NYSA-ILA Medical & Clinical Services Fund v. Axelrod

Citation: 27 F.3d 823Docket: No. 1294, Docket 93-7221

Court: Court of Appeals for the Second Circuit; June 23, 1994; Federal Appellate Court

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The Trustees of the NYSA-ILA Medical Clinical Services Fund (the "Fund") filed a lawsuit asserting that the Employee Retirement Income Security Act (ERISA) preempts New York Public Health Law 2807-d, which imposes a tax on contributions for health care benefits provided by the Fund's medical centers. The United States District Court for the Southern District of New York ruled against the Fund, concluding that ERISA does not preempt the state tax and granting summary judgment to the state health officials. The Fund is an ERISA-regulated multiemployer trust that provides health benefits primarily to longshore workers and their dependents through three medical centers, two located in New York and one in New Jersey, which serve only plan participants. 

In 1990, New York enacted a Health Facility Assessment (HFA) that taxes hospital gross receipts to address a state budget deficit. The HFA, effective January 1, 1991, applies to various medical facilities, including the Fund's centers, and mandates a tax rate of six-tenths of one percent. The definition of 'gross receipts' includes nearly all income received by the medical centers, with limited exceptions. The Fund's centers generate revenue mainly from employer contributions, supplemented by direct payments from employers, co-payments, and miscellaneous income sources. From January to November 1991, the Fund's New York centers reported assessable income of $1,177,670 and paid $7,066 in assessments. The Fund ceased filing HFA reports and paying assessments after November 1991. It excluded transfers from the Fund to the centers from assessable income, a point not contested by the state. The status of these transfers regarding taxation has not been litigated. Since early 1992, the Fund altered its payment structure, routing certain contributions and registration fees through the Fund instead of directly to the medical centers.

The Fund contends that its restructuring avoids the implications of the Hospital Financing Act (HFA) but is hesitant to redirect all payments currently received by medical centers until a resolution of the case. The Fund initiated litigation in April 1992, claiming that ERISA preempts the HFA as it imposes a levy on contributions and health care benefits from the Fund. However, the Fund does not dispute the HFA's applicability to unrelated miscellaneous revenue generated by the centers, such as from scrap sales and supplier rebates. The Fund is seeking declaratory and injunctive relief alongside restitution for prior HFA assessments.

In a summary judgment ruling, the district court determined that the HFA operates as a general tax and is not preempted by ERISA since it only has an incidental effect on ERISA plans. The court noted that the minimal tax imposed by the HFA does not significantly threaten the economic viability of the plan, leading to the dismissal of the action. This ruling is now under de novo review.

ERISA, enacted in 1974, aims to protect the interests of employees in benefit plans, encompassing both pension and welfare plans. An "employee welfare benefit plan" is defined under ERISA as any program maintained by employers or employee organizations for providing medical or other benefits to participants and beneficiaries. The Fund is acknowledged as an employee welfare benefit plan that provides medical benefits through its own medical centers.

One primary goal of ERISA was to eliminate state regulation of employee benefit plans, achieved through an express preemption clause that broadly supersedes state laws related to employee benefit plans. The Supreme Court has clarified that a law is considered to "relate to" an employee benefit plan if it has any connection or reference to such plans, which extends ERISA's preemption to state laws not specifically designed to regulate employee benefits.

State laws can be preempted by ERISA if they apply specifically to employee benefit plans, even without an explicit connection. However, not all state laws that affect these plans are subject to preemption; only those that do so in a significant manner qualify. The Supreme Court has indicated that laws affecting plans in a "tenuous, remote, or peripheral" way do not relate to ERISA plans and thus are not preempted. Examples of state laws that have been found not preempted include general garnishment and severance payment laws.

In the case at hand, the State argues that the Health Fund Assessment (HFA) is a general tax law that affects ERISA plans only incidentally. It compares the HFA to sales and utility taxes, suggesting it should be treated as a regular business cost. However, the argument notes that the HFA specifically targets the health care industry, which is integral to the operation of ERISA welfare plans. The HFA functions as a direct tax on payments meant for medical benefits, thereby significantly impacting the Fund's ability to provide care. It affects the Fund's core operations rather than merely peripheral activities. As a result, the HFA is deemed to relate directly to the Fund and has a substantial effect by depleting resources intended for health care benefits, which will likely lead to reduced benefits or increased costs for beneficiaries. This connection establishes that the HFA is sufficiently linked to ERISA to warrant preemption.

The cost of the plan will increase for employers and/or employees, or benefits must be reduced to counteract the tax implications, which Congress aimed to prevent with ERISA legislation. The court asserts that even if the Fund could avoid the Health Funding Arrangement (HFA) through financial restructuring, it would require significant changes to the Fund's administration and create inconsistencies between its New York and New Jersey facilities. Such state law requirements that compel alterations in traditional administration methods are contrary to ERISA's purpose. The district court acknowledged the HFA's direct impact on the Fund but deemed it too minor to warrant preemption, due to a low tax rate of 0.6%. The court disagrees, stating that the economic impact of a statute can be relevant in determining preemption if its connection to the ERISA plan is weak. However, a statute cannot evade preemption solely because its impact is considered minimal, as this would undermine ERISA’s preemption policy and lead to complex litigation over what constitutes a "substantial" impact. Previous cases support the idea that substantial economic impacts can trigger preemption, but the converse—that minor impacts allow for state regulation—cannot be upheld. Consequently, the court reverses the district court's judgment.