Major Dilemmas of ERISA - Essay Example

The Problems of ERISA ERISA stands for the Employee Retirement Income Security Act of 1974. It is the federal sta y law that governs all benefitplans of employees as well as employees’ welfare benefit plans of private employment. It is therefore axiomatic that the purpose of ERISA is to guarantee the promotion of the employees and their beneficiaries vis-à-vis employment benefit plans. Section 3 (2) of the law states that “terms ‘employee pension benefit plan’ and ‘pension plan’ mean that any plan, fund or program which is established or maintained by an employer or employee organization, or both, to the extent that by its express terms or as a result of its surrounding circumstances such plan, fund or program (a) provides retirement income to employees, or (b) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond” (ERISA). History of ERISA In 1963, when the Studebaker Corporation was forced to shutdown its auto production plant, many of its employees, especially the young ones, did not receive their pensions because Studebaker’s plan was poorly funded. It turned out that a part of the pension funds was used for investment. The incident at Studebaker drew the attention of the entire nation and it provided a catalyst to the enactment of ERISA a decade later. It became known as the “infamous Studebaker” case and gave impetus and direction to the President’s Committee on Corporate Pension Plans created by President John F. Kennedy two years earlier. The Committee later came out with a report entitled Public Policy and Private Pension Program, which set forth a radical pension policy reform where the federal government acquired a more active and extended role into private pension policies (Wooden 2005). The Report of the Committee unsurprisingly drew adverse response not only from employers but even employees who questioned the government’s interference in employment contracts between employers and employees. In addition, a regulatory law will potentially increase the costs of pension plans and the effect is to force the companies to reduce benefits or worse, give up pension plans completely. The Committee made minor revisions but on the whole, retained the essence of the report. This was during the time after Kennedy had been assassinated and Lyndon B. Johnson had taken over the presidency. Up for election in 1964, the staff of Johnson hid the controversial report fearing that it would hurt Johnson’s electoral campaign. In 1965, the report was finally released but the White House disowned it (Wooden 2005). In 1967, Senator John Javits, a Republican from New York, endorsed a bill that called for measures on fundraising, eligibility and testing problems identified in the aforesaid report. The subsequent hearings of the bill and others related to it finally caught the attention of influential lawmakers like Senator Harrison Williams, Chairman of the Senate Labor and Human Resources, Congressman John Dent, Chairman of the House Education and Labor’s Committee Sub-committee on Employment Standards, who collectively led efforts for major reforms in pension plans (Sacher et al 2004).. Finally, in 1974, Senator Javits and Congressman Dent introduced a bill which will later become ERISA. The House Labor Committee worked on the bill first and then the Senate Labor Committee. Later on both houses passed the final version after having reached a consensus as to the final bill. President Gerald Ford signed it into law on Labor Day of that year (Sacher et al 2004).. ERISA: The Law ERISA is divided into three titles: Title I, on “Protection of Employee Benefits Right; Tile II, on Amendments to the Internal Revenue Code Relating to Retirement Plans; Title III, on Jurisdiction, Administration, Enforcement, Joint Pension Task Force; Title IV, on Plain Termination Insurance. The basic and substantial parts of ERISA are those contained in the provisions of Parts 1, 2, 3, 4 and 5 of Subtitle B of Title I. These are important and fundamental provisions because they include the disclosure requirements where the administrator of the pension plans are obliged to furnish copies of the summary plans to the beneficiaries as well as to the Secretary of Labor. Likewise financial and actuarial reports are to be submitted on a yearly basis. This part of the law also sets forth the coverage of the pension plans which prohibits age as a basis for coverage as well as the nonforfeitability of the benefits. The minimum contribution is also laid down in Part 3. The funding coverage as well as the remedy and preemption provisions are also in this title (Tauver & Levy 2002). An important prohibition is that limiting the employer to invest pension funds to more than 10% of its amount, in addition to other prohibited acts. Title I also draws the line between federal and state regulations of health benefits through the preemption provision. Title II of the Code amended the part of