OVERSIGHT ON ERISA, 1978

THURSDAY, JUNE 1, 1978

HOUSE OF REPRESENTATIVES,

PENSION TASK FORCE,

SUBCOMMITTEE ON LABOR STANDARDS,

COMMITTEE ON EDUCATION AND LABOR,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10:30 a.m., in room 2261, Rayburn House Office Building, Hon. Cecil Heftel presiding. Members present: Representatives Heftel, Erlenborn, Miller, Murphy, and Shuster.

Staff present: S. Howard Kline, Pension Task Force counsel; Russell J. Mueller, Pension Task Force actuary and minority legislative associate.

Mr. HEFTEL. Good morning to all of you. We are here today to conduct an oversight hearing on ERISA.

At the time ERISA was drafted by the Congress, the States had done virtually nothing in developing legislation to protect employees and to develop health insurance care for their citizens. In some instances, the laws were almost regressive. But times fortunately have changed, and we do have one example of a State which enacted legislation which has made it mandatory that employers maintain health programs for their employees, in which the employees either pay 50 percent of the medical coverage or 1.5 percent of the employee's salary, whichever is less.

Today we have a Federal law which would preempt and make impossible continuation of that Hawaii law. We are conducting these hearings to determine how, if at all, we should amend or change ERISA.

We have some witnesses who must catch a plane to leave quickly, and so if everyone is in agreement, I would like to call the group ERIC to the front table. ERIC is an industry committee represented by the following: Robert S. Stone, George J. Pantos, Peter G. Nash, and Jerry L. Oppenheimer. I did not read the names of the firms.

If you would identify yourselves as you start your testimony, we will hear all of you, and then ask questions following presentation of your testimony.

(521)

STATEMENTS OF GEORGE J. PANTOS, ATTORNEY, VEDDER, PRICE, KAUFMAN, KAMMHOLZ & DAY; ROBERT S. STONE, SENIOR COUNSEL, INTERNATIONAL BUSINESS MACHINES; PETER G. NASH, ATTORNEY, VEDDER, PRICE, KAUFMAN, KAMMHOLZ & DAY; AND JERRY L. OPPENHEIMER, MAYER, BROWN & PLATT

STATEMENT OF GEORGE J. PANTOS

Mr. PANTOS. Thank you, Mr. Chairman. My name is George J. Pantos, and I am a partner in the law firm of Vedder, Price, Kaufman, Kammholz & Day, Washington, D.C. With me today are Peter G. Nash, a partner in the same law firm, Jerry L. Oppenheimer, a partner with the law firm of Mayer, Brown & Platt, and Robert S. Stone, senior counsel, International Business Machines Corp. (IBM), Armonk, N.Y. We appear today on behalf of the ERISA Industry Committee (ERIC), a nonprofit corporation whose members constitute an association of more than 80 major corporations engaged in a wide cross-section of American business. Each of these corporations maintains one or more retirement plans for the benefit of their employees. In all, the companies represented in ERIC maintain a total of over 750 separate employee retirement plans which pay benefits to some 1.5 million retirees and other beneficiaries, and the approximately 8.5 million participants (employees, retirees, and other beneficiaries) of pension plans sponsored by ERIC members represent about 20 percent of all participants in private pension plans.

We welcome this opportunity to appear before this subcommittee today, Mr. Chairman, to offer views on certain issues of concern to ERIC members which we trust will be of interest to members of the subcommittee.

We would like to concentrate our attention today on three important subjects: first, the ERISA preemption provisions, with specific reference to their application to welfare plans; second, the potentially far-reaching implications of the decision of the Seventh Circuit Court of Appeals in the Daniel v. International Brotherhood of Teamsters case; and third, integration of tax-qualified retirement plans and social security, which is presently before the Ways and Means Committee, but also has impact on this committee's activities.

Robert S. Stone, who also serves as chairman of the ERIC Legal Committee, will comment on the preemption issue; Peter G. Nash, who formerly served as General Counsel of the National Labor Relations Board and Solicitor of Labor, will discuss the broad implications of the Daniel case; and Jerry L. Oppenheimer will discuss the problem of integrating tax-qualified retirement plans and social security.

