In Cappello v. Iola, No. 10-4154 (3rd Cir. 2012), the defendant, James Barrett (“Barrett”), a financial planner, induced the plaintiffs, four small New Jersey corporations and their respective owners, to adopt an employee welfare benefit plan known as the Employers Participating Insurance Cooperative (“EPIC”). However, EPIC was a complex tax avoidance scheme. EPIC’s advertised tax benefits, the plaintiffs discovered years later, were illusory; the scheme masqueraded as a multiple employer welfare benefit plan, but in fact was a method of deferring compensation. After the Internal Revenue Service audited the plaintiffs’ plans and disallowed certain deductions claimed on their federal income tax returns, the plaintiffs initiated this suit against Barrett and other entities involved in the scheme. They asserted, among others, state law claims of misrepresentation of tax advantages and other aspects of EPIC. One question for the Third Circuit Court of Appeals (the “Court”): are these state law claims preempted by ERISA? Here is what the Court said on this question.
To ensure that regulation of employee benefit plans resides exclusively in the federal domain, Congress included in ERISA an expansive preemption provision, codified at section 514(a). This section provides that ERISA shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan. The test for whether a state law cause of action “relates to” an employee benefit plan-and is therefore preempted- is whether it has a connection with or reference to such a plan. In this case, the plaintiffs’ state law claims are preempted by ERISA to the extent they related to misrepresentations made after the plaintiffs adopted EPIC, and are not preempted otherwise. Post-adoption misrepresentations are premised on the plan’s existence and therefore relate to a plan; pre-adoption misrepresentations are not so premised and do not relate to the plan.