrase the deemer clause as well, stating:
[T]he [sutute] generally provides that an employee benefit plan is not to be considered as an
insurance company, bank, trust company, or investment company (and is not to be considered
as engaged in the business of insurance or banking) for purposes of any SUte law that regulates insurance companies, insurance contracts, banks, trust companies, or investment
companies.
Id.
36. See supra note 33.
37. Compare Hewlett-Packard Co. v. Bames, 425 F. Supp. 1294 (N.D. Cal. 1977), a/fd, 571
F.2d 502 (9th Cir.), cert, denied, 439 U.S. 831 (1978) with Insurers' Action Council v. Heaton, 423
F. Supp. 921 (D. Minn. 1976). See infra notes 54-66 and accompanying text.
38. See supra notes 34-37 and accompanying text; see also Brummond, supra note 6, at 6465 (forecasting that because of the uncertainty as to the meaning of ERISA's preemption provision, extensive litigation would be sure to ensue before the exact scope of preemption could be
ascertained). See generally Hinch, Toward a New View of Federal Preemption, 1972 U. I I I . L F .
515.
39. The plain language of a statute ia always a good starting point, so good that the United
Sutes Supreme Court has adopted a dictionary's definition of the phrase "relates to" in ERISA's
preemption clause. See Shaw v. Delta Air Lines, 463 U.S. 85, 96-97 n.16 (1983) (citing Black's Law
Dictionary in stating that "relates to" means "having a connection with or reference to"); see alto
infra notes 72-77 and accompanying text
40. ERISA, supra note 1, § 514(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A) (1982).
41.
U.S. CONST, art VI.
�A)!. 42:607
ely paraphrased
' enumerated in
ption provisions
e law that regute Senator Wil">"" the report
i the text of the
fusion of courts
provision."
ERISA
1989]
PREEMPTION
615
cause of the lack of congressional guidance in interpreting ERISA's
preemption provision. * The initial judicial debate on the preemption
question centered on whether ERISA preempted all state law in the
area of employee benefits, or only those state laws that came into direct
conflict with one of ERISA's substantive provisions. Some courts took
the approach that because there was some doubt as to the scope of
ERISA's preemptive reach, only those state laws that came into direct
conflict with one of ERISA's substantive provisions would be preempted. They declared that the presumption is always against preemption. Other courts looked to the statute's legislative history and to
its wording and concluded that Congress intended for the federal govemment to oversee totally employee benefit plan regulation, leaving no
room even for state regulation that did not conflict with ERISA. Thus,
although courts initially attempted to apply broader and more theoretical preemption doctrines, they were faced ultimately with a matter of
statutory construction: how should ERISA's preemption provision be
read based on its wording and on its legislative history.
4
43
44
48
Problem
how the words
he words of the
d its intent in
t aiso had been
Jre to be saved
of preemption
tion authorizes
i^Hjy fell back
- ^ k e to den ^Wstions be-
U.S. CODE CONG. &
e as well, stating:
• considered as an
t to be considered
ite Jaw that regu>. or investment
al. 1977), aff'd, 571
incil v. Heaton, 423
"/>ra note 6, at 64preemption provieemption could be
i , 1972 U. I I I . L.F.
od that the United
tes to" in ERISA's
citing Black's Law
'ence to"); see aiso
!).
48
IV.
STATUTORY CONSTRUCTION AND CURRENT INTERPRETATION
PROBLEMS
A. Preemption Clause
1. Background
The first problem of statutory interpretation is the phrase "relates
to" in section 514(a). The preemption clause states that state laws
that relate to an "employee benefit plan," as defined in section 3 of
47
42. See, e.g., Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977) (stating lhat when a field is
traditionally occupied by state law, a court should assume no preemption unless it is the clear and
manifest purpose of Congress); Florida Lime & Avocado Growers, Inc. v. Paul. 373 U.S. 132, 142
(1963) (stating that "federal regulation of a field of commerce should not be deemed preemptive of
state regulatory power in the absence of persuasive reasons—either that the nature of the regulated subject matter permits no other conclusion, or that the Congress has unmistakably so ordained"). Contra Hines v. Davidowite, 312 U.S. 52, 67 (1941) (framing the inquiry as whether the
stat* statute subject to possible preemption obstructs "the accomplishment and execution of the
full purposes and objectives of Congress"). See generally Brummond, supra note 6, at 93-97 (providing an overview of the preemption doctrine in general and laying the foundation for its possible
application in the context of § 514 of ERISA).
43. See. e.g., Wadsworth v. Whaland, 562 F.2d 70 (1st Cir. 1977), cert, denied, 435 U.S. 980
(1978) (discussed infra notes 84-88 and accompanying text); see aiso supra note 30 and accompanying text.
44. See. e.g.. Insurers' Action Council v. Heaton, 423 F. Supp. 921 (D. Minn. 1976).
45. id. at 924.
46. See, e.g.. Hewlett-Packard, 425 F. Supp. 1294 (N.D. Cal. 1977), affd, 571 F.2d 502 ( 9th
Cir.), cert, denied. 439 U.S. 831 (1978).
47. ERISA, supra note 1, § 514(a), 29 U.S.C. § 1144(a) (1982).
�616
VANDERBILT LAW REVIEW
[Vol. 42:607
ERISA, are superseded.** Although some courts have struggled with the
question of whether the plan involved is an employee benefit plan * to
which ERISA applies, the more frequently litigated question has been
whether the state statute involved relates to what presumably qualifies
as an employee benefit plan under ERISA.* The meaning to be given
the phrase "relates to" is significant because it defines the initial preemptive reach of the legislation, answering the question of how much
state law ERISA could displace. If read narrowly, the clause could preempt only state laws that were targeted directly at employee benefit
plans and came into direct conflict with one of ERISA's substantive
provisions. Some early interpretations of the preemption clause sup4
0
51
48. Id. § 3(l)-(3), 29 U.S.C. § 1002(l)-(3). Section 3 reads:
(1) The terms "employee welfare benefit plan" and "welfare plan" mean any plan, fund, or
program which was heretofore or is hereafter established or maintained by an employer or by
an employee organization, or by both, to the extent that such plan, fund, or program was
established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care
or benefits, or benefits in the event of sickness, accident, disability, death or unemployment,
or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 186(c) of this title
(other than pensions on retirement or death, and insurance to provide such pensions).
(2) (A) Except as provided in subparagraph (B), the terms "employee pension benefit
plan" and "pension plan" mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to
the extent that by its express terms or as a result of surrounding circumstances such plan,
fund, or program—
(i) provides retirement income to employees, or
(ii) results in a deferral of income by employees for periods extending to the termination
of covered employment or beyond,
regardless of the method of calculating the contributions made to the plan, the method of
calculating the benefits under the plan or the method of distributing benefits from the plan.
(3) The term "employee benefit plan" or "plan" means an employee welfare benefit plan
or an employee pension benefit plan or a plan which is both an employee welfare benefit plan
and an employee pension benefit plan.
Id.
49. See Fort Halifax Packing Co. v. Coyne, 107 S. Ct. 2211 (1987) (holding that a sute sUt. M\% " T " " - f f an employer, in event of plant closing, to furnish a one-time severance payment to
t&enpktteea not covered by a contract expressly providing severance pay is not preempted by
; IgBMftAf because i t does not relate to an employee benefit plan, but to employee benefits); Bell v.
Employee Sec. Benefit Ass'n, 437 F. Supp. 382 (D. Kan. 1977) (suting that a trust set up by
employer was not an employee benefit plan, and therefore was not governed by ERISA); Kilberg &
Inman, Preemption of State Laws Relating to Employee Benefit Plans: An Analysis of ERISA
Section 514, 62 TEX. L. REV. 1313, 1319 n.27 (1984); Turza & Halloway, Preemption of State Laws
Under the Employee Retirement Income Security Act of 1974. 28 CATH. U L. REV. 163, 187 n.136
(1979); see aiso Wayne Chem., Inc. v. Columbus Agency Serv. Corp., 426 F. Supp 316 (N.D. Ind.),
a f f d as modified, 567 F.2d 692 (7th Cir. 1977).
50. See. e.g.. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987), MetropoliUn Life Ins. Co. v.
Massachusetts. 471 U.S. 724 (1985); Shaw v. DelU Air Lines, 463 U.S. 85 (1983); Hewlett-Packard,
425 F. Supp. 1294 (N.D. Cal. 1977), a f f d , 571 F.2d 502 (9th Cir.), cert, denied, 439 U.S. 831 (1978).
51. See, e.g., supra notes 44-45 and accompanying text.
�1
ol- 42:607
uggled with the
enefit p W to
-'stion has been
mably qualifies
ng to be given
the initial preof how much
tuse could prePloyee benefit
i's substantive
clause sup1
^ Plan, fund, or
•i employer or by
Program was
• or their benefior hospiul care
unemployment,
centers, scholar^(c) of this title
pensions).
P
benefit
^BhereafoWFboth, to
nces such plan.
o r
0 1
he termination
the method of
from the plan.
re benefit plan
re benefit plan
that a state sUtance payment to
t preempted by
benefits); Bell v.
trust set up by
ISA); Kilberg &
tlysis of ERISA
i of State Laws
163, 187 n.136
316 (N.D. Ind.),
Life Ins. Co. v.
•wlett-Packard,
^•S. 831 (1978).'
ERISA
1989]
PREEMPTION
617
ported this reading.** If read broadly, however, the preemption clause
could preempt any state law that had any effect on an employee benefit
plan, whether or not it conflicted with a substantive provision of
ERISA."
The reasoning behind these approaches, as well as more moderate
ones, centered around congressional intent in enacting ERISA, and general principles of preemption, which control any federal intrusion into a
traditionally state-dominated field. Proponents of broad preemption argued that Congress intended to preempt totally the field of employee
benefit plans for federal regulation and that it would be inconsistent
with such intent to read the preemption clause narrowly.** Their statutory construction argument was that the term "relates to" should be
given a common sense meaning and that if Congress had meant to limit
the preemptive reach of ERISA, it would have done so with more limiting language. An early case adopting this view was Hewlett-Packard Co.
v. Barnes. * In Hewlett-Packard the Ninth Circuit Court of Appeals
found California's Knox-Keene Health Care Service Plan Act of ^ S *
preempted by ERISA.* The court looked to the wording of the statute,
buttressed by its legislative history, and concluded that preemption was
indisputable.*
At the other end of the spectrum, in Insurers' Action Council v.
Heaton the Insurers' Action Council sought an injunction in federal
6
5
7
8
69
52. Id.
53. See supra note 46 and accompanying text.
54. See Wayne Chem., Inc. v. Columbus Agency Serv. Corp., 426 F. Supp. 316 (N.D. Ind.),
affd as modified, 567 F.2d 692 (7th Cir. 1977); Hewlett-Packard, 425 F. Supp. 1294 (N.D. Cal.
1977). affd, 571 F.2d 502 Oth Cir.), cert, denied, 439 U.S. 831 (1978) (holding that employee
benefit, plans could not be regulated by California's Knox-Keene Act, which purported to regulate
insurance, because of clear wording of deemer clause); see also Standard Oil Co. of Cal. v. Agsalud,
442 F. Supp. 695, 711 (N.D. Cal. 1977) (sUting that "[b]y enacting ERISA, Congress created a
moratorium of indefinite length on the passage of health insurance laws").
55. 571 F.2d 502 (9th Cir.), cert, denied, 439 U.S. 831 (1978).
56. CAL. HEALTH & SAKETY CODE §§ 1340-1399.5 (West 1979). The act regulated funding,
disclosure, sales practices, and quality of services and required that Califomia health care service
plans be licensed by the sUte Commissioner of Corporations. Hewlett-Packard, 425 F. Supp. at
1297. The sutute also sought to regulate self-funded plans. Id. See also infra text accompanying
notes 160-78.
57. Hewlett-Packard, 571 F.2d at 505.
58. Id. The court sUted in part
The clear wording of section 514 and the relevant legislative history show that Congress unmistakably intended ERISA to preempt a state law such as Knox-Keene that directly regulates employee benefit plans. Although [the savings clause] exempts from preemption sUte
regulation of insurance, [the deemer clause] provides that employee benefit plans may not be
considered to be in the business of insurance for purposes of the exception to preemption.
Id. at 504 (ciutions omitted). In 1979 one commenUtor characterized Hewlett-Packard as "probably the strongest single judicial statement to date in favor of full preemption." Manno, supra note
12, at 66.
59. 423 F. Supp. 921 (D. Minn. 1976).
�1
VANDERBILT
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LAW REVIEW
JVol. 42:607
district court to prevent implementation of Minnesota's Comprehensive
Health Insurance Act of 1976,*° claiming that it was preempted by
ERISA. The district court refused to enjoin enforcement of the Comprehensive Health Insurance Act, construing the preemption clause
narrowly** and stating that laws which relate to the substance of an
employee benefit plan, as opposed to the plan's disclosure and reporting
provisions required under ERISA, were not preempted. The court also
reiterated that ERISA's savings clause expressly does not relieve any
person from any state law which regulates insurance, saying that the
state statute must be in direct conflict with ERISA in order for the
preemption clause to take effect.
The Heaton court incorrectly stated that the general rule was savings of insurance regulation, with preemption being the exception. In
construing ERISA's preemption clause as becoming effective only if a
state law came into direct conflict with one of ERISA's substantive provisions, the court overlooked the broad language of the provision. This
construction, as later cases explained, clearly was inconsistent with
ERISA's statutory structure, wording, and drafters' intent.
81
83
C
el
w
U
si
e
P
c
f
e
84
68
88
2.
Alessi and Shaw
The United States Supreme Court attempted to clarify this issue in
Alessi u. Ray bestos-Manhattan Inc." Alessi involved a New Jersey
statute that prohibited reducing pension benefits by an amount equal
to workers' compensation awards for which a retiree was eligible. The
88
60. MINN. STAT. § 62E (1986); see also Brummond, supra note 6, at 91-92 (discussing the
MinnesoU act and .its impact on employee benefit plans). The Act required that insurers offer to
Minnesota residents certain "qualified" policies, which provided statutorily mandated benefits.
Similarly, it required that employers who offer health care plans to employees make available a
certain type of qualified plan. The Act also established a state association whose function was to
offer policies to persons unable to obtain them otherwise, and to reinsure qualified policies issued
by individual insurers. Heaton, 423 F. Supp. at 923.
61. Heaton, 423 F. Supp. at 926.
62. Id.
63. Id.; see Manno, supra note 12, at 67.
64. Heaton, 423 F. Supp. at 926.
65. See supra notes 7-11 and accompanying text.
66. The court stated:
[ERISA's preemption provision] provides that with a very narrow exception, ERISA should
not be construed to relieve any person from any state law regulating insurance, banking, or
securities. Thus the conflict between the challenged state insurance law and ERISA has to be
very clear in order to trigger the preemption provision. The only substantive parts of ERISA
which relate to health and accident insurance are the reporting and disclosure provisions.
These requirements have nothing to do with the substance of the insurance plans which employers must offer their employees.
Heaton, 423 F. Supp. at 926.
67. 451 U.S. 504 (1981).
68. NJ. STAT. ANN. § 34:15-29 (West 1988).
J
i
�42:607
-'O^prehensive
preempted by
it of the Commption clause
ibstance of an
and reporting
The court also
ot relieve any
lying that the
order for the
rule was sav•xception. In
tive only if a
bstantive promsion." This
nsistent with
t.
66
ERISA PREEMPTION
1989]
619
Court held that ERISA preempted the New Jersey^statute because it
eliminated a method for calculating pension benefits (integration) that
was permitted by federal law.** Although the Court did not address the
limits of ERISA's preemptive language, it stated that "even indirect
state action bearing on private pensions may encroach upon the area of
exclusive federal concern." Thus, although this particular statute was
preempted because of a direct conflict with federal law, the Court intimated that the state statute in question need not come into direct conflict with a substantive provision of ERISA in order to relate to an
employee benefit plan.
Since the United States Supreme Court's decision in Shaw v. Delta
Air Lines, courts have given the preemption clause its definitive broad
reading. Shaw involved a New York statute that prohibited discrimination in employee benefit plans on the basis of pregnancy, ' and another
statute that required employers to pay sick-leave benefits to employees
unable to work because of pregnancy. The Court found "no difficulty"
concluding that the state laws related to employee benefit plans and
stating that the breadth of the preemption clause is "apparent" from
the wording of the section. The Court cited Black's Law Dictionary^
when it stated that a "[state] law 'relates to' an employee benefit plaiv
70
71
12
7
74
75
y this issue in
Jersey
H equal
ligrBle
ligiEIe. The
M
)2
. (discussing the
t insurers offer to
andated benefits,
make available a
e function was to
ed policies issued
ERISA should
e, banking, or
USA has to be
arts of ERISA
're provisions,
ins which em-
69. Alessi, 451 U.S. at 524.
70. Id. at 525. The Court stated:
It is of no moment that New Jersey intrudes indirectly, through a workers' compensation law,
rather than directly, through a statute called "pension regulation." ERISA makes clear that
even indirect atate action bearing on private pensions may encroach upon the area of exclusive federal concern.. . . ERISA's authors clearly meant to preclude tbe States from avoiding
through form the substance of the preemption provision.
Id. (citation omitted).
71. Id. This decision effectively overruled the approach taken by the district court in Heaton, 423 F. Supp. 921. See Kilberg & Inman, supra note 49, at 1323-25; see also supra notes 59-66
and accompanying text
72. 463 U.S. 85 (1983).
73. N.Y. EXEC. LAW §§ 290-301(a) (McKinney 1982). The law was a comprehensive antidiscrimination statute that prohibited discrimination on the basis of sex. The statute provided in
part
1. It shall be an unlawful discriminatory practice:
(a) For an employer or licensing agency, because of the age, race, creed, color, national
origin, sex, or disability, or marital status of any individual, to refuse to hire or employ or to
bar or to dischargefromemployment such individual or to discriminate against such individual in compensation or in terms, conditions, or privileges of employment
Id. § 296.1(a). The statute had been interpreted by the highest court in New York to include as a
discriminatory act treating pregnancy differently from other nonoccupational illnesses. Shaw, 463
U.S. at 88 (citing Brooklyn Union Gas Co. v. New York State Human Rights Appeal Bd., 41
N.Y.2d 84, 359 N.E.2d 393, 390 N.Y.S.2d 884 (1976)).
74. N.Y. WORK. COMP. LAW §§ 200-242 (McKinney 1982). The New York law required employers to pay sick leave benefits to employees unable to work because of nonoccupational injuries
or illnesses, including pregnancy.
75. Shaw, 463 U.S. at 96.
�620
VANDERBILT LAW REVIEW
[Vol. 42:607
inth^noraial sense of the phrase, if it has a connection with or reference to such a plan." The Shaw Court stated that it was clearly Congress's intent to give the phrase "relates to" a broad, "common sense"
meaning; therefore, no preemption analysis was necessary. The Supreme Court's decision in Shaw seems to have quieted, at least for now,
the question of what state statutes relate to an employee benefit plan
and are subject to possible preemption under ERISA.
78
77
B.
1.
Savings Clause
History and Purpose
78
The insurance savings clause, drafted in order that ERISA be
consistent with the McCarran-Ferguson Act, reasserted that state governments, and not the federal government, would be primarily responsible for the regulation of insurance and insurance companies. Thus,
Congress intended to carve out an area of exclusive federal regulation
for employee benefit plans while leaving the general regulation of the
"business of insurance" to the states. The problem with this approach
is that the business of insurance and the creation and administration of
employee benefit plans overlap. This is most apparent in the case of an
employer who establishes an employee benefit plan by purchasing a
78
80
gro^
and '
regu
clusi
muc
app
the
acti
pla
tioi
v.
far
sui
th(
ph
lai
fo
ax
it
76. Id. at 96-97 & n.16; see also supra note 42.
77. Shaw, 463 U.S. at 96-97.
78. ERISA, supra note 1, § 514(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A) (1982).
79. Pub. L. No. 78-238, 59 Stat. 33 (1945) (codified at 15 U.S.C. §§ 1011-1015 (1982)).
80. 15 U.S.C. § 1012(b) (1982). The statute states that "[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act
specifically relates to the business of insurance." Id. The McCarran-Ferguson Act was enacted
following heavy lobbying by State insurance commissioners in response to the United States Supreme Court's decision in United States v. Southeastern Underwriters Association, 322 U.S. 533
(1944), which held that Congress, through its commerce clause power, could regulate the business
of insurance. Commentators and courts have agreed that the question of how much regulatory
power the states should have is a difficult one, and illustrates that the Act is not easy to apply in
practice. See, e.g.. Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982); Group Life & Health
Ins. Co. v. Royal Drug Co.. 440 U.S. 205 (1979); SEC v. National Sec., Inc., 393 U.S. 453 (1969);
SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959); Hahn v. Oregon Physicians Serv., 689
F.2d 840 Oth Cir. 1982), cerf. denied, 462 U.S. 1133 (1983); Lowe v. Aarco-Am., Inc., 536 F.2d 1160
(7th Cir. 1976); United Sutes v. Title Ins. Rating Bureau of Ariz., Inc., 517 F. Supp. 1053 (D. Ariz.
