Pay or Play Laws, Erisa Preemption, and Potential Lessons from Massachusetts

Abstract:     
Many states are seeking to involve employers in health care reform efforts through the use of pay or play laws. Under such laws, employers can either play by providing health insurance to their employees in accordance with state standards, or pay a monetary fee to the state. As part of its comprehensive health reform, Massachusetts became the first state to implement such a law. This article examines whether the two Massachusetts pay or play laws are likely to be preempted by the Employee Retirement Income Security Act of 1974. The article argues that the fair share contribution, which imposes a maximum annual $295 per employee fee on employers that do not make a fair and reasonable contribution to employee health care should survive a preemption challenge, on the basis that the fee functions as an indirect economic incentive that is not significant enough to create a Hobson's choice for employers. The article also examines the Massachusetts free rider surcharge, which imposes a fee on employers whose employees access free state health care above a given threshold and who do not offer employees the ability to pay health insurance premiums on a pre-tax basis through a cafeteria plan. The article concludes that the free rider surcharge is also likely to survive an ERISA preemption challenge, on the basis that the required cafeteria plan is not, by itself, an ERISA plan, and need not involve any plan governed by ERISA. Given the conclusion that these two Massachusetts pay or play laws are likely to survive ERISA preemption, the article considers what contribution the Massachusetts employer provisions are likely to make to fundamental health care reform.

Keywords: ERISA, pay or play, health care reform, employer health care

JEL Classifications: 118, J33

Accepted Paper Series