ERISA’s Preemption Clause

Question
I represent a man who sustained traumatic brain injuries that have rendered him wheelchair-bound and unable to feed himself. His wife's health insurance is an ERISA plan, self-funded to $150,000 per fiscal year, with stop-loss health insurance beyond that initial amount. The $150,000 deductible was paid twice before my client's wife left her job and the ERISA health insurance coverage ended. The insurer is claiming a lien for over $500,000 - despite paying $300,000 with stop-loss insurance paying the rest. The settlement was for the policy limit of just over $1 million. The IRS 5500 reflects that the funding is 'general assets of the sponsor'. The plan has learned from every case from FMC v. Halliday through Sereboff.

Is the plan subject to GOL 5-335 if, as case law suggests, its right is not statutory in itself but instead controlled by the scope of the plan which is a contractual document? Are my options more academic than practical -- leaving me only to negotiate the best resolution and hold my nose while I pay. The Medicaid lien was settled at about an 8% pro rata share, the ERISA provider is looking for more than 100% of what it paid.

Answer
Thank you for the question. If the plan is in fact self-funded (general assets) with strong language then you may be at the mercy of the plan. While I agree with you wholeheartedly regarding the statutory v. contractual right and the application of GOL 5-335, the real problem is ERISA’s preemption clause. ERISA expressly preempts state laws insofar as they relate to employee benefit plans (29 U.S.C. 1144(a)). HOWEVER, under ERISA this preemption does not apply to those laws which regulate insurance, banking, or securities (29 USC 1144(b)(2)(A). This is known as the savings clause and if an ERISA plan is in fact insured you can use state law defenses. See FMC Corp. v. Holiday, 498 US 52 (1990). If the employer plan provides benefits through a contract with an insurance carrier then the plan can be categorized as insured. On the other hand, if benefits are provided by the assets of the employer (in part or in whole) or through a trust, then the plan will most likely be categorized as self-funded.

Thus, if the plan was insured rather than self-funded, there is strong argument to be made that 1) 5-335 is a law which regulates insurance 2) an ERISA plan’s right is based on contract/equity not statute and 3) an insured plan cannot seek reimbursement because of 5-335. Unfortunately here a self-funded plan enjoys preemption and is not subject to the savings clause. See FMC Corp.

The issue I would focus on here is the stop loss issue. While it is well settled that the existence of stop loss coverage does not change the plan’s designation as a self-funded ERISA plan, we believe that the stop loss coverage can change the scope of a plan’s reimbursement right. As a result I would suggest demanding proof that 1. Any funds claimed over the attachment point would be reimbursed to the stop loss carrier and 2. The stop loss carrier had a right to such reimbursement. A stop loss arrangement provides for payment to the plan over certain attachment points. Without such proof there is the threat of unjust enrichment as the plan may receive a windfall from payments previously received from the stop loss carrier and any reimbursement made from your client. So in your example…

- Plan pays 500k in two years
- Attachment point is 150k per year
- Plan pays 500k but is actually reimbursed by stop loss carrier for anything over 150k per year; in effect plan out only 300k
- Require proof that if your client paid more than 300k, the stop loss carrier would receive those
- Don’t want plan to receive windfall (payment from your client and stop loss carrier)

Having settled the third party claim and dealing with a strong self-funded ERISA plan puts you between a rock and hard place. However you have the stop loss issue in this case. As an industry standard, many recovery vendors will agree to a 1/3 split of the gross proceeds. It is certainly not ideal but under the circumstances it may provide some hope. I would also remember that you have a sympathetic client and recovery vendors and plans look at litigation as a last resort.

I hope you found this response helpful and please let me know if you have any additional questions.

Michael Russell, Esq.