1981), affd, 700 F.2d 1247 (9th Cir. 1983), cert, denied, 467 U.S. 1240 (1984); Lawyer's Realty
Corp. v. Peninsular Title Ins. Co., 428 F. Supp. 1288 (E.D. La. 1977), a/f'd, 550 F.2d 1035 (5th Cir.
1977); Anderson, Insurance and Antitrust Law: The McCarran-Ferguson Act and Beyond, 25 WM.
& MARY L. REV. 81 (1983); Kimball & Heaney, Emasculation of the McCarran-Ferguson Act: A
Study In Judicial Actinism, 1985 UTAH L. REV. 1; Manno, supra note 12; Comment, Group Life &
Health Insurance Co. v. Royal Drug Co.: The McCarran-Ferguson Act and Health Service Plans,
5 AM. J.L. & MED. 393 (1980); Comment, The Scope of the "Business of Insurance" Provision of
the McCarran-Ferguson Act: Virginia Academy of Clinical Psychologists v. Blue Shield of Virginia, 65 MINN. L. REV. 1187 (1981).
p
E
t
t
t
�. ' ol. 42:607
ERISA PREEMPTION
1989]
621
81
i with or referas clearly Conommon sense"
ary." The Sut least for now,
se benefit plan
hat ERISA be
that state govtarily responsiJanies. Thus,
eral regulation
?ulation of the
this approach
ministration of
th*
f
basing a
80
c a s e
0
1-1015 (1982)).
ifreas shall be conpurpose of regulatsss. unless such Act
> Act was enacted
n
J United States Suation. 322 U.S. 533
iguiat* the business
> much regulatory
w
iot
/ to apply in
roup Life & Health
93 U.S. 453 (1969);
hysicians Serv., 689
Inc., 536 F.2d 1160
iupp. 1053 (D. Ariz.
0; Lawyer's Realty
F.2d 1035 (5th Cir.
nd Beyond, 25 WM.
II-Ferguson Act: A
nent. Group Life &
alth Service Plans,
-ance" Provision of
Hue Shield of Vir-
group policy from an insurance company. The insurance company,
and consequently the plan, may be subject to a panoply of varying state
regulations, while the self-funded employee benefit plan is governed exclusively by ERISA." This inherent tension has manifested itself in
much of the litigation surrounding section 514.
83
2.
Wadsworth v. Whaland
Because of the apparent overlap of state and federal regulation, it
appeared that states could reach employee benefit plans, contrary to
the expressed intent of Congress, through the regulation of both the
activities of insurers who underwrite group policies purchased for those
plans and the content of the group policy itself. This "indirect" regulation of employee benefit plans by the states was at issue in Wadsworth
v. Whaland.* In Wadsworth administrators of various health and welfare funds, which provided coverage through the purchase of group insurance policies, challenged a New Hampshire statute, which regulated
the contents of such policies as being preempted by ERISA. The
plaintiffs argued that ERISA preempted both direct and indirect regulation of employee benefit plans. The First Circuit Court of Appeals
found that the New Hampshire statute did relate to, albeit indirectly,
an employee benefit plan and, therefore, was subject to preemption.
The court, however, found that the statute was not preempted because
it was a statute directed at insurers, which was saved from preemp4
85
88
87
81. The drafters of ERISA clearly anticipated that some employee benefit plans would be
insured through the purchase of group policies from insurance companies. ERISA defines employee welfare benefit plans as being established "through the purchase of insurance or otherwise."
ERISA, supra note 1, § 3(1), 29 U.S.C. § 1002(1) (1982); see supra note 48.
82. See Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 747 (1985) (stating that
this distinction must be maintained in order to give life to the statute as worded by Congress and
that although such an interpretation clearly is contrary to the congressional goal of uniformity in
the regulation of employee benefit plans, only congressional action can change the statute).
83. Id.; see also Northern Group Serv., Inc. v. Auto Owners Ins. Co., 833 F.2d 85 (6th Cir.
1987), cert, denied sub nom. Northern Group Serv. v. State Farm Mut. Ins. Co., 108 S. Ct. 1754
(1988); Blue Cross & Blue Shield of Kansas City v. Bell, 798 F.2d 1331 (10th Cir. 1986).
84. 562 F.2d 70 (1st Cir. 1977). cert, denied, 435 U.S. 980 (1978).
85. N.H. RKV. STAT. AMN. §§ 415:18-a, 419-.5-a, 420:5-a (1983). The statute required issuers of
group health insurance policies to provide coverage for the treatment of mental illnesses and emotional disorders, something not required by ERISA- See aiso infra notes 102-12 and accompanying
teortt.->-»•--«
86. Wadsworth, 562 F.2d at 75-76.
87. Id. at 77. The court rejected a narrow reading of the preemption clause that would have
called for preemption only of state laws directly covered by ERISA. Id. The court noted that the
Conference Committee had replaced a narrower preemption provision with the present "sweeping"
language in order "to avoid 'the possibility of endless litigation over the validity of State action
that might impinge on Federal regulation . . . and potentially conflicting State laws hastily contrived to deal with some particular aspect of [employee benefit plans] not clearly connected to the
Federal regulatory scheme.' " Id. (quoting 120 CONG. REC. 29,942 (1974) (remarks of Sen. Javits)).
�VANDERBILT LAW REVIEW
622
[Vol. 42:607
88
tion. Thus, Wadsworth opened the door for indirect regulation of employee benefit plans that utilize group insurance by regulating the
terms of the policies purchased by such plans. Wadsworth, however, did
not address directly whether the state statute in question was one
which regulated insurance; to the court, it was obviously one that did.
Later courts taking a closer look would not have the luxury of such an
easy determination.
3.
Current Arguments
The wording of ERISA itself provides a strong argument that plans
which purchase a group policy from an insurance company should be
governed only by ERISA and not by state statutes that would otherwise
regulate the contents of the policy. Section 3 of ERISA states that an
employee benefit plan may be insured "through the purchase of insurance or otherwise." * Clearly, the drafters of ERISA anticipated that
some plans would provide for the purchase of a group policy, rather
than self-insurance plans. Some courts, in concluding that a state statute involved is preempted, have held that when an insurance company
exclusively makesfinalclaims decisions, ERISA, not state law, governs
the relationship between the insurance company and the insured.* Unfortunately, section 514* does not define what type of law it considers
as "regulat[mg] insurance." Various commentators* and courts** have
proffered their own definitions; however, no consensus on a definitive
meaning has been reached. Prior to the decisions in Metropolitan Life
Insurance Co. v. Massachusetts** and Pt7ot Life Insurance Co. v.
Dedeaux,* courts focused on determining whether the plan in question
was an employee benefit plan and, thus, was freed of state insurance
regulation under the preemption clause and the deemer clause, rather
8
0
1
2
6
88. Id. at 78. The court stated that to find the New Hampshire statute preempted totally
would read out the savings clause, something contrary to its duty "to construe [an act of Congress]
in such a manner as to give effect to all its parts and to avoid a construction which would render a
provision surplusage." Id.
89. ERISA, supra note 1, § 3(1), 29 U.S.C. § 1002(1) (1982); see supra note 48.
90. See, e.g., McLaughlin v. Connecticut Gen. Life Ins. Co., 565 F. Supp. 434 (N.D. CaL
1983) (calling this conclusion "indisputable").
91. ERISA, supra note 1, § 514(a), 29 U.S.C. § 1144(a) (1982).
92. See, e.g., Brummond, supra note 6, at 122-24; Okin, Preemption of State Insurance Regulation by ERISA, 13 FORUM 652, 672-78 (1978); Comment, ERISA Preemption and Indirect Regulation of Employee Welfare Plans Through State Insurance Laws, 78 COLUM. L. REV. 1536
(1978).
93. See, e.g., Wayne Chem., Inc v. Columbus Agency Serv. Corp., 567 F.2d 692 (7th Cir.
1977); Providence v. Valley Clerks Trust Fund. 509 F. Supp. 388 (E.D. Cal. 1981); Eversole v.
Metropolitan Life Ins. Co., 500 F. Supp. 1162 (CD. Cal. 1980).
94. 471 U.S. 724 (1985).
95. 481 U.S. 41 (1987).
thai
an
insur
f
savir
ERIS
ploy
cleai
pree
utes
emi
Cor
ing
bol
tic
in
si'
st
si
u
8
(
�r
ol. 42:607
gulation of emregulating the
however, did
;stion was one
r one that did
uiy of such an
ent that plans
iny should be
>uld otherwise
states that an
hase of insur^icipated that
policy, rather
a state statnce company
law, governs
isured. Un' ^ oonsiders
n
M
90
:
J have
definitive
fHTefi
politan Life
ance Co. v.
in question
te insurance
ause, rather
1
eempted totally
act of Congresa]
would render a
1
48.
434 (N.D. Cal.
Insurance Reg•i Indirect RegL. Rgy. 1536
' 692 (7th Cir.
1); Eversole v.
1989]
ERISA PREEMPTION
623
than determining whether the statute involved w£is one that regulated
insurance and, therefore, was saved from preemption.**
The most compelling argument in favor of a broad reading of the
savings clause is the plain wording of the statute. If the drafters of
ERISA had intended the statute to displace all state regulation of employee benefit plans, direct and indirect, they would not have inserted a
clear intention that state regulation of insurance is to be saved from
preemption. Without the savings clause, the only state insurance statutes that would survive ERISA would be those that did not relate to an
employee benefit plan and, therefore, were not preempted. If this was
Congress's goal, it could have been achieved more easily by one sweeping preemption clause, rather than a preemption clause qualified by
both a savings clause and a deemer clause.
An approach courts could use to delineate the scope of the preemption and savings clauses is to divide state regulation of group insurance
into distinct categories. The National Association of Insurance Commissioners (NAIC) has offered some guidance in this area,* cateforizing,
state regulation as: (1) laws that relate to the corporate and financial
structure of companies issuing insurance, (2) laws that relate to the sell^
ing of insurance contracts, such as statutes governing the licensing oi
agents and the setting of rates, and (3) laws that relate to the contract
of insurance itself, such as mandated-benefits statutes^*8tate laws falling into the first two categories would not be preempted by ERISA because they neither regulate the "terms and condition*'* of the plan,**
nor arguably relate to an employee benefit plan. State regulation falling into the third category, however, involves the "inexorable intersection of insurance benefits and employee benefit plans." Employee
benefit plans that are insured through the purchase of group policies
7
100
101
96. Following Metropolitan Life and Pilot Life, a three-step analysis, which tracks the language of § 514, became the accepted manner by which to approach an ERISA preemption question. See infra notes 102-60 and accompanying text
97. See Manno, supra note 12, at 57-58 (citing NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS. STATEMENT ON FEDERAL PREEMPTION OF STATE INSURANCE REGULATION OF ERISA
-
17-19
(1976)); see aiso Brummond, supra note 6, at 81-84 (discussing the NAIC categories of insurance
regulation and how these types of insurance regulation affect employee benefit plans).
98. See Manno, supra note 12, at 57-58.
99. See id. at 53, 58; ERISA, supra note 1, § 514(a), 29 U.S.C. § 1144(a) (1982); see also SEC
v. National Sec., Inc., 393 U.S. 453, 459-60 (1969) (stating that the business of insurance for the
purposes of the McCarran-Ferguson Act does not include all the activities of insurance companies,
such as mergers and acquisitions, stock sales, and general corporate business activities, but is limited to "[t|he relationship between insurer and insured, the type of policy which could be issued,
its reliability, interpretation, and enforcement").
100. ERISA, supra note 1, § 514(a), 29 U.S.C. § 1144(a) (1982). Arguably, however, in light of
the expansive reading given to the preemption clause following Shaw v. Delta Air Lines, 463 U.S.
85 (1983), it is difficult to conceive of a state law that does not relate to an employee benefit plan.
101. Manno, supra note 12, at 58.
�624
VANDERBILT LAW REVIEW
, [Vol. 42:607
rather than self-insuring inevitably will be subject to state laws governing the content of those policies. It is this broad category of state
regulation that has given courts the most trouble.
4. Metropolitan Life and Pilot Life
The Supreme Court finally defined the scope of the savings clause
when it addressed the question of whether state mandated-benefit laws
were preempted by ERISA. In Metropolitan Life Insurance Co. u. Massachusetts, * a Massachusetts statute required the provision of certain
minimum mental health care benefits to in-state residents who were insured under general insurance policies, accident or sickness insurance
policies, or employee health-care plans that covered hospital and surgical expenses. * Metropolitan issued group health policies for employee
benefit plans and to employers and unions which employed and represented employees living in Massachusetts; but Metropolitan failed to
provide the benefits mandated by the statute. Metropolitan claimed
that the statute was inapplicable to any group policy issued for an
ERISA plan within Massachusetts because it was preempted by
ERISA's preemption clause. Massachusetts argued that ERISA's savings clause saved the statute from preemption because it was a law that
regulates insurance.
The Court found that the savings clause saved the statute from
10
10
104
108
10* 471 VS. 724 (1986).
103. MASS. Gen. LAWS ANN. ch. 175, § 47B (West Supp. 1985). The Massachusetts statute
provided:
Any blanket or general policy of insurance . . . or any policy of accident and sickness insurance . . . or any employees' health and welfare fund which provides hospital expense and
surgical expense benefits and which is promulgated or renewed to any person or group of
persons in this commonwealth . . . shall, provide benefito for expense of residents of the commonwealth covered under any such policy or plan, arising from mental or nervous conditions
as described in the standard nomenclature of the American Psychiatric Association which are
at least equal to the following minimum requirements:
(a) In the case of benefits based upon confinement as an inpatient in a mental hospital
. . . the period of confinement for which benefits shall be payable shall be at least sixty days
in any calendar year . . . .
(b) In the case of benefits based upon confinement as an inpatient in a licensed or accredited general hospital, such benefits shall be no different than for any other illness.
(c) In the case of outpatient benefits, these shall cover, to the extent of five hundred
dollars over a twelve-month period, services furnished (1) by a comprehensive health service
organization, (2) by a licensed or accredited hospital (3) or subject to the approval of the
department of mental health services fumished by a community mental health center or other
mental health clinic or day care center which furnishes mental health services or (4) consultations or diagnostic or treatment sessions . . . .
Id.
104. Metropolitan Life, 471 U.S. at 734-35.
105. Id. at 735.
�i^ol. 42:607
ta!e laws govtegory of state
ERISA
1989]
625
PREEMPTION
10
107
preemption. * The Court first cited Shaw v. Delta 'Air Lines for the
broad proposition that a state law relates to an employee benefit plan
"if it has a connection with or reference to such a plan." • The Court
then reasoned that although the statute "clearly" met this test and
could be subject to preemption, * it was one that regulated insurance
by regulating the terms of insurance contracts and, therefore, was
saved from preemption.
The impact of Metropolitan Life was significant. It meant that the
states could regulate indirectly employee benefit plans by regulating the
terms of group policies purchased for the plans from insurance companies. It also meant that employees asserting claims against insurance
companies for wrongful denial of benefits could pursue causes of action
under state law, as well as those spelled out in ERISA's civil enforcement provisions. This is especially significant because ERISA does
not provide for the recovery of punitive damages, while a suit, for
example, based on a state common-law theory for tortious breach of
contract, or based on a state statute authorizing recovery of punitive
damages, would expose insurance companies to tremendous liability
and, in some instances, provide employees with huge windfalls.
I0
10
110
savings clause
d-benefit laws
ce Co. v. Masion of certain
who were iness insurance
tal and surgifor employee
id and repretan failed to
itan claimed
ssued for an
eempted by
ERISA's savas a law that
from
ichusetts statute
ickness insurexpense and
i or group of
ts of the com>us conditions
ion which are
•ntal hospital
ist sixty days
ed or accred;ss.
Sve hundred
ealth service
roval of the
iter or other
4) consulta-
111
112
113
114
106. Id. at 744.
107. 463 U.S. 85 (1983).
108. Metropolitan Life, 471 U.S. at 739. The Court added that "[t]he pre-emption provision
was intended to displace all state laws that fall within its sphere, even including state laws that are
consistent with ERISA's substantive requirements." Id. (citing Shaw, 463 U.S. at 98-99).
109. Id. at 739.
110. Id. at 740. This was common sense to the Court, and it drew ample support from the
plain language of ERISA, especially the deemer clause. In particular, the Court noted that "[b]y
exempting from the saving clause laws regulating insurance contracts that apply directly to benefit
plans, the deemer clause makes explicit Congress' intention to include laws that regulate insurance
contracts within the scope of the insurance laws preserved by the saving clause." Id. at 741. The
Court also applied the factors set forth in Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119
(1982), which were used to determine whether a particular practice constitutes the business of
insurance for the purposes of the McCarran-Ferguson Act. Metropolitan Life, 471 U.S. at 742-44;
see infra notes 146-60 and accompanying text.
111. Metropolitan Life, 471 U.S. at 744.
112. Because only large companies could afford to self-insure, and many of these companies
found it easier to let an expert in the field (the insurance company) administer the employee
benefit plan, state insurance regulators could reach any employee benefit plan that was not selfinsured.
113. See ERISA, supra note 1, §§ 501-514, 29 U.S.C. §§ 1131-1145 (1982).
114. See Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985) (holding that the
remedies provided under ERISA's civil enforcement provisions, which do not include punitive
damages, were intended to be exclusive); Sommers Drug Stores Co. Employee Profit Sharing Trust
v. Corrigan Enterprises. Inc., 793 F.2d 1456 (5th Cir. 1986) (holding that punitive damages are not
available under ERISA §§ 409(a). 502(a)(3)), cert, denied, 479 U.S. 1034 (1987). But see
Schoenholtz v. Doniger, 657 F. Supp. 899, 913-14 (S.D.N.Y. 1987) (holding that ERISA's provison
for "such other equitable or remedial relief as the Court may deem appropriate" will permit the
awarding of punitive damages in certain instances (emphasis in original)).
�VANDERBILT LAW REVIEW
626
if
[Vol. 42:607
JjfcfrWpftftm Li/e thus undermined one of Congress's main objecU y ^ in enacting ERISA: to bring uniformity to the area of employee
b^fie^pEra^ ' Uniformity simply cannot be achieved if states are permitted to regulate indirectly the terms of employee benefit plans which
provide for the purchase of group policies that may be subject to mandated-benefit statutes. This is a result clearly contrary to the express
intent of the drafters of ERISA. * Metropolitan Life further undermines the objective of uniformity because, by allowing employees to sue
insurers under state law theories for denial of employee benefits, cases
would vary widely from state to state, depending on whether a state
statute or common law authorized punitive damages. This situation also
would be difficult for interstate employers because they would be faced
with a wide range of state laws with which they would have to comply.
The question then remained open, in the wake of Metropolitan
Life, as to what other state laws, in addition to mandated-benefit statutes, would relate to employee benefit plans, but also would regulate
insurance and thus would be saved from preemption. The Supreme
Court again considered this question in the recent case of Filot L i f e l
Insurance Co; v. Dedeaux. '' In Pilot Life respondent Dedeaux instftuted suit in the United States District Court for the Southern District
of Mississippi asserting the tort of bad faith and breach of contract
claims against petitioner Pilot Life for Pilot Life's failure to pay benefits under a group insurance policy. * The district court granted summary judgment for Pilot Life, finding that Dedeaux's common-law
causes of action were preempted by ERISA. * On appeal to the Fifth
Circuit, the Court of Appeals reversed. The Fifth Circuit relied heavily on Metropolitan Life in finding that Dedeaux's claims were based
on state common law that regulated insurance and, therefore, were
saved from preemption.
In a unanimous opinion, the Supreme Court reversed. The Court
found that Dedeaux's common-law causes of action for the tort of bad
faith and breach of contract were based on state laws that related to an
11
m
I? •
w
11
11
11
11
110
121
122
115. See supra notes 1-37 and accompanying text
116. See ERISA, supra note 1, § 514(b)(2)(B), 29 U.S.C. § 1144(b)(2)(B) (1982). The deemer
clause states that an employee benefit plan shall not be deemed to be an insurance company for
the suiposea of subjecting it to state insurance regulation.
118. Id. at 43. Dedeaux was employed by Entex, Inc., which had esublished a long-term
disability employee benefit plan by purchasing a group insurance policy from Pilot Life. Pilot Life
had the fiduciary duty of determining who would receive benefits under the policy.
