A recently issued appellate court decision illustrates the complexity of ERISA preemption. Williby v. Aetna Life Ins. Co, 2017 WL 3482390 (9th Cir. August 15, 2017) involves the interplay between ERISA’s preemption provision and the savings and deemer clauses found in 29 U.S.C. § 1144.The underlying matter concerned a claim for short-term disability benefits under Boeing’s self-funded STD plan.Although the plan contained a clause giving Aetna, the plan’s administrator, discretion to determine benefit eligibility, the district court applied the de novo standard of review based on its interpretation of the applicability of California Ins. Code § 10110.6, which disables discretionary clauses insurance policies, certificates and in “contracts.” The court of appeals reversed that finding.
The court examined Boeing’s STD plan and found that while it did constitute “insurance,” § 10110.6 conflicted with ERISA’s “deemer” clause and was therefore preempted. The court began by reciting ERISA’s broad preemption provision stating that ERISA “shall supersede any and all State laws insofar as they may … relate to any employee benefit plan” covered by ERISA. 29 U.S.C. § 1144(a). Although the “savings clause” that follows carves out state insurance laws from preemption (“any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. § 1144(b)(2)(A)) – that provision is followed by the “deemer” clause, which states that no “employee benefit plan [covered by ERISA] … shall be deemed to be an insurance company or other insurer … for purposes of any law of any State purporting to regulate insurance companies [or] insurance contracts.” 29 U.S.C. § 1144(b)(2)(B). Hence, the court concluded that while § 10110.6 is saved from preemption as to insured plans, it is negated when it comes to self-funded plans. The court explained:
If the state law is applied to a traditional insurance policy, then the state law falls outside the deemer clause and thus within the saving clause–even if the insurance policy backstops an ERISA plan. On the other hand, if the state law is applied to an ERISA plan itself, which is how such laws operate on self-funded plans, the law falls within the deemer clause and thus is preempted, even if it is a bona fide insurance regulation that only incidentally affects ERISA concerns. See FMC Corp., 498 U.S. at 64, 111 S.Ct. 403. The result is a simple, bright-line rule: “if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it.” Id. The Court thus concluded: “We read the deemer clause to exempt self-funded ERISA plans from state laws that ‘regulat[e] insurance’ within the meaning of the saving clause.” Id. at 61, 111 S.Ct. 403; see Scharff v. Raytheon Co. Short Term Disability Plan, 581 F.3d 899, 907 (9th Cir. 2009) (“[U]nder ERISA’s ‘deemer clause,’ state insurance regulation of self-funded plans is preempted by ERISA.”). Thus, for a self-funded disability plan like Boeing’s, the saving clause does not apply, and state insurance regulations operating on such a self-funded plan are preempted.
(relying on FMC Corp. v. Holliday, 498 U.S. 52, 54, 111 S.Ct. 403, 112 L.Ed.2d 356 (1990)). As a fallback position, Williby asserted for the first time before the court of appeals that the STD plan was a payroll practice, citing Bassiri v. Xerox Corporation, 463 F.3d 927, 929 (9th Cir. 2006). The court found the point was waived.
Finally, although the district court had ruled in the plaintiff’s favor on the merits and recited that its determination would be the same regardless of which standard of review applied, the court of appeals concluded that it was unclear whether the district court had properly conducted such a review and remanded the case for redetermination.
While the result is disappointing since it will mean extra work for the district court which thought it was covering all the bases by presenting an alternative ruling under the abuse of discretion standard, the district court failed to perform an adequate ERISA preemption analysis or properly apply the deemer clause consistent with Supreme Court precedent. The bottom line is that insured plans and self-funded plans are treated differently when it comes to state laws regulating insurance. Such laws are clearly preempted under the deemer clause.