the Internal Revenue Code relative to pension plans: individual retirement accounts (IRA) are created; the maximum tax deduction of the IRS law is also amended; additional grounds to pre-qualify pension plan for tax deduction, like retirees must be given the choice to a joint-and-survivor annuity, non discrimination of benefits to favor certain employees or officers and the plans are made subject to Part 5 of Title I; in the event the employer committed an infraction on prohibited activities under the ERISA or failed to contribute, then an excise tax shall be imposed on that employer. Title III provides for the mechanics in enforcing ERISA through a joint and coordinated efforts of two government agencies: the Department of Labor (DOL) and the Treasury Department. Title IV, as the title implies gives the procedure for the termination of pension plans anmd the creation of a government agency that will ensure that employees of under-funded pension plans that have been terminated receive benefits. The Problems Facing ERISA A critical issue hounding state legislators is the provision of ERISA which has become notoriously known as the ERISA pre-emption. Section 514 (a) states that Title I and IV of the law shall supersede any and all laws of states that “relate to any employer benefit plan”. This provision has become a stumbling block for state legislations in the past and if not modified in future legislations as well. In the past the US Supreme Court had the opportunity to define the phrase “relates to” as something which is a reference to ERISA or to an ERISA plan. The implications are: if there is a specific reference to ERISA, the preemption applies, and; if there is a direct regulation of ERISA plans or the benefits under it, the preemption likewise applies. The judicial predicament however begins when the state law or regulation has a mere indirect effect on ERISA plans (Greene 1999).. In the case of New York Blue Cross Plans v Travelers Insurance Company, 514 US 645, 657 (1995), the SC was again challenged with the interpretation and application of s 514(a). The conflict started when the state of New York imposed three surcharges to persons who use commercial insurers of which the Travellers is one. As a result, the cost of healthcare rose and people were compelled to opt for lower insurance plans like Blue Cross. Travellers went to court charging ERISA preemption. Since the case involved a federal legislation, the federal district court had jurisdiction which decided that there was indeed ERISA preemption. On appeal, the Court of Appeal, 2nd Circuit upheld the lower court’s ruling. The SC however unanimously held to reverse the decision on the ground that the intention of the legislature in providing for the provision in issue was to prevent multiplicity of regulations and not to apply it in a broad and sweeping manner. The phrase, therefore, according to the Court must be read in a normal sense, i.e. when a law has a sufficient connection to pension plans and ERISA (Greene 1999). There are however ERISA provisions which give exemption from preemption and these relate to the “saving” clause and the “deemer” clause. In the former, an employee benefit plan is not subject to the preemption clause if it regulates banking, insurance or securities. But this area presented problems too, as it is debatable as to what exactly constitutes the business of insurance. On the other hand, the “deemer” clause is a limitation of the aforementioned preceding clause because ERISA provides that a state regulation can only be exempted from the preemption clause if the business of insurance to which it regulates is a genuine insurance company and an authentic insurance contract. Therefore, there must be a prior determination made as to the said pre-qualifications before the state regulation can be made to apply on specific insurance benefit plans (Chirba-Martin & Brennan 1994). Thus, even under the exempted cases, controversy and conflict may still arise. A more pressing issue however, involving ERISA is beyond that of judicial interpretations of the aforementioned provisions. The issue is how to go around the ERISA pre-emption provision so that states can enact laws relating to healthcare and pension plans. State legislation, for example, that are aimed at reforming healthcare like health cost and access are prevented from being enacted because they obviously come within the ambit of the “relates to” provision of the ERISA (Chirba-Martin & Brennan 1994). Moreover, state legislations are powerless when it cones to entities which cannot be sued because of the ERISA protection granted them. Managed care organizations (MCOs) that have entered into an agreement with employers under the ERISA law have been deemed to be immune from malpractice and negligence lawsuits. This is significant because HMOs have become ubiquitous recently due to a comparative lower healthcare cost. Also, many employers whose