119. Id. at 44.
120. Id.
121. Id.; see Dedeaux v. Pilot Life Ins. Co., 770 F.2d 1311 (5th Cir. 1985).
122. Pilot Life, 481 U.S. at 57.
e:
ti
h
n
5
�->!• 42:607
s's main objec-a of employee
states are perSt plans which
object to manto the express
-iirther under'ployees to sue
benefits, cases
Aether a state
situation also
ould be faced
ve to comply.
Metropolitan
I-benefit statould regulate
The Supreme
of Pilot Life
edeaux instihern District
' j^ontract
"-Wm benejraHted sumcommon-law
to the Fifth
relied heav' were based
irefore, were
l a
The Court
J tort of bad
related to an
82). The deemer
ice company for
led a long-term
' Life. Pilot Life
-y-
ERISA PREEMPTION
1989]
627
''gftptoyee benefit plan and thus fell within the preemptive reach of section 514(a). The Court, however, disagreed with the Fifth Circuit and
held that the Mississippi common laws of bad faith and contracts did
not regulate insurance so as to be saved from preemption under section
514(b)(2)(A).
In its opinion the Court propounded a set of guidelines that courts
could utilize to determine whether state statutes purporting to regulate
insurance are saved from preemption. The Court predictably employed the expansive definition of "relates to" in section 514(a), defining a state law which relates to an employee benefit plan as one that
has "connection with or reference to such a plan." ** According to the
Pilot Life Court, the Mississippi common law of bad faith and contracts
"undoubtedly" met this definition. *
In turning to the question of whether the state common law regulated insurance and was therefore saved from preemption under
ERISA's savings clause, the Court set forth a series of factors to be
considered. *" The Court referred to Metropolitan Life, in which it had
ruled that mandated-benefit laws regulated insurance, and reiterated
the criteria it had employed in that case. First, the Pilot Life Court
took a common sense view of the language of the savings clause. ** The
Court concluded that in order for a state law to be one that regulates
m
1M
1M
1
1
7
1
1
123. Id. at 47. The Court stated:
There is no dispute that the common law causes of action asserted in Dedeaux's complaint
"relate to" an employee benefit plan and therefore fall under ERISA's express pre-emption
clause, S 514(a). In both Metropolitan Life and Shaw v. Delta Air Lines we noted the expansive sweep of the pre-emption clause. In both cases "[t]he phrase 'relate to' was given its
broad common-sense meaning, such that a state law 'relate[s]to'a benefit plan 'in the normal
sense of the phrase, if it has a connection with or reference to such a plan.'" In particular we
have emphasized that the pre-emption clause is not limited to "state laws specifically
designed to affect employee benefit plans."
Id. (citations omitted) (citing Metropolitan Life, 471 U.S. at 739, quoting Shaw, 463 U.S. at 97).
124. Id. at 50.
125. Id. at 48-49.
126. Id. at 47 (citing Metropolitan Life, 471 U.S. at 739, quoting Shaw, 463 U.S. at 97); see
supra notes 72-77 and accompanying text.
127. Pilot Life, 481 U.S. at 48.
128. Id. at 48-49; see infra notes 129-36 and accompanying text
129. Pilot Life, 481 U.S. at 50. The Court stated:
Certainly a common-sense understanding of the phrase "regulates insurance" does not support the argument that the Mississippi law of bad faith falls under the saving clause. .VUMM , .
mon-sense view of the word "regulates" would lead to the conclusion that in order to regulate"
insurance, a law must not just have an impact on the insurance industry, but must be specifically directed toward that industry. Even though the Mississippi Supreme Court has identified its law of bad faith with the insurance industry, the roots of this law are firmly planted in
the general principles of Mississippi tort and contract law. Any breach of contract, and not
merely breach of an insurance contract, may lead to liability for punitive damages under Mississippi law.
Id.
�628
VANDERBILT LAW REVIEW
[Vol. 42:607
insurance, it must not only impact on that industry, but also must be
"specifically directed toward that industry." Because the Mississippi
laws of bad faith and contracts were grounded in general principles of
Mississippi tort and contract law, and were not principles specifically
applicable to the insurance industry, they did not regulate insurance
from a common sense point of view. '
The second and more probing inquiry employed by the Court was
an application of the factors defining business of insurance for the purposes of the McCarran-Ferguson Act to the Mississippi law in question. " First, the Mississippi common law of bad faith did not affect the
spreading of policyholder risk. " Second, although the Mississippi common law of bad faith could be said to affect the policy relationship between the insurer and the insured, the Court characterized this
connection as "attenuated at best."** Finally, because the Mississippi
common law of bad faith was derived from general principles of that
state's common law, it was not specifically directed towards entities
within the insurance industry. '* Therefore, the Mississippi common
law of bad faith, at best, met one of the three McCarran-Ferguson criteria and could not be said to regulate insurance.
Pilot Life thus further defined the contours of ERISA's preemption
provisions. The preemption clause itself generally will be given an expansive reading, in accordance with Shaw v. Delta Air Lines, meaning that a wide variety of state laws conceivably could be found to
relate to an employee benefit plan. ' The scope of the savings clause
was narrowed by the seemingly broad holding in Metropolitan Life to
preserve only state mandated-benefit laws and, presumably, any state
statute specifically regulating the terms of an insurance contract. '* The
savings clause, however, does not save state laws of general applicability
that may affect incidentally the insurer-insured relationship, such as
common-law principles of contract and tort. In distinguishing Metro190
1 1
1
1
1
1
138
137
1 8
1
140
130. Id.
131. Id.
132. Id. at 50-51.
133. Id. at 50.
134. Id. at 51.
135. Id.
136. Id.
137. 463 U.S. 85 (1983).
138: Such laws could include mandated provider laws and freedom-of-choice laws, as well as
more extreme examples such as building permit requirements and zoning ordinances, because they
could affect the value of the plan funds or restrict in some way their use.
139. In light of this holding, mandated provider laws and freedom-of-choice laws could be
saved from preemption, while building permit requirements and zoning ordinances clearly would
not.
140. See supra note 139; infra notes 152-60 and accompanying text.
�^ o j ! 42:607
ERISA PREEMPTION
1989]
629
J t
^ B o must be
the Mississippi
al principles of
>les specifically
Jlate insurance
the Court was
ce for the puri law in ques! not affect the
ississippi comlationship beicterized this
ie Mississippi
ciples of that
vaids entities
ippi common
^rguson crites preemption
given an exles, *-' meannd to
clause
Utan Life to
y> any state
tract. * The
applicability
np, such as
hing Metro1
a
13
JfoUtan Life, Pilot Life implicitly reaffirmed the notion, that states may
J^^ffnue to regulate indirectly employee benefit plans by regulating the
terms of group insurance policies either purchased for the plans, or
adopted by employers as the terms of their planar
5. Present Inquiry: Business of Insurance
In the wake of Pilot Life, courts have begun to break down the
preemption inquiry into a three-step process, guided by Metropolitan
Life, Pilot Life, and the wording of section 514. FurstTa court asks
whether the state law involved is one which relates to an employee benefit plan. If the state law does not relate to an employee benefit plan, it
is not preempted as stated in section 514(a). If the state law clears
this hurdle, it must be tested under the savings clause. As a second stept
a court asks whether the state law is one which regulates insurance. If
the statute is not found to regulate insurance, it is preempted under
section 514(a). ' If it is found to regulate insurance, however, a court
takes the last step and tests the state law under the deemer clause,
which states that an employee benefit plan shall not be deemed to be
an insurance company or other insurer for the purpose of the claugg.
Thus, even if the state statute involved purportedly regulates msurance,
but is operating on the employee benefit plan as if that plan were an
insurance company or insurer, it still will be preempted. This approach is a sound one, amply supported by the wording of section 514
and Congress's expressed intent to preserve from preemption only those
statutes directed at insurance companies acting uniquely as insurance
companies, but not as underwriters of employee benefit plans.
The test set forth in Union Labor Life Insurance Co. v. Pireno *
to determine whether a practice constitutes the business of insurance
for the purpose of the McCarran-Ferguson Act appears to be the standard courts will adopt in order to determine whether a state statute is
saved from ERISA preemption. The Supreme Court used this test in
both Metropolitan Life and Pilot Life, finding in Metropolitan Life
that the state statute involved did regulate insurance and thus was
saved, * while concluding in Pilot Life that the state law did not reguul
141
14
144
1
6
14
aws, as well as
because they
laws could be
clearly would
141. ERISA, supro note 1. § 514, 29 U.S.C. § 1144 (1982); see abo supra notes 102-40 and
accompanying text.
142. ERISA, supra note 1, § 514(a), 29 U.S.C. § 1144(a) (1982). ERISA only preempts state
laws which relate to an employee benefit plan. Thus, state law which does not relate to an employee benefit plan cannot be preempted a priori by ERISA.
143. Id. § 514(a), 29 U.S.C. § 1144(a) (1982).
144. Id. § 514(b)(2)(B), 29 U.S.C. § 1144(b)(2)(B) (1982).
145. 458 U.S. 119 (1982).
146. Metropolitan Life, 471 U.S. at 744.
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7
late insurance and, therefore, was preempted. *
The test answers the question of whether the state law is one which
regulates insurance by ascertaining how the state law comes to bear on
the business of insurance. The three criteria used are: First, whether
the practice has the effect of spreading a policyholder's risk; second,
whether the practice is an integral part of the policy relationship between the insurer and the insured; and finally, whether the practice is
limited to entities within the insurance industry. If a state law meets
all three criteria, it is likely a law that regulates insurance, while if none
of the three criteria are met, it likely is not. * Somewhere in between
lies a "gray area" in which a court, depending on how strongly one or
more of the criteria are met, could come down on either side. Although
the Court has stated that no one factor is determinative and that the
factors should be considered together, * the test should provide a useful framework through which an analysis can be made, and predictability and certainty achieved, in insurance preemption cases under
ERISA.
California's Unfair Claims Practices Act * has been a recent source
of controversy surrounding the respective scopes of ERISA's preemption and savings clauses. The Unfair Claims Practices Act sets forth a
list of unfair and deceptive insurance practices for which a private
claimant, until recently, could recover both compensatory and punitive
damages. * Once again, the question courts currently are attempting to
148
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:
6-
1
0
1
I
I
tl
i
1
1
m
1
w-
w•
1
ft:.
1
2
147. Pilot Life, 481 U.S. at 49.
ITS. Pireno, 458 U.S. at 129; Pilot Life, 481 U.S. at 48-49.
149. See supra notes 139-40 and accompanying text.
150. Pireno, 458 U.S. at 129.
151. CAL INS. CODB § 790.03 (West 1972 & Supp. 1988). The California act is based on an
NAIC Model Act, the Unfair Claims Settlement Practices Act, which, as of 1981, had been adopted
in 32 states. The analysis herein, therefore, is relevant not only for California but also for other
states in which the issue will be whether the statute regulates insurance and therefore is saved
from preemption. For an analysis of the Model Act and whether it allows a private right of action,
see Comment, 77ie Unfair Claims Settlement Practices Act: A Priuate Cause of Action for Third
Party Claimants Seeking Punitiue Damages, 6 U. DAYTON L. REV. 73 (1981).
152. CAU INS. CODE § 790.03 (West 1972 & Supp. 1988). The portion of the act most often
involved in the litigation is subsection (h). The statute reads, in part:
The following are hereby defined as unfair methods of competition and unfair and deceptive
acts or practices in the business of insurance^]
(h) Knowingly committing or performing with such frequency as to indicate a general
business practice any of the following unfair claims settlement practices:
(1) Misrepresenting to claimants pertinent facts or insurance policy provisions relating to
any coverage at issue.
(2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.
(3) Failing to adopt and implement reasonable standards for the prompt investigation
and processing of claims arising under insurance policies.
�42:607
? one which
to bear on
st, whether
sk; second,
ionship bepractice is
; law meets
hile if none
in between
igly one or
. Although
d that the
vide a use>redictabilses under
ent source
s preempJts forth a
a private
itive
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• based on an
been adopted
ilso for other
jfore is saved
ght of action,
ion for Third
:t most often
I deceptive
a general
relating to
s with reestigation
1989]
ERISA PREEMPTION
631
address is whether the statute regulates insurance and, therefore, is
saved from preemption. The consequences are important for employ183
(4) Failing to affirm or deny coverage of claims within a reasonable time after proof of
loss requirements have been completed and submitted by the insured.
(5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of
claims in which liability has become reasonably clear.
(6) Compelling insureds to institute litigation to recover amounts due under an insurance
policy by offering substantially less than the amounts ultimately recovered in actions brought
by such insureds, when such insureds have made claims for amounts reasonably similar to the
amounts ultimately recovered.
(7) Attempting to settle a claim by an insured for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application.
(8) Attempting to settle claims on the basis of an application which was altered without
notice to, or knowledge or consent of, the insured, his representative, agent, or broker.
(9) Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by
them, of the coverage under which payment has been made.
(10) Making known to insureds or claimants a practice of the insurer of appealing from
arbitration awards in favor of insureds or claimants for the purpose of compelling them to
accept settlements or compromises less than the amount awarded in arbitration.
(11) Delaying the investigation or payment of claims by requiring an insured, claimant, or
the physician of either, to submit a preliminary claim report, and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information.
(12) Failing to settle claims promptly, where liability has become apparent, under one
portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.
(13) Failing to provide promptly a reasonable explanation of the basis relied on in the
insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the
offer of a compromise settlement
(14) Directly advising a claimant not to obtain the services of an attorney.
(15) Misleading a claimant as to the applicable statute of limitations.
Id. As one might imagine, this laundry list of acts and omissions that imposes a "reasonableness"
standard, and utilizes such terms as "prompt," "fair," and "equitable" is a proverbial magnet for
litigation. See, e.g., Kanne v. Connecticut Gen. Life Ins. Co., 859 F.2d 96 (9th Cir. 1988), rev'g
Kanne v. Connecticut Gen. Life Ins. Co., 607 F. Supp. 899 (CD. CaL 1985); Roberson v. Equitable
Life Assurance Soc'y. 661 F. Supp. 416 (CD. Cal. 1987); Presti v. Connecticut Gen. Life Ins. Co.,
605 F. Supp. 163 (N.D. CaL 1985). In Kanne the court considered a claim under the Unfair Claims
Practices Act for wrongful denial of benefits. The district court held that the Califomia statute was
saved from preemption. Kanne v. Connecticut Gen. Life Ins. Co., 607 F. Supp. 899 (CD. Cal.
1985). On appeal, the Ninth Circuit reversed, 819 F.2d 204 (9th Cir. 1987), but withdrew its opinion for reconsideration in light of Pilot Life. 823 F.2d 284 (9th Cir. 1987). The court ultimately
found the Unfair Claims Practices Act preempted by ERISA. Kanne, 859 F.2d 96, 98 (9th Cir.
1988). Under the case of Royal Globe Ins. Co. v. Superior Court, 23 CaL 3d 880, 592 P.2d 329, 153
CaL Rptr. 842 (1979), claimants could assert a private right of action under § 790.03. Royal Globe
was overruled recently, however, by the Califomia Supreme Court in Moradi-Shalal v. Fireman's
Fund Ins. Cos., 46 CaL 3d 287, 758 P.2d 58, 250 CaL Rptr. 116 (1988). In light of this decision,
Califomia claimants will no longer be able to bring a cause of action for violation of § 790.03.
153. See cases cited supra note 152. Although under Moradi-Shalal California plaintiffs can
no longer sue under § 790.03, the court stated that the Royal Globe rule allowing a privaterightof
action would continue to apply to cases filed prior to the Moradi-Shalal decision. Furthermore,
other states which have adopted the Model Unfair Claims Practices Act provision do recognize a
privaterightof action for enforcement See, e.g.. First Sec. Bank v. Goddard, 181 Mont 407, 593
P.2d 1040 (1979); see also Comment, supra note 151, at 76-77.
�632
VANDERBILT LAW REVIEW
[Vol. 42:607
ers, insurance companies, and claimants under employee benefit plans;
if the California statute is found to be saved from preemption, punitive
damages will be available to claimants. As a consequence, employers
and insurers again will be forced to pay heed to a state regulation that
imposes obligations other than those imposed by ERISA.
Applying the business of insurance test, the California statute
would probably not clear the three Pireno hurdles. First, the statute
does not seem to be directed at the spreading of a policyholder's risk. It
imposes standards of conduct on insurers reviewing claims for benefits
under policies, but does not affect the spreading of risk, which is an
essential feature of the business of insurance. Second, one could argue
that the statute regulates the policy relationship between the insurer
and the insured. The statute does so, however, by codifying general
principles of common law such as misrepresentation, unreasonable
processing of claims, and lack of good faith. Finally, the statute is
directed at claims settlement, a practice undertaken by both private insurers and public pension funds. Thus, it is not targeted directly at the
insurance industry. The type of actions it makes illegal, are actions for
which a claimant already would have a cause of action in contract or in
tort, making the statute more like a codification of the common-law
principles, which were found not to regulate insurance in Pilot Life,
than a mandated-benefits statute, which was found to regulate insurance in Metropolitan Life.™
lM
The Eleventh Circuit recently considered whether a Florida statute, FLA. STAT. ANN. § 624.155
(West 1984), which allowed the insured to bring a civil action against an insurer for wrongful
denial of disability benefits under an employee benefit plan group policy, was preempted by
ERISA. See Anschultz v. Connecticut Gen. Life Ins. Co., 850 F.2d 1467 (llth Cir. 1988). The court
relied heavily on Pilot Li/e in concluding that the Florida statute was preempted. Id. at 1468-69.
154. In light of Piiot Li/e, therefore, courts shouldtakea closer look at statutes that purport
to regulate insurance. If state statutes that impose reasonableness standards are treated differently
from common-law principles directed at insurers, states would be able to avoid ERISA by codifying the same "law" that was found not saved from preemption in Pilot Li/e. A state should not be
able to avoid ERISA's preemptive reach by claiming that because the obligation imposed on the
rn statutorily created—rather than derived from common-law—it regulates insurance and,
^ is saved from preemption. To the extent that such statutes merely codify a common-law
obligation, under contract or tort theory, they should be preempted under Pilot Life. Only when
such statutes impose an obligation on an insurer beyond that required under the common law
should courts undertake the business of insurance inquiry under Pireno and Pilot Life. In some
cases, however, this analysis may not be necessary, because such statutes probably would fail the
second prong of the Pireno test.
155. The Massachusetts mandated-benefits statute is distinguished easily from both the
common law of contract and tort at issue in Pilot Life and the California Unfair Claims Practices
Act because it imposes a duty on insurers—to provide mental health coverage—that otherwise
would probably not be imposed by the common law. The Msssachusetts statute would meet the
Pireno requirement that it betargeteddirectiy at insurers, and presumably, because the Supreme
Court found it saved from preemption in Metropolitan Life, would also clear one or two of the
other Pireno hurdles. See also General Ins. Co. v. Mammoth Vista Owners Ass'n, 174 Cal. App. 3d
�42:607
benefit plans;
;ion, punitive
e, employers
gulation that
)rnia statute
> the statute
Ider's risk. It
* for benefits
which is an
could argue
> the insurer
ying general
jnreasonable
he statute is
h private inrectly at the
e actions for
ontract or in
common-law .
Life,
nsur-
1
ERISA
1989]
PREEMPTION
633
obukHU^benefit of the Pireno approach is that it provides a
doctrinal construct by which state laws can be tested. Rather than taking a commott sense view"* of what constitutes insurance regulation,
the Pireno approach provides guidelines to aid courts in their determinations. Furthermore, it is consistent once again with the McCarranFerguson Act because the factors used in the Pireno test are the same
criteria used to define business of insurance for the purposes of that
Act. Because ERISA was drafted with the McCarran-Ferguson Act in
mind, it would be appropriate if some consistency in definition could be
achieved between the two Acts.
Unfortunately, the Pireno approach also possesses shortcomings.
There is always the strong possibility that a state law will meet one or
two of the Pireno criteria and not emerge clearly as a law that does or
does not regulate insurance. Once again the court will be forced to use
the more subjective common sense approach, * creating the very uncertainty and lack of predictability sought to be eliminated. Courts also
could differ in their conclusions as to the application of the Pireno criteria, with the worst scenario being one court finding that a state law
meets all three, while another finds that the same law fails to meet any
of the three. * In other words, application of the criteria themselves is
a subjective inquiry, resulting once again in uncertainty.
187
15
15
C.
Deemer Clause: Further Complications
1. Background
r. ANN. § 624.155
rer for wrongful
s preempted by
1988). The court
i- H . at 1468-69.
