A Private Letter Ruling issued by the Internal Revenue Service contains language relating to federal preemption of state law with regard to life insurance. The purpose of this Bulletin is to clarify the Department´s position that the Private Letter Ruling (PLR) does not present a basis upon which an entity can claim preemption of the Department´s ability to regulate a life insurance policy that would otherwise be subject to the Department´s jurisdiction.
In Private Letter Ruling No. 199921036 (the "Ruling"), the IRS found that proceeds from a self-funded multi-employer death benefit plan covered by ERISA are distributed under a contract of life insurance and thus qualify for exclusion from gross income. In its request for a ruling, the Taxpayer asserted that "the doctrine of federal preemption applies so that ERISA preempts state insurance laws that might otherwise apply to regulate the provision of death benefits by the plan within the state´s jurisdiction." The Ruling accepts this representation and accordingly holds that it need not look to state law to determine whether the death benefit is paid under a life insurance contract. This Ruling thus touches on the issue of the extent to which Title 1 of ERISA can be read to preempt state regulation of life insurance coverage issued in relation to an employee welfare benefit plan.
Without commenting on the merits of the Ruling, the Department wishes to emphasize its position that the Ruling does not alter existing law under which Texas regulates life insurance policies and companies. While Title 1 of ERISA has always been read to apply to totally self-funded employee death benefits just as it does to totally self-funded employee health benefits that are provided as part of an employee welfare benefit plan, the Texas Department of Insurance continues to regulate commercial carriers providing insurance to employee welfare benefit plans. No company should rely upon the Ruling to avoid compliance with Texas law relating to life insurance contracts or life insurance companies.
If you have any questions or concerns regarding this matter, please contact Barbara.Holthaus@tdi.state.tx.us, Staff Attorney at 512-305-7311.
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Sara Shiplet Waitt
Senior Associate Commissioner
Legal & Compliance