The ERISA Industry Committee (ERIC), an employee benefits advocacy group, has filed a lawsuit in a federal court in Seattle, seeking to overturn a Seattle initiative compelling large hotels to provide generous and heavily subsidized health insurance to their low-income workers or pay them significant additional cash wages. The implications of the suit could ripple far outside the Pacific northwest and the hotel industry.
ERIC’s suit is noteworthy for at least two reasons. First, the Seattle initiative is part of a wave of action by cities and states taking health reform into their own hands by imposing insurance coverage or reporting obligations on employers. This is a troublesome trend for employers, particularly those subjected to multiple such obligations. ERIC argues that ERISA pre-empts, or blocks, application of the municipal ordinance to the city’s hotels. A favorable ruling here could lead to similar rulings elsewhere, to the relief of employers everywhere.
Second, ERIC is taking on a significant chore; a favorable ruling won’t be easy. The federal appeals court that would review any decision out of Seattle previously rejected a similar argument against San Francisco’s health insurance coverage mandate on employers.
Administratively challenging, to say the least
The Seattle measure, originally known as Initiative No. 124, requires hotels with 100 or more guest rooms to provide health insurance to lower-paid employees or pay them additional compensation. Qualified employees work least 80 hours per month and have income from their employer of less than 400 percent of the federal poverty level.
Under the measure, the health insurance must be equivalent to at least gold-level coverage on Washington’s health insurance exchange (“the exchange”).
Lockton comment: The Affordable Care Act (ACA) categorizes health insurance available on the ACA’s public health insurance exchanges in terms of metal levels, based on actuarial value. Bronze-level coverage, for example, is coverage designed to pay approximately 60 percent of the policyholder’s expected medical expenses. Gold-level coverage is designed to pay approximately 80 percent.
In addition, the employee cannot be required to pay more than 5 percent of his or her monthly gross taxable earnings for the coverage, even if the coverage insures the employee’s entire family.
Lockton comment: The ACA’s employer mandate, like the Seattle initiative, requires employers to offer health insurance to full-time employees at an affordable cost, but the affordability requirement applies only to self-only coverage.
If the employee is not enrolled in such coverage – it is not adequate for the employer to merely offer it – the employer must, by the 15th of the following month, pay the employee additional cash compensation. The additional cash must be equal to the greater of $275.17 or the difference between (i) the monthly premium for the lowest-cost gold-level policy available on the Washington exchange for the employee’s family, and (ii) 7.5 percent of the amount by which the employee’s wages for the previous month exceed 100 percent of the federal poverty level.
Sounds easy, right? Not so much.
The actual calculation the hotel employers must make is Byzantine, and will trigger significantly larger cash payments for many hotel workers. A toolkit, provided by Seattle to demonstrate the calculation of additional cash compensation, reveals that employers must:
- Determine whether the employee worked 80 or more hours in a month (including paid leave such as vacation, sick time or holidays).
- Determine whether the employee’s income from the employer for the month in question was less than 400 percent of the federal poverty line for a household the size of the employee’s household. If yes, the employee is covered by the city’s ordinance.
- Determine the premium for the lowest-cost gold-level policy available to the employee and his or her family on the exchange; this requires the employer to know the home zip code, age, and smoking status of the employee and of the employee’s spouse, domestic partner and each dependent child. Note that the employee must provide some of this information. The default if the employee refuses is that the employee is a household of one and a non-smoker.
- Determine the employee’s household size, and subtract 100 percent of the monthly poverty guideline for that household size from the employee’s compensation for the month in question.
- Multiply the difference (if greater than zero) by 7.5 percent.
- Subtract the resulting product from the lowest-cost gold-level health insurance policy available to the employee and his or her family on the exchange, as determined in step one above.
- Pay either that difference, or $275.17, whichever is greater.
An illustration in the toolkit reflects that a large hotel employing a 32-year-old non-smoker with one child, paying her $15.45 per hour for substantially full-time work (35 hours per week), would owe the employee an additional $551.54 per month unless the employee were enrolled in the employer’s coverage satisfying the metal level and employee cost requirements. The calculation assumes $619 as the lowest-cost gold-level coverage available to the employee and her child on the Washington exchange.
The Seattle initiative is troublesome to employers in many ways. For example, even if the employer offers the employee gold-level coverage at or below the maximum permitted cost to the employee (5 percent of her gross taxable earnings for the month), the employee can decline the offer and request the additional cash.
Additionally, if the employer offers the heavily subsidized gold-level coverage and the employee enrolls in it, the employer still owes the additional cash compensation for the month unless the employee’s cost for her family’s coverage under the employer plan doesn’t exceed the maximum permitted amount.
The entirety of this measure requires a monthly calculation by the employer for lower-paid employees whose gross compensation fluctuates from month to month.
Lockton comment: These calculations are cumbersome and would have to be performed quickly at the close of each month to ensure additional cash compensation due for the month would be paid within the time requirement (by the 15th day of the next month). As a practical matter, the ordinance essentially forces larger hotels to auto-enroll lower-paid employees in generous, heavily-subsidized coverage. Even then the employee, if auto-enrolled for pre-tax premium payments, could opt out and demand the additional cash. Moreover, the employer may not know, month to month, which employees will work 80 or more hours adding another layer of complexity to the determination.
The ERISA argument
When it passed ERISA, Congress deliberately sought to protect employers from patchwork state and local regulation of employers’ benefit plans. ERISA includes a broad pre-emptive shield designed to insulate employers from state and local law that relates or has a connection with their benefit plans, even indirectly.
ERIC’s argument against the Seattle ordinance is that it impermissibly relates to and has a connection with hotel employers’ health care plans. The ordinance dictates the minimum actuarial value the plans must have and the maximum amount the employer may charge the employee for the coverage, under threat of significant penalty in the form of additional cash wages.
We will watch this lawsuit carefully. If ERIC wins we might expect Seattle to revamp its ordinance to mirror San Francisco’s, which requires the employer to spend a certain sum on an employee’s healthcare, per hour worked by the employee. The employer can satisfy that obligation by offering its own plan, or by contributing to a medical reimbursement account through the city.
The federal appeals court with jurisdiction over both San Francisco and Seattle previously ruled that ERISA does not pre-empt the San Francisco ordinance. With more states and cities wading into the health reform arena, the precise scope and strength of ERISA’s pre-emptive shield may one day soon have to be settled by the U.S. Supreme Court.