Jtes that purport
eated differently
•RISA by codifyite should not be
imposed on the
s insurance and,
y a common-law
f-i/e. Only when
he common law
?t Life. In some
y would fail the
from both the
Claims Practices
-that otherwise
would meet the
ise the Supreme
e or two of the
74 Cal. App. 3d
Prior to ERISA's enactment self-insured plans and plans that purchased group insurance were treated the same. Employers who set up
employee benefit plans were subject to the same state insurance regulation as entities engaged in the insurance business. This meant that an
180
810, 822, 220 Cal. Rptr. 291, 297 (1985) (stoting that § 790.03(h) is "merely a codification of the
tort of breach of the implied covenant of good faith and fair dealing as applied to insurance"). But
cf. Moradi-Shalal v. Fireman's Fund Ins. Cos., 46 Cal. 3d 287, 758 P.2d 58, 250 Cal. Rptr. 116
(1988) (holding that there is no private right of action under § 790.03, and overruling Royal Globe
Ins. Co. v. Superior Court, 23 Cal. 3d 880, 592 P.2d 329, 153 Cal. Rptr. 842 (1979)).
156. See Pilot Life, 481 U.S. at 48 (where the Court ran the Mississippi common law of
contract and tort through the common sense test before embarking on the Pireno analysis); supra
note 129.
157. 15 U.S.C. §§ 1011-1015 (1982 & Supp. 1986); see also supra notes 78-83 and accompanying text.
158. See supra notes 30 & 156.
159. This is less likely considering the recent Supreme Court pronouncements in Pilot Life
and Metropolitan Life, which if followed would provide state and lower federal courts with a great
deal of guidance. An example that comes immediately to mind, however, is a state statute that
governs how an insurance company may invest its capital. It is not far-fetched to suggest that such
a statute could clear none or as many as three of the Pireno criteria.
160. States could reach self-insured employee benefit plans under the premise that because
�634
VANDERBILT LAW REVIEW
[Vol. 42:607
employer who had employees in more than one state would have to
comply with the regulations of every state in which his employees resided, or in which he conducted business. The costs of compliance with
conflicting state requirements were a great deterrent to the implementation of employee benefit plans. * In fact, one of ERISA's primary
purposes was to bring uniformity to the area of employee benefit plans
by subjecting them to one body of federal law.
Following ERISA's enactment employee benefit plans no longer
could be treated as insurers for the purpose of state insurance regulations. Congress made clear its intent in the deemer clause, ** which explicitly forbids a state from "deeming" sat employee benefit -plan tabftt
an insurer or insurance company for the purpose of any state law pur-?
porting to regulate insurance. Thus, according to a literal reading of the
deemer clause, insurance companies that sell and often administer
group policies are subject to a full range of state regulation, while exa^»
ployers who fund and administer their own plans arefreeof state regulation, even though the spreading and underwriting of risk present, iir
an insurance contract ** are also present in the plan. *
1
1
162
1
1
1
8
2. Recent Cases
The Fifth Circuit directly addressed the seemingly anomalous distinction between employee benefit plans underwritten by an insurer
and self-insured plans in Light v. Blue Cross & Blue Shield of Alabama. * In Light a former employee of South Central Bell sued Blue
Cross and Blue Shield under state law seeking actual and punitive damages for benefits allegedly due under the South Central Bell plan. *
The plan was self-insured, not underwritten by Blue Cross and Blue
10
1
7
the plans were underwriting the spreading of employee risk, the plans were engaging in the business of insurance and, therefore, were subject to all state insurance regulation. For a discussion of
the pros and cons of self-insuring, see Brummond, supra note 6, at 78-79.
161. See Fort Halifax Packing Co. v. Coyne, 107 S. Ct 2211 (1987), where the Court stated:
ERISA's pre-emption provision was prompted by recognition that employers establishing and
maintaining employee benefit plans are faced with the task of coordinating complex administrative activities. A patchwork scheme of regulation would introduce considerable inefficiencies in benefit program operation, which might lead those employers with existing plans to
RSRk*- benefits, and those without such plans to refrain from adopting them. Pre-emption
ensures that the administrative practices of a benefit plan will be governed by only a single
'" '"iitiiMiij iJ,' '
Id. at 2217, citeSln MacLean v. Ford Motor Co., 831 F.2d 723, 727 (7th Cir. 1987).
162. See supra notes 2-3.
163. ERISA, supra note 1, § 514(b)(2)(B), 29 U.S.C. § 1144(b)(2)(B) (1982).
164. See Blue Cross & Blue Shield of Kansas City v. Bell, 798 F.2d 1331, 1335 (10th Cir.
1986).
165. Id.; see a/so Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 211 (1979).
166. 790 F.2d 1247 (5th Cir. 1986).
167. Id. at 1247-48.
�2:607
iid have to
iployees reliance with
implements primary
enefit plans
ERISA PREEMPTION
1989]
1
635
8
Shield. * Although he conceded that the plan was self-insured, Light
still argued that state law was saved from preemption under Metropolitan Life * and Eversole v. Metropolitan Life Insurance Co. The
Fifth Circuit disagreed, saying that the distinction between a self-insured plan and a plan underwritten by an insurance company or other
insurer is critical in determining whether state regulations are preempted. Self-insured plans are free of state insurance regulation,
while plans that purchase group insurance may be regulated indirectly
by states.
The absurdity of this situation is illustrated further when an attempt is made to draw the line as to when an employee benefit plan is
not subject to state insurance regulation, notwithstanding the plan's association with an insurance company. The best example is when an employer establishes a trust fund and adopts the terms of a group
insurance policy issued by an insurance company as the terms of its
plan. Technically, the plan has not purchased an insurance policy
from the insurance company—it does not pay premiums, and the insurer does not underwrite the spreading of risk. Instead, the employer makes monthly contributions to the fund and claims are paid
only out of the fund, not from any of the insurance company's proceeds.
The insurance company does act, however, as the administrator of the
plan, making claims decisions on behalf of the employer. * Thus, the
insurance company is not acting as an insurer because it is not underwriting the spreading of its policyholder's risk; it is acting, however, as a
fiduciary or administrator of the plan, making claims decisions based on
the terms of a policy with which it is familiar, because the policy is one
generally issued by that insurer.
1
9
170
171
' no longer
nee regulawhich explan to be
te law puriding of the
administer
, while emstate regupresent in
3
172
178
174
^ 1^13 Idis-
surer
Alasued Blue
nitive damlell plan.
3 and Blue
167
mg in the busia discussion of
e Court stated:
iblishing and
'lei adminis>e inefficienl
;ing plans to
Pre-emption
only a single
J).
1335 (10th Cir.
05, 211 (1979).
17
178
168. Id. at 1247. South Central Bell and Blue Cross and Blue Shield had an agreement
whereby Blue Cross and Blue Shield was responsible for adjudicating all claims and paying all
benefits provided for under the plan. Id. This arrangement is fairly common for self-insured plans.
169. 471 U.S. at 724.
170. 500 F. Supp. 1162 (CD. Cal. 1980).
171. Ught. 790 F.2d at 1248-49 n.3.
172. See Metropolitan Life. 471 U.S. at 741-42.
173. See, e.g.. Moore v. Provident Life & Accident Ins. Co., 786 F.2d 922 (9th Cir. 1986);
Hutchinson v. Benton Casing Serv., 619 F. Supp. 831 (S.D. Miss. 1985).
174. The spreading and underwriting of the policyholder's risk is viewed as the essential feature of an insurance contract, and a company, albeit an insurance company, which m not performing such a function is not acting in the capacity of an insurer. See Group Life & Health Ins. Co. v.
Royal Drug Co., 440 U.S. 205, 211 (1979).
175. Insurers acting in such capacities alao generally defend or settle legal actions on claims
hied under the plan. Courts have held that these too are administrative functions and do not relate
to the spreading and underwriting of a pohcy holder's risk. See Powell v. Chesapeake & Potomac
Tel. Co., 780 F.2d 419, 423 (4th Cir. 1985), cert, denied, 476 U.S. 1170 (1986).
176. See McLaughlin v. Connecticut Gen. Life Ins. Co., 565 F. Supp. 434, 441 (N.D. Cal.
1983) (stating that "[i]t is indisputable that where the insurance company makes final claims deci-
�VANDERBILT LAW REVIEW
636
[Vol. 42:607
The result of this distinction prescribed by the deemer clause is
that the plan cannot be reached by state regulation because it technically is self-insured. ERISA's deemer clause explicitly provides that an
employee benefit plan cannot be deemed to be an insurance company
for the purposes of state statutes regulating insurance. Thue, despite
insuring its employees under a policy issued by an insurance company,
and despite the insurance company making final claims decisions, the
plan, haar circumvented state insurance regulation by funding the entire
plan in advance through the establishment of the trust.
There is a caveat to what seems to be both a logical and legal arrangement for avoiding the reach of state insurance regulation. Plans
which set up such a trust fund and thus self-insure, often purchase
"stop-loss" insurance from the administrator-insurer. * The purpose of
stop-loss insurance is to cover claim payments in the event that the
trust fund is depleted during a particular period due, for example, to a
large number of valid claims resulting from a catastrophe, such as a fire,
epidemic, or accident at the place of employment. To determine the
amount in the trust fund from which claims are to be paid, the employer and insurer calculate an average amount paid out each month in
claims and measure how much accordingly needs to be in the fund. This
could be done by taking an average based on twelve months of claims,
or by any other means which tend to guarantee that the amount in the
fund will be sufficient to cover claims, but not so great as to tie up
necessary capital. The problem arises when, for a given month, claims
exceed the amount in the fund. Stop-loss insurance provides that
should this happen, the insurance company administrator will step in
and pay those claims out of its own funds. When proceeds of the
fund once again exceed claims amounts, the insurance company will be
177
178
17
^89
reim
ply
and.
risk
evei
and
sub;
whifun'
sue!
clai
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bas
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sta
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pit
ad
180
sions under a group insurance policy issued to an employee benefit plan, ERISA governs the relationship between the insurance company and the insured").
177. ERISA, supra note 1. § 514(b)(2)(B), 29 U.S.C. § 1144(b)(2)(B) (1982).
178. In this situation the plan clearly is acting like an insurer because it is spreading and
underwriting risk. It is not deemed to be an insurance company for the purpose of state regulation
of insuranon jfeinwftrtty that type of situation the deemer clause was inserted to address—state*
"ifajfj WfUM^jfr"" ^ *** T ' - * " self-insured employee benefit plans by calling them insurers. If
kdauw^the states totally could undermine one of the primary purposes of
i benefll b t a regulation exclusively to the federaKgovWmWefit
See, e.g.. Insurance Bd. Under the Social Ins. Plan of Bethlehem Steel Corp. v. Muir,
819 F.2d 408 (3d Cir. 1987); Moore v. Provident Life & Accident Ins. Co., 786 F.2d 922 (9th Cir.
1986) (both holding that a plan that purchases stop-loss insurance is not an insured plan for the
purposes of ERISA). Contra Michigan United Food & Commercial Workers Unions v. Baerwaldt,
767 F.2d 308 (6th Cir. 1985), cert, denied, 474 U.S. 1059 (1986).
180. If claims never exceed the amount in the employer's fund, the insurer never incurs its
obligation to pay out the amounts in excess. An insurer in this situation, therefore, seems to be
acting merely as an administrator of a self-insured plan.
1
Ni
izi
Li
te
as
1
in
cc
pl
ir
cl
ir
U
�" I. 42:607
jrrifci clause is
tuse it techni)vides that an
mce company
Thus, despite
nee company,
decisions, the
ing the entire
and legal ariation. Plans
ten purchase
ie purpose of
ent that the
'xample, to a
uch as a fire,
itermine the
aid, the emch month in
e fund. This
is of claims,
: ^ ^ i n the
i^M;ie up
)nth7 claims
ovides that
will step in
eeds of the
)any will be
1989]
ERISA PREEMPTION
637
reimbursed by the employer or the plan.
In this situation the insurance company is acting as more than simply an administrator of a self-insured plan. It is receiving a premium
and, in exchange, is underwriting the spreading of the plan's risk—the
risk of claims exceeding fund proceeds. ' It would appear then that
even a self-funded plan being administered by an insurance company
and adopting a group insurance policy as the terms of its plan could be
subject to state insurance regulation if the "trigger" point—the point at
which the insurance company needs to pay claims from its own
funds—is reached. "
The stop-loss caveat creates uncertainty as to whether and when
such a plan will be subject to state insurance regulation. Is the savings
clause resurrected by the mere existence of stop-loss insurance? Should
the plan be subject to state insurance regulation on a claim-by-claim
basis? Is the savings clause resurrected eternally if the trigger is
reached only once? Does triggering in a given month only subject the
plan to state insurance regulation for that particular month, or for the
plan's entire fiscal year? Is one trigger enough to subject the plan to
state insurance regulation? Does the existence of stop-loss insurance
not matter at all? The fact that there are no easy answers to these
questions indicates that perhaps the entire legal debate that has attempted to draw the line between those plans that are subject to state
insurance regulation and those that are not should be ended and replaced by a framework that provides clarity, predictability, and ease of
administration.
Courts addressing this question should adopt the view taken by the
Ninth Circuit in United Food & Commercial Workers & Employers Arizona Health & Welfare Trust v. Pacyga™ and Moore v. Provident
Life & Accident Insurance Co.** The Ninth Circuit held that the existence of stop-loss insurance does not recharacterize a self-insured plan
as an insured plan, which would open the plan up to state insurance
1 1
1
1
ovems the rela-
spreading and
;tate regulation
iddress—states
em insurers. If
ry purposes of
al govemment
Corp. v. Muir,
1 922 (9th Cir.
d plan for the
v. Baerwaldt
?ver incurs its
seems to be
181. The Sixth Circuit accepted this argument in Baerwaldt, 767 F.2d at 308. The Baerwaldt
court found a Michigan mandated-benefit law, similar to the one at issue in Metropolitan Life,
saved from preemption because the plans in question had purchased a stop-loss policy from an
insurance company. The court stated that "[t)he 'stop-loss' nature of the plans does not alter our
conclusion" because Metropolitan Life results in a distinction between insured and uninsured
plans and because "the plans include an arrangement whereby the plans pay premiums to [the
insurance company) to insure that [the insurance company) will pay all benefits in excess of the
claims liability limit under the group policies." Id. at 312-13.
182. Once the trigger point has been reached, the insurer has acted in the capacity of an
insurer, as well as an administrator of the plan. This situation provides the strongest argument for
the savings of state regulation directed at such insurers.
183. 801 F.2d 1157 Oth Cir. 1986).
184. 786 F.2d 922 (9th Cir. 1986).
�638
VANDERBILT LAW REVIEW
[Vol. 42:607
185
regulation. This approach would allow employers to self-insure their
plans, while providing employers withflexibilitythrough the purchase
of stop-loss insurance in case of unusually high claims liability for a
given period.
V.
CONCLUSION
It is clear that courts have come a long way in the last decade in
untangling ERISA's preemption provisions. They have exercised prudence in attempting to interpret the plain meaning of the statute's
words, supplemented with a thorough examination of the statute's legislative history, in order to better ascertain Congress's intent. Perhaps
their interpretations have been in line with Congress's intentions when
drafting ERISA; some commentators would argue that congressional inaction in the wake of judicial interpretation means exactly this. Congress, however, should not hesitate to clarify the interpretation
problems that remain amd legislate to correct judicial pronouncements
which are inconsistent with congressional intent. ERISA has had a positive impact in the area of employee benefits, but uncertainty about the
meaning of some of its provisions could undermine the very goals Congress set out to achieve. Thus far, courts have interpreted intelligently
ERISA's preemption provision, opening up a dialogue with Congress
and constantly looking to it for guidance. Congress should be wary,
however, not to be lax and allow courts to misconstrue its intentions
and, as a consequence, frustrate Congress's objectives.
Lawrence Allen Vranka, Jr.
186.. The reasoning of the court in Pacyga and Moore is both sensible and consistent with
ERISA's purpose and prior case law interpreting the statute. The Pacyga court stated:
[Stop-loss insurance] cannot be termed health insurance, nor can it be said that the Plan is
providing an insurance contract to its participants. The stop-loss coverage provides for payment to the Plan . . . to reimburse the Plan in the event that it must pay out more than a
certain amount in claims in a given year. The stop-loss insurance does not pay benefits directiy to participants, nor does the insurance company take over administration of the Plan at
the point when the aggregate amount is reached. Thus, no insurance is provided to the participants, and the Plan should properly be termed a non-insured plan. . . .
801 F.2d at 1161-62.
�I
i
ERISA Preemption After
FMC and McClendon
WHAT'S LEFT TO DECIDE
Robert N. Eccles
O'Melvcny & Myers
Washington, D.C
-
J
�-T
ERISA Preemption After FMC Com, and McClendon:
Wh-t's Left to Decide
Robert N. E c c l e s
O'Melveny & Myers
Washington, D.C.
I.
General Scope of ERISA Preemption
i
FMC Corp. and McClendon do not a l t e r the breadth
of ERISA preemption.
Rather, both decisions (7-1 in FMC and
6-0 on t h i s point in McClendon) emphasize that ERISA's
"preemption clause i s conspicuous for i t s breadth" and
k
6
applies to a l l laws that "relate to" employee benefit plans
not j u s t laws that address the s p e c i f i c matters regulated by
fe
ERISA.
j
By the same token, the two decisions do not
resolve issues beyond the s p e c i f i c issues involved in the
two cases.
They e s s e n t i a l l y r e i t e r a t e prior precedent and
thus w i l l not l i k e l y a l t e r decisions on other issues.
In
particular, neither decision appears to expand ERISA
preemption so as to encompass claims which relate to
termination of employment and which, unlike the facts in
McClendon. implicate employee benefit plans only
incidentally.
A t y p i c a l such case i s Hartle v. Packard
E l e c t r i c , 877 F.2d 354 (5th C i r . 1989), i n which a p l a i n t i f f
whose employment had been terminated attempted to prove that
his participation in a pension plan and an ESOP had given
r i s e to an employment contract for a fixed term f i . e . ,
normal retirement age under the pension plan) rather than
�a t - w i l l employment.
The d i s t r i c t c o u r t he'ld t h a t h i s s t a t e -
law c l a i m s were p r o p e r l y removed t o f e d e r a l c o u r t because o f
ERISA p r e e m p t i o n .
The F i f t h C i r c u i t , however, h e l d t h a t h i s
c l a i m s were e m p l o y m e n t - r e l a t e d and o n l y p e r i p h e r a l l y
related
t o t h e ERISA p l a n s and o r d e r e d t h e a c t i o n remanded t o s t a t e
court.
116
See a l s o . P i z l o v . Bethlehem
S t e e l Corp., 889 F.2d
( 4 t h C i r . 1989) where t h e c o u r t h e l d preempted
claims
t h a t d i r e c t l y sought an e n t i t l e m e n t t o pension b e n e f i t s b u t
a l s o h e l d t h a t c l a i m s f o r w r o n g f u l t e r m i n a t i o n o f employment
were n o t preempted,
even though some o f t h e damages sought
on those c l a i m s were f o r p e n s i o n b e n e f i t s l o s t t h r o u g h t h e
t e r m i n a t i o n o f employment.
Regardless o f t h e p o t e n t i a l impact o f FMC Corp.
and McClendon. t h e r e a r e s e v e r a l areas, discussed below,
where t h e scope o f ERISA p r e e m p t i o n i s s t i l l being f o u g h t
out
II.
i n t h e case l a w .
Preemption and Claims Seeking
A.
Benefits
A number o f c o u r t s have h e l d t h a t ERISA preempts
s t a t e law c l a i m s w h i c h seek b e n e f i t s t h a t are not owing
under t h e l i t e r a l t e r m s o f t h e p l a n b u t which were a l l e g e d l y
promised by t h e employer.
A t y p i c a l d e c i s i o n i s L i s t e r v.
S t a r k . 890 F.2d 941 ( 7 t h C i r . 1989).
There, an employee
l e f t a f t e r s i x y e a r s o f employment and i n c u r r e d a break i n
s e r v i c e t h a t r e s u l t e d i n t h e loss o f pension c r e d i t s f o r
�those years.
Nine months l a t e r he r e t u r n e d t o work f o r t h e
same company and was a l l e g e d l y t o l d t h a t h i s p r i o r
c r e d i t s would be r e s t o r e d .
service
He worked a n o t h e r 12 years f o r
the company and, upon a p p l y i n g
f o r h i s pension, learned
that
the p l a n terms p r e c l u d e d h i s e n t i t l e m e n t t o c r e d i t f o r t h e
i n i t i a l s i x years.
