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February 4, 2019

Automatic enrollment given a boost

Dawn Kramer J.D., CEBS

U.S. Department of Labor (DOL) Issues Letter Indicating ERISA Preemption Applies to State Payroll Withholding Laws

On December 4, 2018, the DOL issued a letter in response to an inquiry from the American Council of Life Insurers (ACLI) about the interaction of ERISA and state wage withholding laws that require an affirmative written election before payroll deductions may be taken as contributions toward coverage in an employer-sponsored benefit plan. 

ACLI’s inquiry related to employer-provided disability coverage, but the DOL responded more broadly and indicated that ERISA preempts (overrides) such a state law. This generally means that, unless an employee has waived coverage, an employer with an ERISA-covered benefit plan may automatically enroll employees in coverage and deduct the required contributions from employee paychecks. This letter does not actually represent a change in the DOL’s position or introduce any new guidance, but it is a welcome clarification that allows employers flexibility to increase group plan participation, spreading risk, and expanding protection for their workers. 

ERISA Preemption Primer 

Basically, the legal doctrine of ERISA preemption provides that a benefit plan subject to ERISA may generally ignore any conflicting state law that may relate to the benefit plan with certain limited exceptions. The most significant exception allows states to regulate insurance within their borders, and state laws regulating insurance are “saved” from ERISA preemption. This is why state insurance mandates apply to fully-insured ERISA plans while self-insured ERISA plans may choose to ignore them. 

In support of its position for the preemption of state wage withholding laws in connection with enrollment in an ERISA plan, the DOL cited various court cases and previous Advisory Opinions addressing circumstances in which state laws have been found to relate to an ERISA benefit plan. To the extent an applicable state law is interpreted to regulate or limit an employer’s ability to enroll employees or to make plan-related payroll deductions, it is the DOL’s position that such state law will be preempted and will not apply to the employer’s ERISA plan. 

Note: The DOL’s letter did not address any of the exceptions to ERISA preemption such as the exception saving state insurance laws. As a result, the letter shouldn’t be viewed as sanctioning other actions an employer might want to take with respect to a fully-insured benefit plan. 

Notes and Practical Issues

If an employer wants to implement an automatic enrollment policy, there are a few additional considerations that should be taken into account. For example, ERISA imposes certain fiduciary obligations on an employer in its role as plan administrator. Among other things, this requires comprehensive communications pieces about any plan terms and conditions as well as a clear explanation of the employee’s right to decline coverage and the exact procedures and timeframes for doing so.  

We realize that the inquiry dealt specifically with disability coverage and that many employers provide ancillary coverage such as basic life, AD&D, and disability at no cost to employees. It’s also worth noting that disability was a tricky example to use, as many self-insured short term disability programs may not actually be eligible for ERISA preemption.1 The DOL letter did not address whether the required contributions for benefits subject to automatic enrollment could be taken pre-tax or post-tax, which is really an IRS matter, but either should be permissible.2 This contribution approach should be included in the communication material described earlier.  

The DOL’s response does support the use of an automatic enrollment approach with respect to medical/Rx coverage, although an employer may not wish to do so for various reasons including the higher required employee contributions for these benefits compared to ancillary coverage like life and disability coverage. Also, the Affordable Care Act’s employer shared responsibility requirement can be met merely by offering coverage without regard to whether an employee actually enrolls. In any event, the employee must be given the opportunity to waive coverage.

1 Many employer-provided self-insured short term disability programs will fall within ERISA’s payroll practice exception, and ERISA’s preemption rules will not apply to them. 
2 An employer may prefer disability contributions to be taken post-tax so that the disability benefits will be tax free when paid to participants. 

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