But, first, I wish to commend the subcommittee for scheduling these important oversight hearings. We agree that the time has come to look at the record and evaluate how ERISA has been administered and interpreted, and to assess whether any legislative modifications are warranted at this time.

Since an important focus of ERIC during the past 31⁄2 years has been on ERISA regulations, it would be useful to look backward first and ponder the fact that some 45 months after the passage of

this act, nearly half of the regulations required by the act have not been issued as yet in either proposed or final form. More importantly, less than half of the regulations issued so far have been promulgated in final form, and there is no clear indication when the rest of the regulations will be issued.

This delay in the issuance of regulations has led to uncertainty among plan sponsors concerned with administering and amending their plans in compliance with ERISA. Prompt action by the executive branch to issue all the remaining regulations in final form could assist materially in eliminating uncertainty and in reducing implementation problems for the plans' sponsors.

In fairness, however, it should be noted that, given the complexity of the act and the obstacles surrounding issuance of such a large number of highly technical regulations, the Government's record in those few cases where final regulations have been issued has been viewed as responsive to the needs of plan sponsors.

Many employers have been more concerned with the critical importance of issuing final regulations than they have been with the need for legislative changes to ERISA. In other words, the silence of many employers with numerous plans and large numbers of employees to the various legislative proposals introduced by this body and the Senate since passage of ERISA should not necesarily be construed as either opposition to or support for these proposals, but rather as reflecting a view that it would be premature to amend ERISA until the bulk of the ERISA regulations are issued in final form. To date, important regulations in areas such as severance-pay plans, supplemental-pay plans, HMO's, "top hat" plans, and plans maintained abroad primarily for the benefit of nonresident aliens, have yet to be issued, not to mention important areas outside of title I needing clarification in the IRS Code area such as lump sum, funding, mergers and consolidation.

It is widely felt that while some areas in ERISA might need eventual legislative correction, and while many of the changes proposed so far may be desirable, it would be preferable to avoid piecemeal amendment of such landmark legislation until it is more clearly apparent to Congress, the pension community and the executive branch what overall changes are necessary.

With respect to the division of regulatory responsibilities under ERISA, there may well be need for further clarification, particularly between DOL and IRS. I am informed a memorandum of understanding has been released. However, we are encouraged by the approach being taken by the Labor Department and IRS, and hope that a satisfactory accommodation resolving this important problem can be worked out between the agencies, thereby avoiding the imposition of a legislative solution.

We would like to turn now to the ERISA preemption provisions. Robert S. Stone will discuss this subject. With your permission, I would like to turn to the subject you referred to in your introductory remarks, the preemption provision, and ask Bob Stone to discuss our position on these provisions.

STATEMENT OF ROBERT STONE

Mr. STONE. Mr. Chairman, it is evident from the statutory language and from the legislative history that ERISA unequivocally

preempts State laws relating to employee benefit plans. We wish to commend the drafters of ERISA for including the broad preemption provisions in the statute and explain why plan sponsors feel Federal preemption is essential to the private pension and welfare benefit plan community.

Looking at the statutory scheme, ERISA's broad preemption provisions are limited only by section 514(b)(2)(A) which exempts State laws which regulate insurance, banking or securities.

This limitation, however, is subject to the further limitation that no employee benefit plan-other than a plan established primarily for the purpose of providing death benefits-can be deemed to be an insurance company or to be engaged in the business of insurance for purposes of any law of any State purporting to regulate insurance companies.

Thus, while ERISA preserves traditional State regulation of insurance companies and "the business of insurance," the fact that a plan chooses to offer its coverage "through the purchase of insurance," as the basic definition of employee benefit plan provides in section 3(1), should not permit the State to regulate the plan or its terms and conditions. The statutory scheme thus shows that Congress was well aware that it was preempting all State laws which in any way attempted to regulate the terms and conditions of employee benefit plans.