The Seventh C i r c u i t h e l d t h a t h i s s t a t e
law c l a i m s o f f r a u d and breach o f c o n t r a c t were preempted
because they sought b e n e f i t s under an ERISA p l a n .
The c o u r t
d i s t i n g u i s h e d P i z l o v. Bethlehem S t e e l Corp.. supra. on t h e
ground t h a t i t i n v o l v e d t e r m i n a t i o n o f employment and n o t an
attempted m o d i f i c a t i o n o f a p e n s i o n p l a n .
law h o l d i n g t h a t ERISA does n o t p r o v i d e
C i t i n g t h e case
f o r a remedy based
on an o r a l m o d i f i c a t i o n o f a p e n s i o n p l a n
i n f r a ) , t h e Seventh C i r c u i t a l s o e x p r e s s l y
(see, p. 7,
held t h a t a lack
o f a f e d e r a l remedy d i d n o t a f f e c t p r e e m p t i o n o f t h e s t a t e
law
claims.
Similar conclusions have been reached in a number
of other cases.
See. e.g.. Cefalu v. B.F. Goodrich Co., 871
F.2d 1290 (5th Cir. 1989) (claim that franchisee was
promised retirement benefits identical to employees is
preempted by ERISA, and ERISA does not permit a remedy based
on oral contract relating to benefits; court also holds that
the fact that state law claims are asserted only against
employer, not against the plan, does not affect preemption);
Straub v. Western Union Telegraph Co., 851 F.2d 1262 (10th
Cir. 1988) (state law claims for breach of contract and
j
�n e g l i g e n t m i s r e p r e s e n t a t i o n , which a r i s e from a f a i l u r e t o
p r o v i d e c e r t a i n employees w i t h a b e n e f i t i n c r e a s e t h a t had
a l l e g e d l y been promised, a r e preempted by ERISA).
B.
A l t h o u g h t h e cases discussed above r e p r e s e n t t h e
w e i g h t o f a u t h o r i t y i n f i n d i n g ERISA preemption
of benefit
c l a i m s , a s u b s t a n t i a l number o f d e c i s i o n s f i n d no
preemption.
A l t h o u g h a few o f these d e c i s i o n s can be
d i s t i n g u i s h e d from t h e d e c i s i o n s above because o f t h e i r
unique f a c t s , most o f them j u s t c o n f l i c t w i t h those
decisions.
1.
166
I n Wells v. General Motors Corp., 881 F.2d
( 5 t h C i r . 1989), t h e employer n e g o t i a t e d w i t h t h e u n i o n
a V o l u n t a r y T e r m i n a t i o n o f Employment Plan
("VTEP"), under
which employees c o u l d r e c e i v e severance pay i f t h e y e l e c t e d
t o r e s i g n and thus f o r e g o s e n i o r i t y and r e h i r e
Employees who had accepted
rights.
t h e VTEP a l l e g e d t h a t t h e y were
t o l d t h a t t h e y would be e l i g i b l e f o r r e h i r e b u t , when t h e y
a p p l i e d f o r r e h i r e a t new p o s i t i o n s , were t o l d t h a t t h e y
were i n e l i g i b l e due t o t h e i r acceptance o f VTEP.
They
b r o u g h t s t a t e law c l a i m s a l l e g i n g m i s r e p r e s e n t a t i o n s i n
c o n n e c t i o n w i t h VTEP.
The F i f t h C i r c u i t , n o t i n g t h a t
whether t h e r e was ERISA preemption
o f these c l a i m s depended
on whether VTEP was an ERISA p l a n , h e l d t h a t i t was n o t . I t
r e l i e d on t h e d e c i s i o n i n F o r t H a l i f a x Packing Co., I n c . v.
Covne. 482 U.S. 1 (1987) which t h e F i f t h
Circuit
�c h a r a c t e r i z e d as p r e s e n t i n g
the f a c t s o f Wells.
f a c t s "remarkably s i m i l a r " t o
I n F o r t H a l i f a x , t h e Supreme C o u r t h e l d
t h a t a Maine s t a t u t e w h i c h r e q u i r e d an employer t o make a
one-time severance payment t o employees a f f e c t e d by a p l a n t
c l o s i n g d i d n o t r e q u i r e c r e a t i o n o f an ERISA p l a n and was
thus n o t preempted by ERISA.
Unlike the facts i n Wells, t h e
Court i n F o r t H a l i f a x r e l i e d h e a v i l y on t h e f a c t t h a t t h e
Maine s t a t u t e d i d n o t r e q u i r e t h e e s t a b l i s h m e n t
o f any
a d m i n i s t r a t i v e a c t i v i t y t o pay b e n e f i t s which c o u l d
r i s e t o an ERISA p l a n .
See a l s o M a r s h a l l
give
v. Bankers L i f e
and Casualty Co.. 1991 WL 96476 ( C a l . App., 2 D i s t . )
( h o l d i n g , p r i n c i p a l l y on t h e b a s i s o f F o r t H a l i f a x , t h a t an
employer, which purchased a group i n s u r a n c e p o l i c y t o
provide employee b e n e f i t s b u t d i d n o t p l a y a s i g n i f i c a n t
r o l e i n a d m i n i s t e r i n g t h e b e n e f i t s , had n o t e s t a b l i s h e d an
ERISA p l a n ) ; B r i c k e r v . Mavtaa. 450 N.W.839 (Iowa 1990)
[11 E.B.C. 2677]
( c i t i n g F o r t H a l i f a x , c o u r t f i n d s no ERISA
preemption o f c l a i m s by former employees o f a l l e g e d
misrepresentations
by company's r e t i r e m e n t s p e c i a l i s t t h a t
t h e i r e n t i t l e m e n t t o an i n c r e a s e d
p e n s i o n b e n e f i t would n o t
be a f f e c t e d i f t h e y r e t i r e d on t h e day b e f o r e t h e i n c r e a s e
became e f f e c t i v e ; c o u r t a l s o r e l i e s on G r e e n b l a t t
v. The
Budd Co.. i n f r a , f o r t h e p r o p o s i t i o n t h a t a c l a i m
against
employer f o r b e n e f i t s r e l a t e s t o o i n d i r e c t l y t o a p l a n t o
warrant
preemption).
�2.
I n Perry v. P*I*E Nationwide,
I n c . , 872 F.2d
157 ( 6 t h C i r . 1989), employees i n a f i n a n c i a l l y d i s t r e s s e d
company agreed t o a wage giveback
p a r t i c i p a t i o n i n an ESOP.
i n return f o r
S e v e r a l months a f t e r
their
e l e c t i o n , t h e company was s o l d so t h a t p a r t i c i p a t i o n i n t h e
ESOP was w o r t h l e s s w h i l e t h e wage c u t was i r r e v o c a b l e . The
S i x t h C i r c u i t h e l d t h a t t h e i r s t a t e law c l a i m s o f breach o f
f i d u c i a r y d u t y and l a c k o f c o n s i d e r a t i o n were preempted
because t h e y r e l a t e d t o t h e ESOP.
I t a l s o h e l d , however,
t h a t s t a t e law c l a i m s o f f r a u d , m i s r e p r e s e n t a t i o n , c o e r c i o n
and promissory
e s t o p p e l were n o t preempted.
f o r t h i s h o l d i n g was " t h a t p r e e m p t i o n
The r a t i o n a l e
should apply t o a
s t a t e law c l a i m o n l y i f Congress has p r o v i d e d a remedy f o r
t h e wrong o r wrongs a s s e r t e d , " 872 F.2d a t 162.
On i t s
face, t h i s r a t i o n a l e c o n f l i c t s w i t h t h a t o f L i s t e r v. S t a r k ,
supra, and o t h e r cases which h o l d t h a t t h e l a c k o f a f e d e r a l
remedy does n o t a v o i d ERISA p r e e m p t i o n .
What t h e S i x t h
C i r c u i t may have been s a y i n g , however, i s t h a t t h e absence
i n ERISA o f a remedy f o r t h e c o n d u c t a t i s s u e —
r e s c i s s i o n o f t h e wage giveback
Congressional
—
here,
may be an i n d i c a t i o n o f
i n t e n t t h a t ERISA and ERISA preemption
not t o a p p l y t o t h i s t y p e o f c o n d u c t .
were
See a l s o S c o t t v.
G u l f O i l Corp.. 754 F.2d 1499, 1505-06 ( 9 t h C i r . 1985)
( c l a i m t h a t former employer n e g o t i a t e d over b e n e f i t s w i t h
new employer i n a t o r t i o u s manner t h a t d e p r i v e d employees o f
f u t u r e severance b e n e f i t s i s n o t preempted by ERISA; i t does
n o t i n v o l v e t h e a d m i n i s t r a t i o n o f a p l a n s i n c e no p l a n ever
�came i n t o e x i s t e n c e ) and G r e e n b l a t t v. The
F. Supp. 735,
742
(E.D.
Pa.
1987)
Budd Co. . 666
(claim arising
alleged misrepresentation of pension
from
b e n e f i t s i s not
preempted because " [ t ] h a t t h e s u b j e c t o f t h e
deception
concerned pension b e n e f i t s i s o n l y i n c i d e n t a l and
not
e s s e n t i a l t o the p l a i n t i f f ' s cause o f a c t i o n " ) .
C.
There i s a s m a l l b u t g r o w i n g
over whether or i n what c i r c u m s t a n c e s
s p l i t i n the c i r c u i t s
ERISA p e r m i t s e s t o p p e l
or s i m i l a r claims t o o b t a i n p l a n b e n e f i t s .
1.
Most c o u r t s , as i n L i s t e r v. S t a r k and
Straub
v. Western Union, supra. h o l d t h a t ERISA does not p e r m i t
such c l a i m s because t h e y amount t o o r a l m o d i f i c a t i o n s of a
p l a n i n v i o l a t i o n o f ERISA § 4 02's
requirement
be m a i n t a i n e d pursuant t o a w r i t t e n document.
t h a t a plan
The
such d e c i s i o n i s Nachwalter v. C h r i s t i e . 805 F.2d
( l l t h Cir.
956,
960
1986).
2.
A few r e c e n t d e c i s i o n s , however, have c r e a t e d
h o l e s i n t h e no-estoppel
900 F.2d
leading
112,
rule.
I n B l a c k v. TIC I n v . Corp..
114-15 ( 7 t h C i r . 1990),
the court, a f t e r
d e s c r i b i n g t h e c i r c u i t s as s p l i t b u t f a v o r i n g e s t o p p e l , h e l d
t h a t e s t o p p e l should a p p l y t o " c l a i m s f o r b e n e f i t s under
unfunded s i n g l e - e m p l o y e r w e l f a r e b e n e f i t p l a n s " b u t
expressed no o p i n i o n as t o i t s a p p l i c a t i o n i n o t h e r
situations.
Even t h e E l e v e n t h C i r c u i t , w h i l e a d h e r i n g t o
�its
a n t i - e s t o p p e l r u l e i n Nachwalter v. C h r i s t i e , supra, has
made s i g n i f i c a n t i n r o a d s
into that rule.
I n Kane v . Aetna
L i f e I n s . . 893 F.2d 1283 ( l l t h C i r . 1990), t h e c o u r t h e l d
t h a t estoppel
c o u l d be a p p l i e d t o e n f o r c e
oral
i n t e r p r e t a t i o n s by p l a n r e p r e s e n t a t i v e s o f ambiguous p l a n
provisions.
I n N a t i o n a l Companies H e a l t h
Joseph's H o s p i t a l . 13 E.B.C. 2041,
Plan v. S t .
2045-46 ( l l t h C i r . 1990),
t h e c o u r t extended t h e a p p l i c a t i o n o f e s t o p p e l
t o what i t
c h a r a c t e r i z e d as " i n f o r m a l w r i t t e n i n t e r p r e t a t i o n s o f a
p l a n " , i n t h i s case a memorandum e x p l a i n i n g t h e evenrs which
would t e r m i n a t e COBRA c o n t i n u a t i o n coverage.
Ill.
Preemption and Damage Claims A g a i n s t
Insurers
As noted above, t h e c o u r t s have g e n e r a l l y , b u t n o t
u n i f o r m l y , h e l d t h a t s t a t e law c l a i m s
relating t o benefits
b r o u g h t a g a i n s t p l a n s and employers a r e preempted.
Claims
a g a i n s t i n s u r e r s and t h e i r agents, however, have produced
more mixed r e s u l t s .
In
791
Farlow v. Union C e n t r a l L i f e I n s . Co.. 874 F.2d
( l l t h C i r . 1989), a p l a n p a r t i c i p a n t a l l e g e d t h a t an
i n s u r a n c e agent, i n an e f f o r t t o i n d u c e t h e employer t o
s w i t c h i n s u r a n c e coverage, made f a l s e r e p r e s e n t a t i o n s
t h e n a t u r e o f t h e new coverage.
about
A f t e r l e a r n i n g t h a t t h e new
p o l i c y d i d n o t p r o v i d e m a t e r n i t y o r pregnancy coverage f o r
t h e p a r t i c i p a n t ' s w i f e , t h e p a r t i c i p a n t and w i f e b r o u g h t
8
�s t a t e law
and
causes of a c t i o n a g a i n s t the i n s u r e r ,
i t s agent,
h i s agency, i n c l u d i n g common law c l a i m s o f
m i s r e p r e s e n t a t i o n and
n e g l i g e n c e and
a statutory claim
v i o l a t i o n o f t h e Alabama " t w i s t i n g " s t a t u t e .
C i r c u i t , holding
t h a t the conduct a l l e g e d
w i t h t h e r e f u s a l t o pay
fraudulent
The
was
llth
"intertwined
b e n e f i t s " , d i s m i s s e d t h e common-law
c l a i m s on t h e b a s i s of ERISA preemption.
I t then held
the s t a t e s t a t u t e d i d not c r e a t e a p r i v a t e r i g h t o f
thus a v o i d i n g a decision
as t o whether the s t a t u t e
"saved" from p r e e m p t i o n by ERISA §
had
So.2d 235
(Ala.
held,
t h a t an employee's c l a i m
been f r a u d u l e n t l y induced by an HMO
switch
action,
was
[ 1 1 E.B.C. 1751], the Alabama Supreme C o u r t
a f t e r t h e Farlow d e c i s i o n ,
that
514(b)(2)(A).
I n HealthAmerica v. Menton. 551
1989)
for
and
that
he
i t s agent t o
h i s coverage under an ERISA p l a n from i n s u r a n c e
coverage t o t h e HMO
was
not preempted by ERISA.
r e l i e d p r i n c i p a l l y on P e r r y v. P*I*E N a t i o n w i d e ,
supra, f o r t h e p r o p o s i t i o n
The
Inc.,
t h a t preemption s h o u l d n o t
found where ERISA does not p r o v i d e a remedy f o r t h e
asserted.
The
court
court also held
be
wrong
t h a t , even i f t h e common-law
c l a i m s were h e l d preempted, i t would h o l d t h a t a
non-
preempted cause o f a c t i o n c o u l d be b r o u g h t under t h e Alabama
"twisting" statute.
courts —
On
i n t e r p r e t i n g the s t a t e m e n t s of t h e Supreme C o u r t
i n P i l o t L i f e I n s . Co.
ERISA was
t h i s l a t t e r p o i n t , a number o f
Dedeaux. 481 U.S.
41
(1987) t h a t
i n t e n d e d t o p r o v i d e an e x c l u s i v e scheme f o r
�enforcement o f b e n e f i t c l a i m s —
have h e l d t h a t ERISA
preempts s t a t e s t a t u t o r y causes o f a c t i o n f o r m i s h a n d l i n g
c l a i m s r e l a t e d t o an ERISA p l a n .
of
Kanne v. C o n n e c t i c u t
General L i f e I n s . Co.. 867 F.2d 489 ( 9 t h C i r . 1988); I n r e
L i f e I n s . Co. o f N o r t h America. 857 F.2d 1190 ( 8 t h C i r .
1988); A n s c h u l t z v. C o n n e c t i c u t General L i f e I n s . Co.. 850
F.2d
1467 ( l l t h C i r . 1988).
See a l s o M u l l e n i x v. Aetna L i f e
and Cas. I n s . Co.. 912 F.2d 1406, 1412-13 ( l l t h C i r . 1990)
( l l t h C i r c u i t adheres t o i t s a n a l y s i s i n Farlow and r e j e c t s
o p i n i o n i n HealthAmerica v. Menton as n o t p e r s u a s i v e on
preemption i s s u e ) .
In Perkins
(5th
v. Time I n s . Co., 898 F.2d 470, 473
C i r . 1990), on f a c t s s i m i l a r t o Farlow, t h e c o u r t h e l d
t h a t a c l a i m f o r t o r t i o u s breach o f c o n t r a c t a g a i n s t an
i n s u r e r was preempted by ERISA because i t r e l a t e d t o an
ERISA p l a n and would be preempted even i f t h e a c t i o n were
r e c h a r a c t e r i z e d as based on M i s s i s s i p p i ' s
statute.
"twisting"
W i t h o u t m e n t i o n i n g Farlow, however, t h e n
court
a l s o h e l d t h a t t h e same c l a i m a g a i n s t t h e i n s u r a n c e agent
was n o t preempted because i t r e l a t e d o n l y i n d i r e c t l y t o an
ERISA p l a n and i n v o l v e d a c t i v i t y
formation.
p r i o r t o t h e plan's
See a l s o . Isaac v. L i f e I n v e s t o r s I n s . Co. o f
America. 749 F. Supp. 855, 864 n.3 (E.D. Tenn. 1990) (case
i n v o l v i n g f a c t s s i m i l a r t o Farlow and P e r k i n s
was f i l e d i n
s t a t e c o u r t , removed t o d i s t r i c t c o u r t i n l l t h C i r c u i t , and
then t r a n s f e r r e d t o d i s t r i c t c o u r t i n 6 t h C i r c u i t ;
10
court
�concluded i t was c o n s t r a i n e d t o f i n d no p r e e m p t i o n on b a s i s
0
f Perry v. P*I*E N a t i o n w i d e , supra. w h i l e o b s e r v i n g " t h e
c o r r e c t n e s s o f t h e . . . d e c i s i o n i n P e r r y . . . c o u l d be
the
IV.
subject of l e g i t i m a t e debate.").
Preemption
Exists
Where a P a r a l l e l F e d e r a l Claim
Potentially
;
Because o f t h e b r e a d t h o f ERISA p r e e m p t i o n and t h e
e x c l u s i v e n a t u r e o f i t s enforcement
scheme, one would
t h a t ERISA preemption would always a p p l y where ERISA
think
itself
p r o v i d e s a cause o f a c t i o n t o remedy c e r t a i n c o n d u c t .
are,
There
however, areas i n which t h e c o u r t s have r e c o g n i z e d t h e
e x i s t e n c e o f p o t e n t i a l l y p a r a l l e l f e d e r a l and s t a t e c l a i m s .
I n p a r t , t h e d e c i s i o n s i n these areas seem t o r e c o g n i z e t h e
fragility
o f t h e ERISA c l a i m a s s e r t e d and t o be u n w i l l i n g t o
preempt more s t r a i g h t f o r w a r d s t a t e law c l a i m s .
One area t h a t has o c c a s i o n e d much r e c e n t
l i t i g a t i o n i s over assigned c l a i m s , t y p i c a l l y c l a i m s brought
by a m e d i c a l s e r v i c e p r o v i d e r under ERISA as t h e assignee o f
a participant's benefits.
Although t h e courts are s t i l l
d i v i d e d as t o whether such an assignee has s t a n d i n g t o
a s s e r t ERISA c l a i m s , t h e w e i g h t o f a u t h o r i t y f a v o r s such
standing.
See Kennedy v. C o n n e c t i c u t General
L i f e I n s . Co.,
924 F.2d 698, 699-701 ( 7 t h C i r . 1991) ( c o l l e c t i n g cases and
f i n d i n g ERISA j u r i s d i c t i o n over assignee's c l a i m ) .
11
Even
�where ERISA s t a n d i n g i s recognized,
however, t h e w e i g h t o f
a u t h o r i t y h o l d s t h a t t h e e x i s t e n c e o f an ERISA c l a i i n does
n o t r e q u i r e preemption o f a s t a t e law c l a i m by a p r o v i d e r
which would e x i s t w i t h o u t t h e assignment.
I n Memorial
H o s p i t a l v. Northbrook L i f e I n s . Co., 904 F.2d 236 ( 5 t h C i r .
1990), t h e F i f t h C i r c u i t —
r e i n t e r p r e t i n g , i n l i g h t of
Mackev v . L a n i e r C o l l e c t i o n s Agency & S e r v i c e ,
I n c . , 4 86
U.S. 825 (1988), i t s own d e c i s i o n i n Hermann H o s p i t a l v.
