'Self-funded' benefit plans exempt from state regulation, Supreme Court rules

November 28, 1990|By Lyle Denniston | Lyle Denniston,Washington Bureau of The Sun

WASHINGTON -- Workers' benefits under plans funded by their own companies cannot be modified to satisfy state insurance laws, the Supreme Court ruled yesterday in a decision that may affect more than 10 million employees nationwide.

Even if state insurance controls would alter benefit plans in the workers' favor, the court made clear, those controls can never be applied to "self-funded" plans.

Such plans, which rose sharply in popularity beginning about 20 years ago, now provide employee benefits in four of every five of the nation's larger companies, the court had been advised.

The plans involve funding of benefits by the company itself, rather than by plans that buy insurance from an outside source to cover the benefits offered.

The court's decision means that benefits provided under insurance contracts are fully subject to state insurance laws but that those provided under self-insured plans are exempt from such controls because, the court ruled, such plans are protected from state insurance regulation by the federal Employee Retirement Income Security Act of 1974.

The ruling, by a 7-1 vote, cleared up a conflict among lower courts on the issue by drawing a clear demarcation between the two kinds of benefit plans.

Justice Sandra Day O'Connor, who wrote the opinion, declared that Congress meant to exempt self-funded plans from state insurance controls to avoid "a patchwork scheme of regulation" that might cause employers to cut back on worker benefits to pay the added costs of complying with state insurance requirements.

The decision barred Pennsylvania from enforcing against self-insured plans a state law that says a plan may not require a worker to pay back benefits received from the plan if the worker also collects separately under an automobile insurance policy.

The case involved an Illinois-based company, FMC Corp., which requires workers or their families who receive benefits from a plan to reimburse the company if they also collect benefits from a third party.

Pennsylvania's insurance law would have barred FMC from enforcing that requirement against a worker's daughter who had received plan benefits as well as the settlement of a legal claim following an auto accident in January 1987.

Justice John Paul Stevens dissented alone in the case of FMC vs. Holliday (No. 89-1048). The newest justice, David H. Souter, who joined the court after the case was argued last month, did not participate.

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