ERISA Preempts State Withholding Law

March 11, 2008

Employers can thank the son of a Supreme Court Justice for obtaining needed guidance on an ERISA preemption issue that has been a traditional gray area of group health plan administration.

The DOL issued Advisory Opinion 2008-02A in February 2008 in answer to an issue presented by Eugene Scalia, son of Justice Antonin Scalia. The issue arose with one of his clients, Sprint Nextel, and a plan provision that allowed for automatic enrollment. This is a plan feature where an employee who does not make an affirmative election is put in default health plan coverage and has contributions withheld from the paycheck. The Proposed Cafeteria Plan Regulations issued last year permit automatic enrollment but do not comment on whether state payroll withholding laws would supersede these rules.

Kentucky is a state that requires all withholding from wages to be either required by law or authorized in writing by the employee. Kentucky's government had indicated that the Sprint Nextel plan violated its withholding law because the automatic enrollment was not required by law.

The DOL held that ERISA preempts the Kentucky law. Specifically, the law “has a prohibited connection with ERISA plans because it prohibits automatic enrollment arrangements in such plans and regulates Sprint Nextel’s decisions on how it provides employee medical coverage and plan funding.” The DOL had previously issued a consistent opinion on a similar New York withholding law.

This is good news for employers who want to encourage plan participation, particularly among healthy employees who might drag their feet on enrolling right away. In theory, an employer could even use automatic enrollment for a Health FSA, although determining the default amount of coverage would be a key decision. The Proposed Cafeteria Plan Regulations set out the following guidelines for automatic enrollment:

• Each newly eligible employee is automatically enrolled in employee-only coverage
• Contributions are then withheld from pay
• Each employee receives a notice explaining the automatic enrollment process, the amount of premiums, the right to decline coverage and the process for declining coverage
• Changes to this election are available outside of open enrollment only for permissible changes of status and other reasons under §1.125–4, the regulations governing permitted election changes

For a copy of the Advisory Opinion, please go to: www.dol.gov/ebsa/pdf/ao2008-02a.pdf.