MEBA M e d i c a l & B e n e f i t s Plan. 845 F.2d 1286 ( 5 t h C i r . 1988)
which appeared t o have reached a c o n t r a r y c o n c l u s i o n
—
held
t h a t t h e p r o v i d e r ' s s t a t e law c l a i m was b r o u g h t " i n i t s
independent s t a t u s as a h o s p i t a l " and was n o t a f f e c t e d by
i t s s e p a r a t e ERISA c l a i m .
Likewise,
claims by p l a n s o r p l a n
against plan service providers —
fiduciaries
e.g., m a l p r a c t i c e
a g a i n s t a t t o r n e y s o r accountants —
claims
have been h e l d n o t
preempted, even though i n c e r t a i n c i r c u m s t a n c e s an ERISA
c l a i m m i g h t a l s o be brought i f t h e p r o v i d e r k n o w i n g l y
p a r t i c i p a t e d i n a breach o f f i d u c i a r y d u t y o r p a r t i c i p a t e d
i n a p r o h i b i t e d t r a n s a c t i o n under ERISA.
Philadelphia District
1146,
See P a i n t e r s o f
Council v. P r i c e Waterhouse, 879 F.2d
1152-53 and n.7 (3d C i r . 1989) (no p r e e m p t i o n o f
m a l p r a c t i c e c l a i m ) and Gibson v. P r u d e n t i a l I n s . Co. o f
America. 915 F.2d 414, 417-18 ( 9 t h C i r . 1990) (damage c l a i m
a g a i n s t a n o n - f i d u c i a r y c l a i m s a d m i n i s t r a t o r i s preempted;
c o u r t says t h a t t h e e x i s t e n c e o f some ERISA remedy a g a i n s t
12
�non-fiduciaries
"suggests t h a t Congress i n t e n d e d t o i n c l u d e
t h e i r b e h a v i o r under ERISA.")
v.
T^»qislative Proposals on Preemption
There are now b i l l s i n b o t h Houses o f Congress,
S.794 and H.R.1602 which would o v e r r u l e
P i l o t L i f e I n c . Co.
y. Dedeaux, supra, and e l i m i n a t e ERISA p r e e m p t i o n as i t
a p p l i e s t o i n s u r e r s t h a t d e c i d e b e n e f i t c l a i m s under ERISA
plans.
The e f f e c t o f t h i s l e g i s l a t i o n ,
i f enacted, would be
t o r e i n s t a t e s t a t e law causes o f a c t i o n , i n c l u d i n g damage
remedies, as t h e y would a p p l y w i t h o u t
13
ERISA p r e e m p t i o n .
�Issue B r i e f No. 609
VVcismngton
University
N A T I O N A L H E A L T H POLICY FOKI M
THE ROLE OF FEDERAL STANDARDS IN HEALTH SYSTEMS REFORM:
H W MUCH LEASH SHOULD ERISA GIVE THE STATES?
O
w i t h presentations byP a t r i c i a Ann B u t l e r
Attorney and Health Policy
Consultant
Boulder, Colorado
Mary Jo O'Brien
Deputy Commissioner
Minnesota Department of Health
Michael S. Gordon
At torney-at-Law
Washington, D.C.
Meg H. O'Donnell
General Counsel
Vermont Health Care A u t h o r i t y
t o be followed by a discussion w i t h
several p a n e l i s t s knowledgeable about ERISA issues
Wednesday. November 18, 1992
8:30 a.m. t o noon
210 Cannon House Office B u i l d i n g
Independence and New Jersey Avenues, S.E.
I f you would l i k e to attend this meeting, please c a l l Dagny
Canard a t (202) 872-1392 as soon as possible.
With h e a l t h systems reform e f f o r t s bogged down a t the f e d e r a l
l e v e l , many states are f o r g i n g ahead w i t h plans t o increase access
to health insurance and t o c o n t r o l costs. Some have thrown down
the gauntlet and declared dates by which t h e i r c i t i z e n s w i l l be
guaranteed h e a l t h coverage, w h i l e leaving the d e t a i l s of implement a t i o n f o r l a t e r . A few states have embarked on complex programs
to r e s t r u c t u r e t h e i r h e a l t h care financing systems.
However,
v i r t u a l l y a l l s t a t e proposals t o finance h e a l t h care f o r the
uninsured face a formidable b a r r i e r :
the f e d e r a l Employee
Retirement Income Security Act of 1974 (ERISA). State governments
have asked f o r waivers from ERISA t o allow them t o tax and r e g u l a t e
s e l f - i n s u r e d employee b e n e f i t plans and t o take other measures t o
broaden t h e base used t o finance care f o r t h e uninsured and
indigent. But many corporations and unions a d m i n i s t e r i n g m u l t i state h e a l t h plans object t o ERISA waivers on the grounds t h a t
having t o conform t o a checkerboard of s t a t e reguirements would be
�- 2 onerous. I n a d d i t i o n , union r e p r e s e n t a t i v e s have expressed concern
t h a t a l l o w i n g t h e s t a t e s t o conduct l a r g e - s c a l e experiments would
d e f l a t e h e a l t h systems r e f o r m e f f o r t s a t t h e f e d e r a l l e v e l .
ERISA, i n e f f e c t , a l l o w s employers t o o f f e r t h e same b e n e f i t
package t o employees throughout t h e c o u n t r y w h i l e a v o i d i n g s t a t e
requirements such as mandated b e n e f i t s , premium t a x e s , and
c o n t r i b u t i o n s t o h i g h - r i s k p o o l s t o cover people t h a t o t h e r w i s e
would n o t be able t o a f f o r d h e a l t h i n s u r a n c e . B a r r i n g changes i n
the law o r new i n t e r p r e t a t i o n s by t h e c o u r t s , ERISA may stand i n
the way o f most, i f n o t a l l , a t t e m p t s by s t a t e s t o t a x s e l f - i n s u r e d
plans i n o r d e r t o cover t h e u n i n s u r e d .
So far, Congress has resisted granting ERISA exemptions,
except in the case of Hawaii, which began requiring employers to
offer health insurance just before ERISA's enactment. (See Issue
Brief No. 555, "Expanding Access to Health Care in the States:
Experimenting with Mandates in Hawaii and Massachusetts.")
According to John Lewin, M.D., director of the state's Department
of Health, a reform proposal made by President Nixon to Congress in
1974 was the model for Hawaii's employer mandate, which was
included in the Prepaid Health Care Act (PHCA). After a challenge
by the Standard Oil Company in 1976, a federal appellate court
ruled that the law violated ERISA; in 1981, the Supreme Court
upheld the appellate court's decision, forcing the issue back to
Congress. In 1983 Congress granted the state an exemption from
ERISA. Under PHCA and subsequent legislation, Hawaii has come by
far the closest of all the states to establishing universal
coverage; s t a t e sources r e p o r t t h a t o n l y about 3.75 p e r c e n t of i t s
residents l a c k h e a l t h insurance.
The s t a t e has, however, been
seeking t o broaden i t s ERISA w a i v e r , whose p r o v i s i o n s were f r o z e n
when i t was g r a n t e d .
While Hawaii seeks a broader exemption f r o m ERISA, s e v e r a l
other states,
among them Colorado,
Florida,
Massachusetts,
Minnesota, Oregon, and Vermont, have embarked on h e a l t h r e f o r m
e f f o r t s t h a t may be c o n t i n g e n t on ERISA exemption.
S t a t e s face
growing p r e s s u r e b o t h t o p r o v i d e access t o h e a l t h i n s u r a n c e and t o
c o n t a i n t h e c o s t s o f Medicaid and h e a l t h coverage f o r s t a t e
employees.
S t a t e governments a l r e a d y spend an average of 20
p e r c e n t o f t h e i r t o t a l budgets on h e a l t h - r e l a t e d programs, w h i l e ,
i n some s t a t e s , almost o n e - q u a r t e r o f t h e p o p u l a t i o n i s u n i n s u r e d ,
a c c o r d i n g t o t h e General A c c o u n t i n g O f f i c e (GAO).
Caught between p r e s s u r e from t h e s t a t e s t o g r a n t ERISA waivers
and p r e s s u r e from t h e sponsors o f m u l t i - s t a t e h e a l t h p l a n s n o t t o
do so, and unable t o reach consensus over h e a l t h systems r e f o r m ,
the f e d e r a l govemment must c o n s i d e r t h e r a m i f i c a t i o n s o f s t a t e s '
o v e r h a u l i n g t h e i r h e a l t h systems.
I n t h i s context, several
q u e s t i o n s a r i s e , i n c l u d i n g an e x a m i n a t i o n o f t h e e x t e n t t o which
ERISA governs h e a l t h b e n e f i t p l a n s .
E x a c t l y what s h o u l d t h e
f e d e r a l government r e q u i r e of employee b e n e f i t plans?
I f ERISA's
preemption o f s t a t e s ' a b i l i t y t o r e g u l a t e employee b e n e f i t plans i s
too r i g i d t o a l l o w needed s t a t e r e f o r m s , i s t h e f e d e r a l law t o o
- ^
�- 3f l e x i b l e i n other areas? For example, ERISA imposes few substant i v e requirements, such as minimum b e n e f i t standards and reserve
requirements, on employee h e a l t h plan sponsors. On the other hand,
should ERISA allow c e r t a i n types of employee health plan sponsors,
e s p e c i a l l y those administering so-called s e l f - i n s u r e d plans, t o
escape some s t a t e regulations?
Should a l l plans f a l l i n g under
ERISA's j u r i s d i c t i o n , i n c l u d i n g those t h a t are f u l l y insured, be
exempt from s t a t e insurance regulations t h a t add unnecessary costs?
This Forum session w i l l examine what the federal r o l e might be
i n r e g u l a t i n g p r i v a t e health benefits i n the context of health
systems reform, regardless of whether the states or the federal
government end up taking the lead.
Among the issues t o be
discussed i s exactly what should be held constant a t the federal
l e v e l i f the states are allowed t o move i n diverse d i r e c t i o n s .
What p r o t e c t i o n s should ERISA and other federal laws o f f e r people
covered by p r i v a t e health plans? How should the r e s p o n s i b i l i t y f o r
ensuring these p r o t e c t i o n s be allocated among the s t a t e s , the
federal government, plan sponsors, and individuals?
The Effects of ERISA
The primary reason f o r the passage of ERISA was t o insure the
solvency and equity of the nation's p r i v a t e pension plans.
In
d r a f t i n g the law, Congress included l i m i t e d f i d u c i a r y and d i s c l o sure standards governing employee welfare b e n e f i t plans, i n c l u d i n g
health plans, but i n t e n t i o n a l l y d i d not adopt the kind of substant i v e requirements t h a t i t applied to pensions plans, because a t the
time there appeared t o be l i t t l e or no need to do so. Thus, ERISA
prescribes minimum p a r t i c i p a t i o n , vesting, and funding standards
for p r i v a t e - s e c t o r pension plans offered by employers or employee
organizations but does not apply these standards t o h e a l t h plans.
ERISA does not determine a minimum standard f o r b e n e f i t s o f f e r e d
under a h e a l t h plan, j u s t as i t does not set a minimum l e v e l of
b e n e f i t s f o r p r i v a t e pension plans.
In the h e a l t h care arena, ERISA's greatest impact r e s u l t s not
from what i t requires, but r a t h e r from what i t prevents the states
from doing. The McCarran-Ferguson Act, passed i n 1945, established
the r e g u l a t i o n of insurance as an area of exclusive s t a t e j u r i s d i c t i o n . I n i t s preemption clause, ERISA, i n t u r n , "supersedes" a l l
state laws r e l a t i n g t o employee b e n e f i t plans, thereby p l a c i n g the
r e g u l a t i o n of such plans under exclusive federal j u r i s d i c t i o n .
ERISA s t i p u l a t e s , however, t h a t states can continue t o regulate
insurance. Therefore, states i n d i r e c t l y can regulate f u l l y insured
employee b e n e f i t plans by r e g u l a t i n g the insurers from which
employers purchase insurance, but they cannot regulate s e l f - i n s u r e d
plans. The net e f f e c t i s t h a t — without there having been serious
congressional consideration of the p o s s i b i l i t y — ERISA has ended up
p r o v i d i n g a mechanism through which health plan sponsors can
u n i l a t e r a l l y escape s t a t e insurance r e g u l a t i o n by deciding t o s e l f insure. ERISA s t i p u l a t e s t h a t neither an employee b e n e f i t plan nor
any t r u s t established under such a plan s h a l l be deemed t o be
�engaged i n t h e business o f i n s u r a n c e f o r t h e purpose of any s t a t e
insurance laws.
When ERISA was passed, o n l y a s m a l l f r a c t i o n o f h e a l t h plans
were s e l f - i n s u r e d ; today, by most e s t i m a t e s , more than h a l f t h e
n a t i o n ' s workers w i t h p r i v a t e h e a l t h coverage a r e e n r o l l e d i n s e l f i n s u r e d p l a n s . H e a l t h p l a n sponsors face many i n c e n t i v e s t o a v o i d
s t a t e r e g u l a t i o n , which may i n c l u d e mandated b e n e f i t requirements,
premium taxes, c o n t r i b u t i o n s t o r i s k p o o l s , payments t o guarantee
funds, requirements t o p a r t i c i p a t e i n community-rated
insurance
p o o l s , and standards g o v e r n i n g r e s e r v e s and c o n t r i b u t i o n s .
I n t e n t i o n a l l y o r o t h e r w i s e , ERISA's preemption clause has
f a c i l i t a t e d a d r a m a t i c e r o s i o n o f t h e ambit o f s t a t e h e a l t h
insurance r e g u l a t i o n , a process t h a t continues as i n c r e a s i n g l y
s m a l l e r companies seek t o s e l f - i n s u r e w i t h t h e c r e a t i v e use o f
stop-loss insurance.
The s h r i n k i n g number o f workers i n f u l l y
i n s u r e d h e a l t h p l a n s poses a problem f o r s t a t e s seeking t o f i n a n c e
coverage o f t h e u n i n s u r e d ; i n r e c e n t years, some s t a t e s have taxed
i n s u r e r s t o h e l p f i n a n c e l i m i t e d programs t o cover t h e u n i n s u r e d ,
such as insurance p o o l s f o r h i g h - r i s k i n d i v i d u a l s .
States also
have mandated systems t h r o u g h which some h e a l t h plans s u b s i d i z e
o t h e r s through p r i c e d i f f e r e n t i a l s , community r a t e s , o r " r e i n s u r ance" p o o l s . Some s t a t e s have l e v i e d taxes on p r o v i d e r s t o fund
uncompensated care r a t h e r than c o n c e n t r a t i n g t h e burden on t h e
narrowing base o f f u l l y i n s u r e d p l a n s . A l l such taxes and subsidy
mechanisms have been c h a l l e n g e d o r a r e l i k e l y t o be c h a l l e n g e d
under ERISA.
I f ERISA c o n s t r a i n s s t a t e s f r o m f i n a n c i n g modest attempts t o
cover the u n i n s u r e d and from h a v i n g some p l a n s s u b s i d i z e o t h e r s , . i t
c e r t a i n l y looms as a b a r r i e r t o more sweeping h e a l t h systems r e f o r m
p r o p o s a l s . Some b e n e f i t e x p e r t s argue i t i s w i t h i n the power o f
s t a t e l e g i s l a t o r s t o f i n a n c e u n i v e r s a l h e a l t h insurance programs
t h r o u g h income o r c o r p o r a t e t a x e s w i t h o u t r u n n i n g a f o u l o f ERISA,
but t h a t s t a t e lawmakers s i m p l y l a c k t h e p o l i t i c a l f o r t i t u d e t o do
so; s t a t e governments would r u n t h e r i s k o f t a x p a y e r s ' v i e w i n g such
v i s i b l e new taxes as an unnecessary burden heaped on a h e a l t h care
system t h a t a l r e a d y i s t o o expensive.
Other l e g a l e x p e r t s argue
t h a t even broad-based t a x e s , such as income and c o r p o r a t e taxes,
would v i o l a t e ERISA i f t h e y were p a r t o f a r e f o r m t h a t had a
s i g n i f i c a n t impact on employee b e n e f i t p l a n s . For example, under
some r e f o r m plans a broad-based t a x i s used t o f i n a n c e an insurance
system t h a t would d i s p l a c e p r i v a t e h e a l t h p l a n s . An argument can
be made t h a t making p r i v a t e p l a n s go away o r p r o v i d i n g a s t r o n g
i n c e n t i v e t h a t would l e a d t o t h e i r disappearance would have an
"impact" on them.
State Proposals
on Shaky Ground
Most s t a t e s t r a t e g i e s designed t o r e f o r m t h e h e a l t h insurance
system face t h e r i s k o f being o v e r t u r n e d i n c o u r t because t h e y
would cause some impact t o employee b e n e f i t p l a n s . I n an August
�- 51992 paper prepared f o r the National Academy f o r State Health
Policy, P a t r i c i a B u t l e r , J.D., o u t l i n e d the following i n i t i a t i v e s
as l i k e l y t o be challenged under ERISA:
•
"Pay or play" laws, where an employer i s required t o pay a tax (that funds
a public health plan) but i s given a c r e d i t f o r health benefits offered t o
employees.
•
Universal p u b l i c l y funded and administered health programs, such as
single- or multiple-payer models (whether or not funded by p a y r o l l or
other taxes).
•
State h o s p i t a l r a t e - s e t t i n g programs that fund uncompensated care (at
least as applied t o self-funded health plans).
•
State provider taxes earmarked f o r health programs f o r the uninsured or
the poor (at l e a s t as applied t o self-funded plans).
•
Regulating "stop loss" insurance c a r r i e r s t h a t share r i s k with self-funded
health plans.
C o n f l i c t s between ERISA and Subsidizing Insurance Pools
I n a general sense, ERISA has i t s o r i g i n s i n common law
p e r t a i n i n g t o t r u s t s and f i d u c i a r i e s . Under t h i s area of law, a
person responsible f o r assets held i n t r u s t f o r someone else has a
duty t o handle and invest them prudently and s o l e l y f o r the b e n e f i t
of the person f o r whom the assets are being held. Both ERISA and
the I n t e r n a l Revenue Code contain an exclusive b e n e f i t r u l e
r e q u i r i n g t h a t plan assets be used e x c l u s i v e l y t o provide benefits
and pay a d m i n i s t r a t i v e expenses f o r the p a r t i c i p a n t s and beneficiar i e s i n the plan.
Even assuming the ERISA preemption issue were
overcome, unless ERISA were amended i n other respects, i t i s open
to question whether any l e g i s l a t i o n r e q u i r i n g pooling among plans
would v i o l a t e the exclusive b e n e f i t r u l e . As health care costs
continue t o r i s e u n c o n t r o l l a b l y , sponsors of health plans w i t h
average or below-average costs are more l i k e l y t o use the ERISA
preemption argument t o r e s i s t s t a t e govemment e f f o r t s t o have them
subsidize the cost of care f o r the uninsured or f o r plans covering
disproportionate numbers of s i c k people r e q u i r i n g r e l a t i v e l y higher
medical expenditures.
Unable t o t a x s e l f - i n s u r e d h e a l t h plans d i r e c t l y t o help
shoulder the burden of care f o r the uninsured, some states have
attempted t o include them i n d i r e c t l y by taxing hospitals and
physicians, whose charges are inputs t o the cost of both f u l l y
insured and s e l f - i n s u r e d plans. Another subsidy strategy i s stateenforced p r i c e d i f f e r e n t i a l s f o r d i f f e r e n t categories of payers.
I n May 1992, a f e d e r a l D i s t r i c t Court dealt such state s t r a t e g i e s
a blow when i t barred New Jersey from enforcing state h o s p i t a l
r a t e - s e t t i n g r e g u l a t i o n s t h a t required s e l f - i n s u r e d plans t o pay
charges exceeding a h o s p i t a l ' s a c t u a l cost of care.
I n a suit
brought against the s t a t e and 70 h o s p i t a l s by 14 s e l f - i n s u r e d ,
j o i n t l y administered union h e a l t h and welfare funds, the court held
that ERISA preempts s t a t e r e g u l a t i o n s allowing hospitals t o include
�- 6 i n t h e i r charges costs t h e y i n c u r t o cover t h e u n i n s u r e d , t o
s u b s i d i z e t h e Medicare program, and t o g i v e d i s c o u n t s t o o t h e r
types o f b e n e f i t plans. While the New Jersey d e c i s i o n i s under
appeal, a s e l f - i n s u r e d u n i o n p l a n has sued t h e s t a t e of Minnesota,
c l a i m i n g t h a t the s t a t e ' s r e c e n t l y enacted 2 p e r c e n t t a x on h e a l t h
care p r o v i d e r s v i o l a t e s ERISA.