Any reasoned construction of the statutory terms in conjunction with one another must lead to the conclusion that the ERISA provisions specifically preempt direct or indirect regulation of "the terms and conditions of employee benefit plans" (section 514(c)(2)). Otherwise, the inescapable conclusion would be that ERISA's preemption was limited to the administration and implementation of group plans but not to the form of benefits provided under those plans.

Furthermore, by adding the parenthetical exception in the preemption provisions, section 514(b)(2)(B), Congress stated that an employee plan which provides death benefits is not exempt from State insurance laws by virtue of the broad preemption provisions of ERISA. The statement indicates that Congress was well aware of the relationship of State insurance laws to employee benefit plans. Congress chose to continue to permit only State regulation of employee benefit plans providing for death benefits. Had Congress so intended it could easily have extended this limited exception to medical or other types of health insurance benefits. By singling out only death benefits as not falling within ERISA's preemption provision, it is clear that Congress intended to permit ERISA preemption of all the other employee benefit plans previously regulated by State insurance or benefit laws.

Congress devoted considerable attention to the preemption issue, recognized the need to prevent conflicting regulation over employers with multi-state operations, and expressed an intention to avoid the costly litigation that would surely result from piecemeal preemption.

Most of the courts which have dealt with these issues to date have quoted Congressmen Dent and Erlenborn along with Senator Williams and Senator Javits to support the scope of preemption. Their statements demonstrate the intent of Congress to regulate

the entire field of employee benefit plans to the exclusion of State regulation.

If I may quote Congressman Dent in the legislative history of ERISA:

Finally, I wish to make note of what is to me the crowning achievement of this legislation, the reservation to Federal authority of the sole power to regulate the field of employee benefit plans. With the preemption of the field, we round out the protection afforded participants by eliminating the threat of conflicting and inconsistent State and local regulation.

I wish to bring to the committee a recent case, Wadsworth v. Whaland; Dawson v. Whaland.

We think it is important to bring to this committee's attention the results which can occur if ERISA's preemption of State law and regulation are not given their broad application. In a decision handed down by the First Circuit, the court concluded that a New Hampshire insurance law mandating the inclusion of mental health coverage in all group insurance policies issued in that State was exempt from ERISA's preemption by virtue of the clause in section 514(b)(2)(A) permitting State regulation of insurance. The court paid scant attention to the total statutory structure and never responded to contentions that the parenthetical statement in section 514(b)(2)(B) excluding death benefits from ERISA's preemption showed Congress intent to preempt States from any direct or indirect regulation of any other employee welfare benefit plans. Instead, the court concluded that the New Hampshire law was permitted to indirectly affect plans because it only regulated group insurance, and to do otherwise, the court said, "would nullify all State insurance laws concerning group insurance when the group policy is issued to an employee benefit plan." But then the court further offered a solution to the appellants that since their contracts were experience-rated, their insurance companies were really only administrators and the trust funds were actually selfinsurers. The court noted that had the appellants made such a contention, the New Hampshire law would have been preempted by virtue of the section 514(b)(2)(B) language which precludes a plan from being "deemed to be an insurance company." This interpretation surely has the effect of creating incentives for employers to "self-insure" in order to avoid the effect of State laws such as the New Hampshire statute.

Whether one agrees with the conclusions reached by the first circuit or not, the effect of such conclusions can be devastating to plan participants. For example, an employer who is unable to afford group insurance-which the State law has mandated to include much more coverage, such as mental health coverage, than the employer can afford-can designate himself a "self-insured." Unfortunately, the employer in such a situation is probably less able to shoulder the financial burden and, in fact, the provision of benefits to employees in such situations may well be illusory. Apparently this has become of concern to certain insurance associations which note some of their clients are now becoming selfinsured. While such a result is admittedly speculative, the actual experience of the trust fund administered by Mr. Dawson in New Hampshire presents us with a situation which we believe is contrary to every intention Congress had in drafting ERISA.

30-779 - 78-34