One of the most powerful and frequently litigated features of ERISA is its preemption clause. Under this provision, ERISA preempts — that is, supersedes and displaces — state laws that relate to employee benefit plans covered by the statute. For business owners, the practical significance of this doctrine is enormous. It affects where benefits disputes are litigated, what legal theories plaintiffs can pursue, what remedies are available, and ultimately whether state-based protections that employees or their families might otherwise rely on can be invoked against an ERISA-covered plan. Understanding ERISA preemption is not merely an academic exercise; it is a central feature of the benefits law landscape that shapes the risk profile of every employer benefit program.
The Text of ERISA’s Preemption Clause
ERISA’s preemption provision, found in Section 514, declares that ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” covered by the statute. This language is extraordinarily broad. The Supreme Court has repeatedly observed that the phrase “relate to” was deliberately given expansive meaning by Congress. In theory, any state law that has a connection with or reference to a covered employee benefit plan falls within the preemptive scope of Section 514.
The breadth of this language has produced decades of complex and at times unpredictable jurisprudence. Courts have struggled to identify principled limits on a clause whose natural reading would preempt virtually any state law touching on employment, insurance, healthcare, or financial relationships, areas in which state regulation is both pervasive and historically rooted. The Supreme Court has progressively refined the doctrine over time, though it cannot be said that the law in this area is entirely settled or free from difficulty.
What “Relates To” Means After Shaw v. Delta Air Lines
The foundational Supreme Court decision on ERISA preemption is Shaw v. Delta Air Lines, decided in 1983. There, the Court interpreted “relate to” to mean that a state law is preempted if it has a connection with or reference to an employee benefit plan. The Court struck down New York’s Human Rights Law to the extent it required employee benefit plans to provide certain pregnancy-related benefits, finding that it related to employee benefit plans by its express terms and therefore fell within Section 514’s preemptive sweep.
Shaw established a framework that, read broadly, suggested nearly any state law affecting benefit plan design or administration would be preempted. For several years, courts interpreted the preemption clause aggressively, routinely dismissing state law claims that arose in the benefits context in favor of federal ERISA claims. This had an important practical consequence: ERISA’s civil enforcement provisions, found in Section 502, contain a narrower set of remedies than state law typically provides. Specifically, ERISA Section 502 does not authorize extracontractual compensatory damages or punitive damages in most circumstances, meaning that a participant whose state law tort or contract claim is preempted by ERISA is often left with the remedy of simply recovering the benefit that should have been paid — potentially after years of expensive litigation.
The Narrowing of Preemption: New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance
The Supreme Court began to pull back from the broadest reading of ERISA preemption in its 1995 Travelers decision. There, the Court upheld a New York law that imposed surcharges on hospital bills depending on whether payment was made by a commercial insurer, a non-HMO Blue Cross and Blue Shield plan, or an HMO. ERISA plans could be indirectly affected by these surcharges, but the Court held that the law was not preempted because it did not mandate an employee benefit structure or administration. The Court reasoned that interpreting “relate to” in the most literal sense would swallow up every state law touching on the economics of healthcare, an outcome Congress could not have intended.
Travelers marked the beginning of a more contextual and purposive approach to ERISA preemption analysis. Rather than asking mechanically whether a state law has any connection with an employee benefit plan, courts now ask whether the state law governs a central matter of plan administration, such as the payment of benefits, claim processing, or plan governance, or whether it merely has a tenuous, remote, or peripheral connection to the plan. Genuinely peripheral state laws, such as generally applicable criminal statutes, contract law principles, or property law rules that happen to be invoked in a benefits-related dispute, are less likely to be preempted.
The Savings Clause: State Insurance Laws That Survive
ERISA’s preemption clause contains two significant exceptions. The first is the savings clause, which provides that nothing in Section 514 shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities. The savings clause preserves state insurance regulation from ERISA preemption. This is practically important because the vast majority of group health insurance products are sold through state-licensed insurers subject to state insurance regulation, and Congress did not intend ERISA to displace the entire state insurance regulatory framework.
The savings clause means that a state law mandating that insurance policies include certain benefits — coverage for mental health services, coverage for certain cancer treatments, coverage for mastectomies, and so on — is not preempted by ERISA to the extent it governs insurance contracts. An insurer doing business in a state must comply with that state’s insurance mandates. However, the savings clause has important limitations that are directly relevant to employers.
The Deemer Clause: Why Self-Funded Plans Are Different
ERISA also contains a deemer clause, which provides that an employee benefit plan shall not be deemed to be an insurance company or engaged in the business of insurance for purposes of any state law purporting to regulate insurance. When the savings clause and the deemer clause are read together, they create a critical distinction between insured plans and self-funded plans.
An insured plan is one in which the employer purchases a group insurance policy from a commercial insurer. The insurer bears the financial risk for claims. Because the insurer is subject to state insurance regulation, the policy it issues must comply with state insurance mandates. State insurance laws are saved from preemption by the savings clause and can be enforced against the insurer.
A self-funded plan, by contrast, is one in which the employer itself bears the financial risk for claims. Rather than purchasing an insurance policy, the employer pays claims directly from plan assets or from its general assets. Self-funded plans typically hire a third-party administrator to process claims, and they often purchase stop-loss insurance to cap their exposure on catastrophic claims, but the plan itself — not an insurer — is the entity obligated to pay benefits. Under the deemer clause, a self-funded ERISA plan cannot be deemed to be an insurance company, which means state insurance mandates cannot be applied to it. A self-funded plan is not required to include benefits mandated by state insurance law.