More r e c e n t l y , f u l l y i n s u r e d p l a n s , which f a l l under the
j u r i s d i c t i o n of b o t h s t a t e insurance r e g u l a t i o n s and ERISA, have
begun u s i n g an ERISA preemption argument t o c h a l l e n g e s t a t e mandated h o s p i t a l surcharges, as w e l l .
I n a l a w s u i t f i l e d i n the
U.S. D i s t r i c t Court of Manhattan, the H e a l t h I n s u r a n c e A s s o c i a t i o n
of America and T r a v e l e r s C o r p o r a t i o n argue t h a t New York s t a t e
cannot r e q u i r e employee b e n e f i t p l a n s , b o t h f u l l y i n s u r e d and s e l f i n s u r e d , and non-Medicaid h e a l t h maintenance o r g a n i z a t i o n s (HMOs)
t o pay surcharges on i n p a t i e n t h o s p i t a l b i l l s . At i s s u e a r e a 13
p e r c e n t p r i c e d i f f e r e n t i a l g i v e n t o Blue Cross; an 11 p e r c e n t
surcharge on commercial i n s u r e r s t h a t goes i n t o t h e s t a t e g e n e r a l
revenue f u n d ; and a 9 p e r c e n t surcharge f o r p a t i e n t s covered by
HMOs t h a t a l s o goes i n t o t h e s t a t e g e n e r a l revenue fund.
I t i s w o r t h n o t i n g t h a t the sponsors o f some p u b l i c - s e c t o r
h e a l t h p l a n s , which are not covered by ERISA, a l s o a r e s e e k i n g t o
a v o i d p a r t i c i p a t i o n i n s t a t e f i n a n c i n g systems designed t o s u b s i d i z e care f o r t h e i n d i g e n t and u n i n s u r e d . The f e d e r a l government
r e c e n t l y o r d e r e d i n s u r e r s c o v e r i n g f e d e r a l employees i n C o n n e c t i c u t
t o s t o p p a y i n g a t a x t h a t h e l p s h o s p i t a l s o f f s e t the c o s t o f
p a t i e n t s unable t o pay f o r themselves.
The s t a t e has sued the
O f f i c e o f Personnel Management f o r f a i l i n g t o make t h e payments.
Court r u l i n g s concerning how much ERISA a l l o w s one p l a n t o
s u b s i d i z e care f o r people o u t s i d e the p l a n n o t o n l y may s c u t t l e
s t a t e a t t e m p t s t o r e d i s t r i b u t e h e a l t h care d o l l a r s but a l s o may
a f f e c t employers' a b i l i t y t o n e g o t i a t e d i s c o u n t s w i t h p r o v i d e r s .
GAO
Recommendations
A GAO r e p o r t , p u b l i s h e d i n June 1992, c a u t i o u s l y o u t l i n e s a
p o s s i b l e t r a d e - o f f i n which Congress might g i v e s t a t e s more
f l e x i b i l i t y t o develop comprehensive i n s u r a n c e r e f o r m s , w h i l e a t
the same t i m e imposing c o n d i t i o n s g o v e r n i n g l i m i t e d ERISA w a i v e r s .
A c c o r d i n g t o t h e GAO r e p o r t :
States are hampered by the ERISA preemption p r o v i s i o n , which
makes i t d i f f i c u l t t o design and implement innovative health care
reforms. I f the Congress wants t o give states more f l e x i b i l i t y t o
develop comprehensive reforms, i t should consider whether t o amend
ERISA so t h a t the Department of Labor can give states a l i m i t e d waiver
f o r ERISA's preemption clause i n order t o develop innovative approaches
to employer-based health insurance. The Congress could define minimum
standards — governing such factors as benefits packages, extent of
coverage, and terms under which the waiver might be revoked - t h a t a
state must meet to. receive and maintain such a waiver.
- -7
�- 7A f t e r l e a v i n g s u b s t a n t i v e r e g u l a t i o n s o u t o f ERISA f o r y e a r s , t h e
f e d e r a l government now may c o n s i d e r imposing more d e t a i l e d
s t a n d a r d s , o n l y a f t e r s e v e r a l s t a t e s have taken t h e i n i t i a t i v e on
reform.'
Medicare, Medicaid Waivers Also Requested
Both Massachusetts and Oregon have l e g i s l a t e d p l a y - o r - p a y
r e f o r m schemes t h a t have y e t t o be implemented.
Although both
i n i t i a t i v e s were designed t o be c o m p a t i b l e w i t h ERISA, i t i s
u n c e r t a i n whether e i t h e r w i l l w i t h s t a n d an ERISA c h a l l e n g e i n
court.
F l o r i d a , Minnesota, and Vermont a l s o have enacted compreh e n s i v e r e f o r m p r o p o s a l s t h a t would a f f e c t p r i v a t e employee b e n e f i t
plans.
To f i n a n c e coverage f o r t h e u n i n s u r e d — a group spanning
b o t h those i n s i d e t h e p r i v a t e work f o r c e and those o u t s i d e i t s t a t e governments a r e seeking waivers n o t o n l y from ERISA b u t a l s o
f r o m t h e r u l e s g o v e r n i n g M e d i c a i d and Medicare.
This summer,
Oregon's r e f o r m package was d e a l t a s e r i o u s blow when DHHS denied
i t a w a i v e r needed t o s h o r t e n t h e l i s t o f m e d i c a l s e r v i c e s covered
by M e d i c a i d i n exchange f o r broadening t h e group o f people t h a t t h e
program would cover.
The reason g i v e n f o r r e j e c t i n g Oregon's
r a t i o n i n g p r o p o s a l was t h a t i t v i o l a t e d t h e Americans w i t h
D i s a b i l i t i e s Act.
W i t h debate over h e a l t h systems r e f o r m g r i d l o c k e d a t t h e
f e d e r a l l e v e l , s t a t e governments have become i n c r e a s i n g l y f r u s trated.
D u r i n g t h e summer, s e v e r a l governors demanded t h a t t h e
a d m i n i s t r a t i o n and Congress remove l e g a l b a r r i e r s t o comprehensive
reform a t the state l e v e l .
Waiver B i l l s
B i l l s designed t o g i v e t h e s t a t e s l i m i t e d exemptions from ERISA
f a i l e d t o pass d u r i n g t h e 102nd Congress. However, t h e d i s c u s s i o n
t h e y s t i m u l a t e d demonstrates t h e need t o d e f i n e more c l e a r l y t h e
f e d e r a l r o l e i n r e g u l a t i n g health b e n e f i t s , while
possibly
foreshadowing key elements o f f u t u r e debate over n a t i o n a l h e a l t h
systems r e f o r m .
Sens. P a t r i c k J. Leahy (D-Vt.) and D a v i d Pryor (D-Ark.)
sponsored a b i l l t h a t would f a c i l i t a t e s t a t e - b a s e d h e a l t h r e f o r m by
e s t a b l i s h i n g a f e d e r a l commission t h a t c o u l d g r a n t ERISA, M e d i c a i d ,
and Medicare w a i v e r s i f s t a t e s met c e r t a i n c o n d i t i o n s .
At a
September 9 h e a r i n g b e f o r e t h e Senate Finance Committee, s e v e r a l
g o v e r n o r s t e s t i f i e d t h a t they needed t h e w a i v e r s t o implement
s t r a t e g i e s that include:
• l e v y i n g assessments t o c r e a t e s t a t e w i d e p o o l i n g arrangements,
• r e q u i r i n g employers t o e i t h e r o f f e r a s t a n d a r d b e n e f i t package
as d e f i n e d by t h e s t a t e o r pay i n t o a p u b l i c program.
�• d e v e l o p i n g common a d m i n i s t r a t i v e procedures t h a t m i g h t i n c l u d e
u n i f o r m claims forms and b i l l i n g procedures, and
• establishing uniform provider
reimbursement r a t e s .
T e s t i f y i n g i n o p p o s i t i o n t o the Leahy/Pryor b i l l , a r e p r e s e n t a t i v e
of the ERISA I n d u s t r y Committee, a lobby group r e p r e s e n t i n g
large
c o r p o r a t i o n s , s a i d the waivers would lead t o a " b a l k a n i z a t i o n of
t h e h e a l t h care system by i n v i t i n g the s t a t e s t o t a k e 50 d i f f e r e n t
approaches.". A r e p r e s e n t a t i v e of the AFL-CIO argued t h a t s t a t e
d e m o n s t r a t i o n s c o u l d delay needed comprehensive r e f o r m a t the
federal level.
The Leahy/Pryor b i l l would e s t a b l i s h a f e d e r a l commission t o
oversee s t a t e r e f o r m e f f o r t s . The b i l l would e s t a b l i s h standards
f o r a p p r o v a l of up t o 10 s t a t e d e m o n s t r a t i o n s .
These standards
would i n c l u d e :
• a requirement t h a t a s t a t e i n c r e a s e the p e r c e n t a g e of i n s u r e d
t o a t l e a s t 95 percent of t h e p o p u l a t i o n or i n c r e a s e the
p o p u l a t i o n of i n s u r e d by 10 percentage p o i n t s ;
• a c o s t containment mechanism a s s u r i n g t h a t h e a i t h
care
i n f l a t i o n w i t h i n a s t a t e does not exceed t h e average annual
percentage i n c r e a s e i n the gross domestic p r o d u c t p l u s 3.7
p e r c e n t f o r 1994, 2.7 p e r c e n t f o r 1995, 1.7 p e r c e n t f o r 1996,
0.7 p e r c e n t f o r 1997, and 0 percentage p o i n t s f o r each year
t h e r e a f t e r ; and
• federal
period.
budget n e u t r a l i t y
over the
five-year
demonstration
The b i l l d e f i n e s minimum coverage l e v e l s t h a t s t a t e - s p o n s o r e d
"standard and b a s i c " b e n e f i t packages c o u l d p r o v i d e and t h a t s t a t e s
c o u l d r e q u i r e employers t o p r o v i d e .
The b i l l exempts s e l f - i n s u r e d
b e n e f i t p l a n s f r o m meeting the minimum b e n e f i t s t a n d a r d s i f an
"employer's per-employee c o n t r i b u t i o n i s d e t e r m i n e d by the commiss i o n t o be e q u i v a l e n t w i t h i n t h a t s t a t e of a n a t i o n a l average v a l u e
of a t l e a s t $1,250 f o r an i n d i v i d u a l and $2,500 f o r a f a m i l y
(indexed t o the s t a t e ' s wage g r o w t h ) . "
I n exchange f o r meeting these and o t h e r r e q u i r e m e n t s , the
f e d e r a l commission c o u l d waive c e r t a i n r e q u i r e m e n t s o f M e d i c a i d ,
Medicare, and ERISA. Under the b i l l , t h e commission c o u l d g r a n t
s t a t e s a " n a r r o w l y c r a f t e d ERISA w a i v e r a u t h o r i t y " i n o r d e r t o
c o l l e c t assessments f o r purposes of e q u a l i z i n g c o n t r i b u t i o n s across
h e a l t h care p l a n s and t o p r o v i d e s u b s i d i e s t o persons who have no
i n s u r a n c e or are d i f f i c u l t t o i n s u r e .
Meanwhile, Sen.
Dave Durenberger (R-Minn.), r e p r e s e n t i n g
a
s t a t e whose newly passed p r o v i d e r t a x has been c h a l l e n g e d i n c o u r t ,
i n t r o d u c e d l e g i s l a t i o n t h a t i n e f f e c t would o v e r t u r n the May
1992
i n v a l i d a t i o n of p a r t s of New Jersey's h o s p i t a l r a t e - s e t t i n g law.
�- 9 D u r e n b e r g e r ' s b i l l would amend ERISA t o a l l o w s t a t e s t o a p p l y t o
the f e d e r a l government f o r w a i v e r s t h a t would a l l o w them t o impose
a " n o n - d i s c r i m i n a t o r y " t a x on a l l h e a l t h care p l a n s , i n c l u d i n g
those t h a t are s e l f - i n s u r e d . The b i l l would make c l e a r t h a t nond i s c r i m i n a t o r y , broad-based h e a l t h care taxes imposed by s t a t e s on
h o s p i t a l s , d o c t o r s , and o t h e r p r o v i d e r s would not v i o l a t e ERISA.
I n a d d i t i o n , the b i l l would a l l o w s t a t e s t o set h o s p i t a l r a t e s t o
i n c l u d e r e c o v e r y f o r uncompensated care c o s t s and o t h e r h e a l t h related costs.
Proponents o f Durenberger's proposal argue t h a t i t i s u n f a i r
t h a t t h e r i s k p o o l s t h a t s t a t e s have e s t a b l i s h e d t o cover the
o t h e r w i s e u n i n s u r a b l e are s u b s i d i z e d by s t a t e taxes on commercial
i n s u r e r s , w h i l e s e l f - i n s u r e d plans avoid c o n t r i b u t i n g .
Because
ERISA p r e v e n t s s t a t e s f r o m t a x i n g s e l f - i n s u r e d p l a n s , t h e same
i n e q u i t y stands i n the way of broader s t a t e plans t o f i n a n c e care
f o r the u n i n s u r e d t h r o u g h taxes a f f e c t i n g h e a i t h p l a n s .
About 22
s t a t e s c u r r e n t l y impose taxes on h o s p i t a l s , d o c t o r s , and o t h e r
p r o v i d e r s f o r t h e purpose o f f i n a n c i n g and s u b s i d i z i n g uncompens a t e d c a r e , s t a t e M e d i c a i d programs, and o t h e r programs, a c c o r d i n g
t o the p r o p o s a l .
A l t h o u g h the waiver b i l l s d e s c r i b e d above f a i l e d t o pass,
Congress d i d add t o a t a x b i l l (H.R. 11) ERISA w a i v e r s designed t o
p r e s e r v e M a r y l a n d ' s a l l - p a y e r r a t e - s e t t i n g system and t o broaden
H a w a i i ' s exemption from ERISA ( a l t h o u g h not t o the e x t e n t d e s i r e d
by Hawaii o f f i c i a l s ) . A t the t i m e of t h i s w r i t i n g . P r e s i d e n t Bush
was expected t o v e t o the t a x b i l l .
U n i l a t e r a l Reduction of B e n e f i t Levels
The a b i l i t y o f s e l f - i n s u r e d plans t o w i t h d r a w coverage f o r
c e r t a i n d i s e a s e s i s a key i s s u e i n the d i s c u s s i o n about t h e e x t e n t
of f e d e r a l employee b e n e f i t r e g u l a t i o n . I n two r e c e n t cases, f o r
example, f e d e r a l c o u r t s have r u l e d t h a t employers do n o t v i o l a t e
ERISA by i m p o s i n g l i m i t a t i o n s on h e a l t h b e n e f i t s payable f o r AIDS
t r e a t m e n t . A c c o r d i n g t o a paper e n t i t l e d " R e g u l a t i o n o f Employment
Based H e a l t h B e n e f i t s , " p r e p a r e d by a t t o r n e y Edward Shay f o r the
I n s t i t u t e o f M e d i c i n e Committee on Employment-Based H e a l t h Plans:
I n McGann v . H. and H . Music Company, the F i f t h C i r c u i t Court o f
Appeals h e l d t h a t an employer c o u l d reduce i t s AIDS maximum b e n e f i t
f r o m $1 m i l l i o n t o $5,000 w i t h o u t v i o l a t i n g ERISA because t h e $1
m i l l i o n was n o t a v e s t e d , o r promised b e n e f i t and because t h e c l a i m a n t
c o u l d n o t show a d e s i r e o r m o t i v a t i o n by the employer t o r e t a l i a t e
a g a i n s t c l a i m a n t ' s e f f o r t s t o u t i l i z e the b e n e f i t . The c o u r t observed
t h a t absent a showing o f a d e s i r e t o r e t a l i a t e a g a i n s t the i n d i v i d u a l
c l a i m a n t , ERISA "does n o t p r o h i b i t w e l f a r e p l a n d i s c r i m i n a t i o n between
or among c a t e g o r i e s of d i s e a s e . " On s i m i l a r f a c t s , t h e c o u r t i n Owens
v . Storehouse, I n c . , reached the same c o n c l u s i o n about AIDS b e n e f i t s
i n an ERISA w e l f a r e p l a n .
I n Owens, the c o u r t n o t e d t h a t w i t h o u t a
$25,000 cap on AIDS t r e a t m e n t , t h e p r o j e c t e d m e d i c a l expenses f o r the
p l a i n t i f f Owens c o u l d " t h r e a t e n an a l r e a d y cash poor business w i t h
financial ruin."
�- 10 The p l a i n t i f f i n the H. and H. Music case has p e t i t i o n e d the
U.S.
Supreme Court f o r appeal.
The c o u r t asked t h e s o l i c i t o r
g e n e r a l t o p r e s e n t views on the case.
The s o l i c i t o r g e n e r a l
recommended t h a t t h e c o u r t not hear the appeal.
I t should be noted t h a t c o u r t r u l i n g s on whether employers may
withdraw coverage f o r c e r t a i n diseases may be tempered by l i t i g a t i o n stemming from the Americans w i t h D i s a b i l i t i e s A c t , which took
e f f e c t f o r employers w i t h more than 25 employees on J u l y 26, 1992.
Many c o r p o r a t e b e n e f i t managers t h a t f e r v e n t l y oppose s t a t e
mandates o f c a t e g o r i e s o f b e n e f i t s they c o n s i d e r t o be of m a r g i n a l
v a l u e are d i s t u r b e d by r e p o r t s t h a t some companies a r e w i t h d r a w i n g
or d r a s t i c a l l y r e d u c i n g coverage f o r the care o f l i f e - t h r e a t e n i n g
diseases. The q u e s t i o n a r i s e s : At what p o i n t i s a company s i m p l y
too s m a l l o r t o o f i n a n c i a l l y weak t o s e l f - i n s u r e and s t i l l o f f e r a
v i a b l e b e n e f i t s package t o employees?
How much l a t i t u d e should
employers have t o w i t h d r a w coverage f o r l i f e - t h r e a t e n i n g diseases?
And a t what p o i n t i s a h e a l t h b e n e f i t package so skimpy t h a t i t
r e a l l y i s not "insurance"?
ERISA's Advantages
As Congress c o n s i d e r s amending ERISA t o remove b a r r i e r s t o
e s t a b l i s h i n g u n i v e r s a l coverage and adequate coverage l e v e l s - a l l
a t some expense t o business, l a b o r , and t a x p a y e r s — q u e s t i o n s are
b e i n g r a i s e d about what aspects of ERISA s h o u l d be r e t a i n e d i f t h e y
o f f e r some advantage.
According t o t h e Shay paper, a l t h o u g h
ERISA's l a c k of r e g u l a t o r y safeguards i s a r g u a b l y troublesome, p l a n
sponsors o p t i n g t o a v o i d s t a t e r e g u l a t i o n by s e l f - i n s u r i n g may reap
c o s t - s a v i n g s i n s e v e r a l areas, i n c l u d i n g t h e f o l l o w i n g :
• ERISA l i m i t s b e n e f i c i a r y claims t o t h e v a l u e o f l o s t b e n e f i t s ;
s t a t e j u d i c i a l proceedings r o u t i n e l y t a r g e t i n s u r e r s as deep
pocket defendants who pay p u n i t i v e damages f o r bad f a i t h
d e n i a l of c l a i m s .
• ERISA p e r m i t s cost containment i n c e n t i v e s i n terms of p r e c e r t i f i c a t i o n and copayments; s t a t e s f r e q u e n t l y p r o h i b i t such
p r a c t i c e s w i t h anti-managed-care laws.
• ERISA p e r m i t s r a p i d design o f c o s t - e f f e c t i v e or p r e f e r r e d
d e l i v e r y system designs, such as employer-sponsored p o i n t - o f s e r v i c e HMOs; s t a t e s have been l e s s f l e x i b l e i n a l l o w i n g s t a t e
r e g u l a t e d HMOs t o d i v e r s i f y i n t o s i m i l a r l i n e s o f business.
• ERISA a l l o w s employers t o determine t h e s u b r o g a t i o n and
coordination of b e n e f i t p r i o r i t i e s f o r t h e i r health b e n e f i t
p l a n s ; s t a t e s f r e q u e n t l y f a v o r o t h e r types o f a c c i d e n t and
h e a l t h i n s u r a n c e t h r o u g h a n t i - s u b r o g a t i o n laws.
• ERISA does n o t t a x the employer's c o n t r i b u t i o n t o a s e l f funded h e a l t h b e n e f i t s p l a n ; s t a t e s t a x h e a l t h
insurance
premiums.