pension plans are self-funded, and individuals buying their own health coverage are exempt from state regulation. Although the courts have relaxed this view, still suits against such entities are not certain to hold in the light of the ERISA preemption clause (Coleman 1997). . The catch is that most HMOs would rather accept claims under ERISA because the remedies and recoveries under it are limited, thus, the most common defense of the HMOS are ERISA preemption. “ERISA has become a loophole for HMOs to wiggle out of malpractice suits […] it’s being used as a sword against employees in taking away their rights of redress for injuries and even deaths caused by health plans” (qtd. Coleman 1997). Conclusion: Future of ERISA A law that obstructs stakeholders in searching for appropriate redress and remedies for their healthcare and pension plan grievances must be modified, altered and amended and if need be repealed to make it responsive to the needs of the people and of the time. It cannot exist in a vacuum from the rest of society especially from the stakeholders who suffer the brunt of its inefficacies. ERISA was spurred by the “infamous Studebaker” incident and was conceived to protect employees from situations where their future hangs in the balance because of the incompetence of pension plan administrators. It was therefore conceived for a noble cause but time had shown that the law suffers from deficiencies and loopholes. The passage of time had also rendered some of its provisions outdated and inapplicable. Likewise, being a federal law has made it difficult for the framers of ERISA to foresee all and every weaknesses that the law may engender especially on the state level. Such deficiencies and loopholes redound to the injury of stakeholders and therefore, Congress must act accordingly. According to Professor Robert Covington of Vanderbilt University, the chief argument against amending ERISA is the cost it will entail, the kind of cost that will be borne later by the shareholders. The rationale is that once an HMO is made to pay damages, it will pass the cost to others (1999). However, this is not a good reason for sustaining a law that has proven to put stakeholders at a disadvantageous position. On the other hand, proponents of change posit two grounds: the universal idea of fairness and the concept of deterrence. If the HMO will and cannot be moved by the idea of fairness in giving coverage to all patients alike, then certainly, the idea of a suit for damages hanging over its head like the sword of Damocles may have a more persuasive effect (Vanderbilt 1999). Professor Vanderbilt thus proposed four areas of amendment to the ERISA law: in the case of denial of treatment, there must be an arbitration-like mechanism that will review the incident without the usual red tape and procedural requirements that will hinder a fast and quick resolution of the matter; add MCOs to the list of those which can be regulated by the state under s 514 (b)(2)(A); redefine and restrict the concept of self-funded plans to those who do not use “stop-loss insurance with low threshold” and; create or appoint a commission that will determine the need for an extensive regulation of the health care system of the country. Works Cited Chapter 18-Employee Retirement Income Security Program. US Code Collection.LII. Cornerll University Law School. http://www.law.cornell.edu/uscode/html/uscode29/usc_sup_01_29_10_18.html Chirba-Martin, Mary Ann & Brennan, Troyen. The Critical Role of ERISA in the State Health Reform. Health Affairs. 1994.http://content.healthaffairs.org/cgi/reprint/13/2/142.pdf Coleman, David. Will Health Plans Keep Their Erisa Shield? Managed Care Magazine. http://www.managedcaremag.com/archives/9705/9705.erisa.shtml Covington, Robert. Amending ERISA’s Preemption Scheme. Kansas Journal of Law and Public Policy. 1999. Retrieved May 2, 2008. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=169149 Greene, Ryan. The Evolving Standard for ERISA Preemption of State Law Under Recent United States Supreme Court Precedent. FindLaw. http://library.findlaw.com/1999/Jul/1/126249.html Institute of Medicine (U.S.). Committee on Employer-Based Health Benefits, Field, Marilyn Jane & Shapiro, Harold T. Employment and health benefits: a connection at risk. National Academies Press. 1993: New York Blue Cross Plans v Travelers Insurance Company 514 U.S. 645, 657 (1995). Sacher, Steven J. & Singer, James I. & Connerton, Terese M.& American Bar Association Section of Labor and Employment Law, Employee Benefits Committee, Jane Kheel, Stanley, Evan J. . Spelfogel, Ronald Dean, Barbara S . Gutmann, Susan Katz Hoffman, Jeffrey Lewis, Howard Shapiro. Employee Benefits Law. BNA Books. 2004: pp 6-7. Tauber, Yale & Levy, Donald. Executive Compensation. BNA Books. 2002: p 219. Wooten, James A. The Employee Retirement Income Security Act of 1974: A Political History. University of California Press. 2005: pp. Read More