ERISA Pre-emption: When does ERISA apply to a short term disability insurance plan?

A case heard before the U.S. District Court’s Southern District in Texas gives us an opportunity to study ERISA pre-emption. George Monkhouse originally filed his suit against his employer, Stanley Associates Inc. (Stanley) in the 506th Judicial District Court of Grimes County, Texas. He claimed that Stanley had failed to provide the disability benefits promised in its short-term disability income plan. The plan administrator of the short term disability plan was Cigna.

Stanley had the case removed to the U.S. District Court, claiming that the Employee Retirement Income Security Act (ERISA) pre-empted any state based claim Monkhouse had against the Stanley short-term disability plan. Monkhouse’s short-term disability attorney argued otherwise. He claimed that the Stanley STD plan was not an employee welfare benefit plan, but rather it was an exempt payroll practice that fell under the jurisdiction of the Department of Labor (DOL). He moved that the Court remand the suit back to the state jurisdiction it rightly deserved to be considered under.

Court must consider motion to remand

When a disability attorney moves for remand, it is the responsibility of the defendant, in this case Stanley, to prove that the federal court had “jurisdiction over the controversy.” This has been established by case law. At the same time, it doesn’t matter how cleverly a disability attorney words his/her arguments, if a state law claim falls under ERISA’s civil enforcement provision, the jurisdiction is completely preempted by this federal law.

The question then before the Court was whether Stanley’s short-term disability plan was an “employee welfare benefit plan.” Or did the Stanley plan fall under ERISA’s “payroll practice” exemption.

Under ERISA, the terms “employee welfare benefit plan” and “welfare plan” means any plan, fund, or program which an employer establishes or maintains to provide participants or their beneficiaries (whether purchased through insurance or other means) benefits in the event they become sick or disabled. ERISA’s “payroll practice” exemption shall not include “payments made of an employee’s normal compensation, out of the employer’s general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons.”

Case law relating to ERISA preemption reviewed

In Chevron USA, Inc. v. Natural Resources Defenses Counsel, Inc., the Supreme Court ruled that the first order for a Court is to determine whether Congress spoke directly to the question that is at issue. If Congress had clearly addressed the issue, then Federal preemption is a clear-cut matter. Unless, Stanley could point to a case that had ruled “that Congress had unambiguously expressed its intent for ERISA to cover self-funded STD plans,” then the DOL’s regulations would hold.

In Morash, the Supreme Court unanimously found that a related labor department payroll practices regulation, which exempted payments of compensation from an employer’s general assets for vacation days, was not preempted by ERISA. In Norberry v. Life Ins. Co. of N. Am. and Laney v. IndependenceBlue Cross, the Court upheld ERISA exemption for the DOL’s payroll practice law.

Payroll practice issue is considered

Stanley’s short-term disability plan fell clearly within the scope of the payroll practice regulation. The plan dictated that Stanley would pay a disabled employee 60% of their weekly earnings during the time they were unable to work. According to the DOL interpretation, “normal compensation” includes payments that are less than full salary. Bassiri confirmed this interpretation, as did Butler v. Bank of Am..

The Court also observed that Stanley’s payment of benefits came from the company’s general assets during “periods of time during which the employee is physically or mentally unable to perform his or her duties.” In Stern, the Court had found that IBM’s similar program fell under the DOL rule. Langley v. DaimlerChrysler Corp. found that that company’s disability absence plan also fell under the DOL law. The list of cases confirming that plans of the type provided by Stanley are under the DOL jurisdiction continues and are not worth reciting here.

Disability plan’s attorneys argue that the plan was held out as an ERISA plan

Stanley’s disability plan attorneys cited McMahon v. Digital Equipment Corp. as proof that ERISA governs when an employer establishes a plan and treats it as an ERISA plan, and presents the plan to employees and the Federal government as an ERISA plan. A careful look at this case failed to support Stanley’s argument. In McMahon, Digital Equipment Corp. had held its disability plan out to its employees as being governed by ERISA, had filed papers with the federal government as required of an ERISA plan, and had partially funded its plan with insurance and a fidelity bond. These three elements resulted in a determination that the plan fell under ERISA.

In Stern v. IBM Corp., the same issue raised by Stanley was clearly rejected by the Court based upon the fact that plans that paid benefits out of their own general assets are considered exempt under DOL law. To rule otherwise would allow such plans to claim to be ERISA plans when it was financially beneficial. The Court ruled that a mere labeling of the plan as an ERISA plan does not make it a plan governed by ERISA.

Stanley had clearly labeled its short-term benefit plan an ERISA plan. It informed participants of their rights under ERISA and notified them that the company filed a Form 5500 annual report with the IRS and the DOL each year. Yet, Monkhouse’s disability attorney was able to present to the Court a document from the plan administrator, CIGNA, stating that Monkhouse’s claim was non-ERISA. And the non-compliance of CIGNA’s denial letter with ERISA requirements supported the administrator’s understanding that the claim was a non-ERISA claim.

In Bilheimer v. Fed. Express Corp., a case in which Attorneys Dell & Schaefer represented the disability claimant, the Court found that it didn’t matter what administrative procedures FedEx had put in place or that it treated its plan as though it was governed by ERISA. The short-term disability plan was funded entirely by general assets and this made it a payroll practice.

Case law in this case was clearly on the side of Monkhouse. Stanley failed to prove that ERISA had jurisdiction over its short-term disability plan. At the same time, the Court found that Stanley “had objectively reasonable grounds to believe the removal was legally proper.” Monkhouse’s request for compensation for his disability attorney’s fees was denied.

So when does ERISA preemption apply?

ERISA preemption applies when a short-term disability plan is funded at least partly by insurance. When the plan is entirely funded by the company establishing it, it takes more than just stating that the plan is governed by ERISA. If you have any questions as to whether the short-term disability plan you participate in is a payroll practice exempt from ERISA, take the time to contact a disability attorney. It could make a difference in the benefits you receive.