�- 11 Whether ERISA should a l l o w employees t o sue f o r p u n i t i v e
damages when the a d m i n i s t r a t o r s o f employee b e n e f i t p l a n s engage i n
u n f a i r claim practices i s a contentious
issue.
While some
employers and i n s u r e r s may argue t h a t a l l o w i n g such s u i t s would
u n d u l y i n c r e a s e c o s t s , some consumer advocates and t r i a l lawyers
argue t h a t ERISA does not o f f e r employees an adequate means t o
redress
u n f a i r c l a i m payment p r a c t i c e s .
A c c o r d i n g t o some
o b s e r v e r s , recent c o u r t i n t e r p r e t a t i o n s o f ERISA leave p r i v a t e
h e a l t h p l a n b e n e f i c i a r i e s w i t h o u t adequate p r o t e c t i o n a g a i n s t
f r a u d . ' I n c o n t r a s t , an employee covered by p u b l i c - s e c t o r h e a l t h
p l a n s can sue f o r p u n i t i v e damages i f a c l a i m payment i s denied
unfairly.
I s s u e s f o r Discussion
A f i r s t - o r d e r q u e s t i o n i n d e c i d i n g ERISA's r o l e i n h e a i t h
systems r e f o r m i s whether p r i v a t e - s e c t o r employers w i l l continue t o
a d m i n i s t e r and pay f o r h e a l t h coverage.
D i s c u s s i o n s about
i m p r o v i n g ERISA presume t h a t they w i l l do so. Some a n a l y s t s f e e l
t h a t even s i n g l e - p a y e r ,
non-employer-based p l a n s t o p r o v i d e
u n i v e r s a l access c o u l d be b l o c k e d i n c o u r t through an ERISA
challenge.
D e c i d i n g how t h e f e d e r a l government s h o u l d r e g u l a t e h e a l t h
b e n e f i t p l a n s r a i s e s many issues. A l t h o u g h by no means exhaustive,
t h e f o l l o w i n g l i s t o f questions i n d i c a t e s t h e range and complexity
of the subject:
Expanding Access t o Health I n s u r a n c e and C o n t r o l l i n g Costs
• To what e x t e n t should t h e f e d e r a l government determine how
people i n one p r i v a t e h e a l t h p l a n s u b s i d i z e people o u t s i d e t h e
plan? To what e x t e n t should t h e s t a t e s determine t h i s ?
• Should ERISA be amended so t h a t i t c l e a r l y a l l o w s s t a t e s t o
t a x employee b e n e f i t plans and h e a l t h care p r o v i d e r s i n o r d e r
t o s u b s i d i z e coverage f o r t h e uninsured and those i n need o f
f i n a n c i a l assistance
t o buy h e a l t h i n s u r a n c e o r h e a l t h
services?
• Should insurance reforms, such as moving toward community
r a t i n g , r e g u l a t i n g u n d e r w r i t i n g p r a c t i c e s , and g u a r a n t e e i n g
t h e a v a i l a b i l i t y o f coverage, be enacted and overseen a t t h e
federal or state levels?
Should t h e s t a t e s work w i t h i n
federal guidelines?
• Should t h e f e d e r a l government guarantee and oversee t h e
p o r t a b i l i t y o f a each c i t i z e n ' s h e a l t h coverage from employer
t o employer, from s t a t e t o s t a t e , and between t h e p r i v a t e and
p u b l i c sectors?
• To what e x t e n t should t h e f e d e r a l government impose cost
c o n t r o l s , b o t h w i t h i n i t s own programs and o u t s i d e of them?
�- 12 Should i t s e t standards f o r s t a t e c o s t - containment e f f o r t s ?
Could the f e d e r a l government do t h i s e f f e c t i v e l y ?
• Should the f e d e r a l government " r o l l back" s t a t e b e n e f i t
mandates determined t o r a i s e the c o s t of h e a l t h i n s u r a n c e
unnecessarily?
• Should the f e d e r a l government r e q u i r e
i n s u r a n c e coverage f o r a l l c i t i z e n s ?
and
guarantee
health
• I f the f e d e r a l government i s given a much g r e a t e r r e g u l a t o r y
r o l e w i t h r e s p e c t t o p r i v a t e h e a l t h p l a n s , what agency or
agencies s h o u l d a d m i n i s t e r and e n f o r c e the new standards?
What would be the b e s t way t o i n t e g r a t e such r e g u l a t i o n w i t h
the c u r r e n t a d m i n i s t r a t i o n and enforcement o f ERISA?
Protecting
t h e I n t e g r i t y of H e a l t h B e n e f i t s
f o r Employees
• Should the f e d e r a l government e s t a b l i s h a minimum b e n e f i t
s t a n d a r d f o r a l l plans? I f so, what would be included?
• Should a minimum c o n t r i b u t i o n
employers? I f so, how much?
level
• Should employees'
incomes?
levels
contribution
be
be
established
based
on
for
their
• Does ERISA a d e q u a t e l y p r o t e c t the s o l v e n c y o f h e a l t h plans?
• How would t h e govemment assure the s o l v e n c y o f newly c r e a t e d
" p u b l i c - p r i v a t e " h e a l t h insurance p u r c h a s i n g e n t i t i e s t h a t
would serve employees i n s e v e r a l of t h e "managed c o m p e t i t i o n "
r e f o r m p r o p o s a l s now under, c o n s i d e r a t i o n ?
• Should p r i v a t e h e a l t h coverage of r e t i r e e s be mandated?
• Are t h e l e g a l remedies a v a i l a b l e under ERISA s u f f i c i e n t t o
p r o t e c t b e n e f i c i a r i e s harmed when b e n e f i t s are not p r o v i d e d as
s p e c i f i e d i n the plan?
Needs of P l a n Sponsors
• How much v a r i a n c e s h o u l d be allowed i n b e n e f i t r e g u l a t i o n from
state to state?
• Should f e d e r a l r e g u l a t i o n of employee b e n e f i t s and
state
r e g u l a t i o n o f i n s u r a n c e be more c l e a r l y d e f i n e d and b e t t e r
coordinated?
E x a c t l y what should each l e v e l of govemment
regulate?
• I f employers are t o accept f e d e r a l o r s t a t e l i m i t s on t h e i r
c u r r e n t o p t i o n s t o a v o i d r i s k s , share c o s t s w i t h employees,
and n e g o t i a t e p r i c e s of h e a l t h s e r v i c e s , t h e n how can employers be a s s u r e d t h a t govemment w i l l be a b l e t o c o n t r o l costs?
�- 13 • To what degree should p l a n sponsors be p r o t e c t e d f r o m l a w s u i t s
stemming from t h e i r h e a l t h p l a n management p r a c t i c e s ?
D i s t r i b u t i o n a l Issues
• I n l i g h t of the d i s p a r i t y of w e a l t h between s t a t e s , t o what
degree s h o u l d the f e d e r a l government h e l p f i n a n c e
health
i n s u r a n c e f o r lower-income people?
• I f the f e d e r a l government were t o impose more d e t a i l e d b e n e f i t
s t a n d a r d s , s h o u l d the " c a r r o t s " i t o f f e r s the s t a t e s be mixed
w i t h the " s t i c k s " ?
Should s t a t e adherence t o f e d e r a l standards, such as those p e r t a i n i n g t o b e n e f i t l e v e l s , u n i v e r s a l i t y of coverage, and cost containment, have a b e a r i n g on how
many f e d e r a l d o l l a r s s t a t e s receive?
For example, i f a s t a t e f a i l e d t o meet f e d e r a l standards,
s h o u l d i t r e c e i v e l e s s under Medicaid or Medicare?
Should
Medicare b e n e f i c i a r i e s l i v i n g i n a s t a t e f a i l i n g t o meet
f e d e r a l standards be r e q u i r e d t o pay h i g h e r copayments and
premiums? Should p r o v i d e r s be p a i d l e s s , i f f e d e r a l standards are not met?
The
Forum Session
Four speakers w i l l g i v e b r i e f p r e s e n t a t i o n s t o be f o l l o w e d by
a p a n e l d i s c u s s i o n i n v o l v i n g the speakers and s e l e c t e d d i s c u s s a n t s .
P a t r i c i a Ann B u t l e r , J.D.,
an a t t o r n e y and h e a l t h p o l i c y
c o n s u l t a n t , w i l l d i s c u s s how ERISA p r e s e n t s a b a r r i e r t o s t a t e
health-care f i n a n c i n g reform proposals.
Ms.
B u t l e r , who
has
a d v i s e d s e v e r a l s t a t e governments on a v a r i e t y o f h e a l t h p o l i c y
i s s u e s , i s a s s i s t i n g the governor of Colorado i n a n a l y z i n g
ColoradoCare, a u n i v e r s a l h e a l t h - c a r e program.
She r e c e i v e d her
law degree from t h e U n i v e r s i t y o f C a l i f o r n i a , B e r k e l e y , i n 1969,
and i s c u r r e n t l y , e n r o l l e d i n t h e U n i v e r s i t y o f Michigan's
Pew
d o c t o r a l program.
M i c h a e l S. Gordon, J.D., w i l l discuss the e v o l u t i o n and impact
o f ERISA's p r e e m p t i o n p r o v i s i o n .
From 1970
t h r o u g h 1975,
Mr.
Gordon served under the l a t e Sen. Jacob K. J a v i t s (R-N.Y.) as
m i n o r i t y counsel f o r pensions, Senate Labor and P u b l i c Welfare
Committee, and a s s i s t e d i n the d r a f t i n g and enactment of ERISA.
Since 1976, Mr. Gordon has s p e c i a l i z e d i n t h e p r a c t i c e of ERISA and
employee b e n e f i t s law i n Washington, D.C,
f i r s t as a f o u n d i n g
p a r t n e r o f the f i r m of M i t t e l m a n & Gordon and s i n c e 1985 as t h e
p r i n c i p a l of h i s own law f i r m .
He r e p r e s e n t s b o t h c o l l e c t i v e l y
b a r g a i n e d and n o n c o l l e c t i v e l y b a r g a i n e d employee b e n e f i t plans and
m a i n t a i n s an a c t i v e l i t i g a t i o n p r a c t i c e , w h i c h has
included
representation
o f employee b e n e f i t p l a n s , employers, unions,
s e r v i c e p r o v i d e r s , and employee b e n e f i t p l a n p a r t i c i p a n t s and
beneficiaries.
He graduated f r o m the U n i v e r s i t y of Chicago Law
School i n 1955.
�Mary Jo O'Brien, M.S.,
deputy commissioner, Minnesota Department of H e a l t h , w i l l d e s c r i b e Minnesota's r e c e n t l y enacted h e a l t h
insurance r e f o r m package as w e l l as the s t a t e ' s p e r s p e c t i v e on
ERISA i s s u e s . Ms. O'Brien i s r e s p o n s i b l e f o r the a d m i n i s t r a t i o n of
programs designed t o p r o t e c t and promote p u b l i c h e a l t h .
The
Minnesota commissioner of h e a l t h has a p p o i n t e d her to oversee t h e
implementation of H e a l t h R i g h t , l e g i s l a t i o n designed t o c o n t r o l
h e a l t h care costs and i n c r e a s e access.
Ms. O'Brien p r e v i o u s l y
worked as d i r e c t o r of l e g i s l a t i v e r e l a t i o n s a t the Minnesota
Medical A s s o c i a t i o n and has h e l d s e v e r a l o t h e r a d m i n i s t r a t i v e and
p u b l i c a f f a i r s p o s i t i o n s w i t h b o t h p r i v a t e and governmental
agencies.
She r e c e i v e d her M.S. degree i n r e h a b i l i t a t i o n counseling from St. Claude S t a t e U n i v e r s i t y i n Minnesota.
Meg H. O'Donnell, J.D., g e n e r a l counsel, Vermont H e a l t h Care
A u t h o r i t y , w i l l d i s c u s s Vermont's r e c e n t l y enacted h e a l t h r e f o r m
l e g i s l a t i o n as w e l l as ERISA i s s u e s .
A f t e r r e c e i v i n g her law
degree a t New York Law School i n 1988, she has worked as an
a s s o c i a t e f o r two law f i r m s and as a law c l e r k t o an a s s o c i a t e
j u s t i c e of the Vermont Supreme Court.
I n 19 82, Ms. O'Brien
r e c e i v e d a master's degree from C o l u m b i a - U n i v e r s i t y ' s Department of
Middle East Languages and C u l t u r e s w i t h a c o n c e n t r a t i o n i n A r a b i c
studies.
The f o l l o w i n g p a n e l i s t s w i l l j o i n the speakers i n a d i s c u s s i o n :
G. Lawrence A t k i n s , Ph.D., d i r e c t o r of employee b e n e f i t s p o l i c y ,
Winthrop, Stimson, Putnam & Roberts.
I n h i s p o s i t i o n a t the law
f i r m , Dr. A t k i n s p r o v i d e s . c o n s u l t a t i o n on h e a l t h care and employee
b e n e f i t s p o l i c y i s s u e s t o s e v e r a l l a r g e employers. P r e v i o u s l y , he
served f o r e i g h t years as a s t a f f member of t h e Senate S p e c i a l
Committee on Aging, where he most r e c e n t l y was m i n o r i t y s t a f f
d i r e c t o r under r a n k i n g m i n o r i t y member Sen. John Heinz (R-Pa.).
Dr. A t k i n s r e c e i v e d h i s Ph.D. degree i n s o c i a l w e l f a r e p o l i c y f r o m
Brandeis U n i v e r s i t y .
P h y l l i s C. B o r z i , J.D., pension and employee b e n e f i t s counsel t o
the Subcommittee on Labor-Management R e l a t i o n s of the House
Committee on Education and Labor.
Known as one of Washington's
premier ERISA e x p e r t s , she j o i n e d the committee s t a f f i n 1979 a f t e r
being i n p r i v a t e p r a c t i c e .
She r e c e i v e d her law degree f r o m
C a t h o l i c U n i v e r s i t y , where she was e d i t o r - i n - c h i e f of t h e LawRe v i ew.
Gary C l a x t o n , s e n i o r a n a l y s t , N a t i o n a l A s s o c i a t i o n of Insurance
Commissioners (NAIC).
Before coming t o t h e NAIC, Mr. C l a x t o n was
a s e n i o r p o l i c y a n a l y s t i n the P u b l i c P o l i c y I n s t i t u t e of t h e
American A s s o c i a t i o n of R e t i r e d Persons. He a l s o worked f o r t h r e e
years w i t h t h e Michigan Insurance Bureau and c o n s u l t e d w i t h t h e
N a t i o n a l Governors' A s s o c i a t i o n .
C h r i s t o p h e r C. Jennings, deputy s t a f f d i r e c t o r . Senate S p e c i a l
Committee on Aging. A s t a f f member of t h e a g i n g committee f o r more
than nine y e a r s , Mr. Jennings serves as Sen. Pryor's primary h e a l t h
�- 15 care r e f o r m a d v i s o r
and was i n s t r u m e n t a l
i n d r a f t i n g the
Leahy/Pryor b i l l .
He a l s o served as Sen. Pryor's s t a f f represent a t i v e t o t h e Pepper Commission.
J u d i t h P. Mazo, J.D., s e n i o r v i c e p r e s i d e n t and d i r e c t o r o f
research. The Segal Company.
I n working f o r t h i s n a t i o n a l
a c t u a r i a l , b e n e f i t s , and compensation c o n s u l t i n g f i r m , Ms. Mazo has
advised a v a r i e t y o f c l i e n t s , i n c l u d i n g union-sponsored h e a l t h
plans.
Previously,
she was engaged i n p r i v a t e law p r a c t i c e
s p e c i a l i z i n g i n ERISA and served as s p e c i a l counsel t o t h e Pension
B e n e f i t Guaranty C o r p o r a t i o n (PBGC). Ms. Mazo was s e n i o r a t t o r n e y
f o r t h e PBGC and e x e c u t i v e a s s i s t a n t t o i t s g e n e r a l counsel from
1975 t o 1979. She graduated from Yale Law School.
D a l l a s S a l i s b u r y , M.P.A., p r e s i d e n t , Employee B e n e f i t Research
I n s t i t u t e (EBRI). EBRI i s a " t h i n k tank" t h a t focuses on employee
b e n e f i t s and r e l a t e d issues o f economic s e c u r i t y . Mr. S a l i s b u r y
j o i n e d EBRI i n 1978 as i t s f i r s t employee. Before t h a t , he served
as a s s i s t a n t e x e c u t i v e d i r e c t o r f o r p o l i c y a t t h e PBGC and as
a s s i s t a n t a d m i n i s t r a t o r f o r p o l i c y and r e s e a r c h o f t h e l a b o r
department's Pension and Welfare B e n e f i t Programs A d m i n i s t r a t i o n .
He r e c e i v e d h i s master's degree i n p u b l i c a d m i n i s t r a t i o n from t h e
Maxwell Graduate School a t Syracuse U n i v e r s i t y i n 1973.
A l i c i a Smith-Pelrine,
J.D., group d i r e c t o r f o r human resources,
N a t i o n a l Governors' A s s o c i a t i o n (NGA). I n h e r c u r r e n t p o s i t i o n ,
Ms. P e l r i n e i s r e s p o n s i b l e f o r p o l i c y development on a wide range
of i s s u e s i n c l u d i n g h e a l t h care, income maintenance, l a b o r , and
employment.
She r e c e n t l y worked w i t h s e v e r a l governors seeking
waivers f r o m ERISA. Before j o i n i n g t h e NGA i n 1986, Ms. P e l r i n e
worked w i t h t h e F l o r i d a Department o f H e a l t h and R e h a b i l i t a t i v e
Services f o r e i g h t y e a r s . She r e c e i v e d h e r law degree from F l o r i d a
S t a t e U n i v e r s i t y i n 1978.
*****
Karl Polzer
Senior Research A s s o c i a t e
J u d i t h M i l l e r Jones
Director
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Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
A name given to the resource
Health Care Reform
Identifier
An unambiguous reference to the resource within a given context
2006-0810-F
Description
An account of the resource
<p>This collection consists of records related to Hillary Rodham Clinton's Health Care Reform Files, 1993-1996. First Lady Hillary Rodham Clinton served as the Chair of the President's Task Force on National Health Care Reform. The files contain reports, memoranda, correspondence, schedules, and news clippings. These materials discuss topics such as the proposed health care plan, the need for health care reform, benefits packages, Medicare, Medicaid, events in support of the Administration's plan, and other health care reform proposals. Furthermore, this material includes draft reports from the White House Health Care Interdepartmental Working Group, formed to advise the Health Care Task Force on the reform plan.</p>
<p>This collection is divided into two seperate segments. Click here for records from:<br /><a href="http://clinton.presidentiallibraries.us/items/browse?advanced%5B0%5D%5Belement_id%5D=43&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=2006-0810-F+Segment+1"><strong>Segment One</strong></a> <br /><a href="http://clinton.presidentiallibraries.us/items/browse?advanced%5B0%5D%5Belement_id%5D=43&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=2006-0810-F+Segment+2"><strong>Segment Two</strong></a></p>
Provenance
A statement of any changes in ownership and custody of the resource since its creation that are significant for its authenticity, integrity, and interpretation. The statement may include a description of any changes successive custodians made to the resource.
Clinton Presidential Records
Publisher
An entity responsible for making the resource available
William J. Clinton Presidential Library & Museum
Text
A resource consisting primarily of words for reading. Examples include books, letters, dissertations, poems, newspapers, articles, archives of mailing lists. Note that facsimiles or images of texts are still of the genre Text.
Original Format
The type of object, such as painting, sculpture, paper, photo, and additional data
Paper
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
A name given to the resource
Briefing Book on ERISA [Employee Retirement Income Security Act] Issues [1]
Creator
An entity primarily responsible for making the resource
Health Care Task Force
General Files
Identifier
An unambiguous reference to the resource within a given context
2006-0810-F Segment 1
Is Part Of
A related resource in which the described resource is physically or logically included.
Box 56
<a href="http://clinton.presidentiallibraries.us/items/show/36144" target="_blank">Collection Finding Aid</a>
<a href="https://catalog.archives.gov/id/12090749" target="_blank">National Archives Catalog Description</a>
Provenance
A statement of any changes in ownership and custody of the resource since its creation that are significant for its authenticity, integrity, and interpretation. The statement may include a description of any changes successive custodians made to the resource.
Clinton Presidential Records: White House Staff and Office Files
Publisher
An entity responsible for making the resource available
William J. Clinton Presidential Library & Museum
Format
The file format, physical medium, or dimensions of the resource
Adobe Acrobat Document
Medium
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Preservation-Reproduction-Reference
Date Created
Date of creation of the resource.
5/5/2015
Source
A related resource from which the described resource is derived
42-t-2194630-20060810F-Seg1-056-008-2015
12090749