DOL 'Preempts' Congress

Written by: Nick Curabba

The Department of Labor last week posted on its website Advisory Opinion 2008-02A expressing its opinion that, at least when it comes to ERISA preemption, Congress is…well…kind of irrelevant.

The advisory opinion is in response former to Solicitor of Labor Eugene Scalia's questions on behalf of Sprint-Nextel's automatic enrollment cafeteria plan, which automatically defaults non-electing employees into a health plan.  Importantly, the default plan requires employee cost sharing in the form of payroll deductions.

Notwithstanding the recent expansion of ERISA's preemptive power to facilitate automatic enrollment for 401(k) plans, the Department took the position in the advisory opinion that plain vanilla, pre-PPA preemption works just fine to trump those pesky state withholding laws.  For the countless lobbyists, lawyers, trade associations, and others in the benefits commentariat that urged Congress to expand ERISA's preemptive power to facilitate automatic enrollment 401(k) plans, the Department's new opinion may come as somewhat of a surprise.

Indeed, one of the key rationales for statutory expansion of ERISA § 514 was the perceived lack of clarity and inadequacy of pre-PPA preemption to effectively impose uniform federal standards in the face of conflicting state statutes.  In the absence of such clarity, Congress was compelled to act.  

And act they did.  Section 902 of the PPA expanded the scope of ERISA preemption to specifically trump state laws that the interfere with certain types of automatic contribution arrangements, paving the way for more employers to adopt "automatic 401(k)s." The expansion did not come, however, without a cost. 

In order to get to the new-and-improved preemption, automatic contribution arrangements must meet a series of preconditions, including requirements as to how the defaulted contributions must be invested, periodic election opportunities for defaulted participants, and new disclosure and notice requirements. Failure to meet those disclosure requirements  could result in civil penalties of up to $1,000 a day under new section 502(c)(2), also enacted as part of PPA. 

With the statement of its position in Advisory Opinion 2008-02A, the Department appears to suggest that the effort to enact the new preemption provision was unneeded.   Worse still, because the Department's position is the new preemption preconditions apply only to individual account plans (see footnote 3 in Ad. Op. 2008-02A), there now appears to be a two-tiered preemption system, with extraneous preconditions still required for automatic contribution arrangements, but an easier path to preemption for non-individual account plans.