This distinction has enormous practical consequences. Large employers with self-funded health plans are not bound by state insurance mandates regarding benefits coverage. They can design their plans with benefit structures that would not be permissible if the plan were insured. This is one of the primary reasons why many large employers choose to self-fund their health plans: it gives them substantially greater flexibility in plan design and frees them from the patchwork of state insurance mandates that vary from state to state. It also means that employees of self-funded plans may have access to fewer state-law protections than employees covered by insured plans.
Complete Preemption and Removal to Federal Court
ERISA preemption has both a defensive dimension and an offensive one. The defensive dimension is the one described above: an employer or plan administrator can raise ERISA preemption as a defense to a state law claim, arguing that the state law is displaced by federal law. But ERISA’s preemption also has an offensive dimension known as complete preemption, which operates as a basis for removing cases from state court to federal court.
The doctrine of complete preemption, recognized in Metropolitan Life Insurance Co. v. Taylor, holds that ERISA Section 502(a) — the statute’s civil enforcement provision — so completely preempts certain state law claims that any complaint raising such a claim is necessarily a federal question that can be removed to federal court regardless of how the plaintiff has pled it. A plaintiff who files a state court lawsuit seeking to recover benefits under a group health plan, for example, is asserting a claim that “could have been brought” under Section 502(a)(1)(B), and therefore the case can be removed to federal court even if the plaintiff has characterized the claim as a breach of contract or bad faith denial of benefits under state law.
For employers, complete preemption is often a strategic advantage. Federal courts apply ERISA’s remedial framework, which typically allows only recovery of denied benefits, restitution of plan assets in certain fiduciary breach cases, and attorneys’ fees in appropriate circumstances. By removing benefits disputes to federal court, employers defending benefit denial claims avoid state court juries and the potentially generous state law remedies — particularly punitive damages — that can make benefits litigation extremely expensive.
The Continuing Evolution: Rutledge v. Pharmaceutical Care Management Association
The Supreme Court’s 2020 decision in Rutledge v. Pharmaceutical Care Management Association is the most recent significant development in ERISA preemption doctrine. The case involved an Arkansas law that required pharmacy benefit managers — the entities that administer drug benefits under health plans — to reimburse pharmacies at least as much as the pharmacy’s acquisition cost for each drug. A trade association for pharmacy benefit managers argued that the Arkansas law was preempted by ERISA because it affected plan costs and therefore related to employee benefit plans.
The Supreme Court unanimously rejected the preemption argument and upheld the Arkansas law. The Court emphasized that ERISA does not preempt state laws that impose duties on third parties, such as pharmacy benefit managers, even if those laws increase the costs of operating an employee benefit plan. The Court drew a distinction between state laws that govern how plans pay benefits and state laws that regulate the conduct of entities in the healthcare market. Only the former category is preempted. This decision has important implications for the ongoing debate over state-level healthcare price transparency and drug pricing laws, and it signals that the Court continues to resist the broadest possible reading of ERISA preemption.
ERISA Preemption and State Healthcare Laws
The intersection of ERISA preemption and state healthcare regulation has become increasingly contested as states have enacted increasingly ambitious laws aimed at controlling healthcare costs, protecting patients, and regulating the conduct of insurers and healthcare providers. Network adequacy laws, surprise billing laws predating the federal No Surprises Act, price transparency requirements, and laws regulating prior authorization practices all raise preemption questions.
As a general matter, state laws that regulate the conduct of insurers — including the terms of insurance contracts they issue — survive preemption under the savings clause. State laws that mandate specific benefits in all health plans, including self-funded plans, or that directly govern how ERISA plans administer benefits, are more likely to be preempted. The line between these categories is not always clear, and litigation over the preemptive scope of specific state laws continues in federal courts across the country.
Practical Implications for Employers
For business owners, ERISA preemption has several immediate practical implications. First, the choice between an insured and self-funded health plan is not purely a financial decision — it is also a legal one. Self-funded plans enjoy broader preemption protections that afford more flexibility in plan design but also reduce the protections available to employees under state insurance law. Employers considering a switch to self-funding should understand the legal dimensions of that choice in addition to the actuarial and administrative ones.
Second, when an employee or former employee brings a state court lawsuit involving benefits, the characterization of the claim matters enormously. If the claim is one that could be brought under ERISA Section 502(a), ERISA likely preempts it and it can be removed to federal court. If the claim is for a state law injury that is only tangentially related to the benefit plan — such as a discrimination claim or a claim involving conduct that would be actionable regardless of whether a benefit plan existed — it may survive preemption. Understanding this distinction helps employers make strategic litigation decisions.
Third, even where ERISA preempts a state law cause of action, the preemption defense does not make the employer’s conduct legally unassailable. ERISA Section 502 provides its own enforcement framework, and the Department of Labor has broad authority to enforce ERISA’s requirements. Preemption closes certain litigation doors but opens others — and the remedies available under ERISA, while more limited than state tort law in some respects, can include disgorgement of profits, removal of fiduciaries, and other significant equitable remedies.
Finally, ERISA preemption law continues to evolve. The Supreme Court’s recent willingness to limit the breadth of preemption in cases like Travelers and Rutledge suggests that the pendulum has swung away from the aggressive preemption of the 1980s. Employers and their counsel should stay current with developments in this area, particularly as states continue to innovate in healthcare and benefits regulation and as those innovations are tested against the boundaries of federal preemption.