ERISA Preemption

• Author: Eric E. Johnson
• Pages: 429-452

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12. ERISA Preemption

“A rule without a penalty is just a suggestion.”

– Unknown

Basics

The Employee Retirement Income Security Act of 1974 – known as

“ERISA” – is a federal statute regulating employee benefits. ERISA

is important in the negligence context because of its preemptive

effect.

Federal laws can trump state laws – an effect called “preemption” –

because of the Supremacy Clause of the U.S. Constitution in Article

VI, Clause 2. It provides:

“This Constitution, and the Laws of the United

States which shall be made in Pursuance

thereof; and all Treaties made, or which shall be

made, under the Authority of the United States,

shall be the supreme Law of the Land; and the

Judges in every State shall be bound thereby,

any Thing in the Constitution or Laws of any

State to the Contrary notwithstanding.”

This power allows federal statutes to erase state causes of action. As

you know, tort law is a matter of state law.

The ERISA preemption provision is found in the federal statutes at

29 U.S.C. § 1144, but it is better known by its native section number

as ERISA § 514. The statute provides:

“[T]he provisions of this subchapter and

subchapter III of this chapter shall supersede

any and all State laws insofar as they may now

or hereafter relate to any employee benefit

plan[.]”

This provision has been interpreted to bar tort lawsuits stemming

from wrongfully withheld benefits. So if an employee is entitled to

medical care under the employer’s health plan, and that medical care

is wrongfully denied, a common-law contract or tort lawsuit will not

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be allowed. This has the effect of providing a substantial level of

immunity for healthcare decisions made in the context of employee-

benefit program. The ERISA preemption effect is especially sharply

felt in the context of decisions made by health maintenance

organizations (HMOs).

Although state-law causes of action are not available to employees

wrongfully denied benefits, ERISA itself provides a cause of action.

ERISA § 502 creates a special private right of action such that

employees wrongfully denied benefits can sue to recover the value of

the benefits. The crucial difference between ERISA § 502 and

common-law causes of action lies in the amount recoverable. ERISA

§ 502 does not permit recovery for consequential damages or

punitive damages. So if a person dies because of being wrongfully

denied coverage for needed treatment under an employee-benefit

plan, the recovery is limited to the monetary amount that should have

been disbursed for the treatment. The family may not recover an

amount that would compensate them for the loss of their loved one.

Critics charge that this gives insurers and HMOs little incentive to

pay the benefits that insureds are legally due. If a health-care

organization is confronted with an authorization request for a life-

saving surgery that will cost $75,000, the organization can authorize

the surgery, in which case it will be out $75,000, or the organization

can withhold authorization, in which case it faces a potential liability

– assuming a § 502 action is brought – of $75,000. This means that

health-care organizations have little to lose by withholding treatment

authorizations. Of course, if a health-care organization is chronically

uncooperative, it can expect to lose customers. Since, however, the

health-care organizations’ true customer is the employer – not the

covered employees – the organization may find that it wins more

business by keeping costs low rather than through excellent service.

It is important to keep in mind what causes of action ERISA does

not bar.

ERISA does not bar state tort law suits against health-insurers or

HMOs that are not providing services as part of an employee benefit

program. The vast majority of people with health insurance get that