Multi-State Employers: Compliance and Operational Complexity Across Jurisdictions

LFP-07.04 | Sharp Analysis | Series 07: The Geography of Level Funded

A 30-person employer with workers in Texas, California, and New York faces three regulatory regimes, three network realities, and three marketplace environments. ERISA preemption theoretically provides uniformity for the plan design. The theory does not match the operational reality for the stop loss component, network access, and employee communication compliance.

Remote work has permanently changed employer geographic footprints in ways that the level funded market has not fully adjusted to. Bureau of Labor Statistics data shows that 22.9% of employed persons teleworked in the first quarter of 2024. Among workers in professional and business services, the telework rate reached 41.5%. Among information industry workers, it was 47.5%. The small employers who fit the level funded profile, in terms of size, industry, and risk characteristics, are disproportionately represented in industries with the highest remote work rates. A 20-person software company that was single-state in 2019 may now have employees in seven states. The plan design has not changed. The compliance footprint has grown considerably.

The Multi-State Employer Profile

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The remote work shift that accelerated in 2020 permanently reset employer geography for knowledge-work industries. Before the pandemic, a 25-person financial services firm in Austin almost certainly had all of its employees in Texas. That same firm today may have employees in Colorado, Florida, Georgia, and New York. Hiring from a national talent pool, rather than a local one, is now the default strategy for employers in most professional service industries.

The benefits implications of geographic expansion were not the primary consideration when these hiring decisions were made. Employers who understood that adding an employee in a new state created payroll tax obligations and potential corporate tax nexus often did not fully appreciate that the same decision created a new set of health benefits compliance questions: whether the stop loss carrier is licensed in the new state, whether the leased network provides adequate coverage for employees there, whether the state where the new employee works has requirements that interact with the level funded arrangement, and whether the employee in that state has better options through ICHRA than through the group plan.

The Census Bureau’s Statistics of U.S. Businesses tracks multi-establishment firm counts by firm size category. An employer with employees working remotely from home addresses in multiple states is, for health benefits compliance purposes, a multi-state employer regardless of whether the firm has formal offices in those states. The remote work expansion created de facto multi-state operations in firms that had always operated as single-state employers and that had no compliance infrastructure designed for that complexity.

Where ERISA Preemption Provides Protection and Where It Does Not

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ERISA Section 514, codified at 29 U.S.C. § 1144(a), preempts any state law that relates to an employee benefit plan. The preemption is broad for plan design. A self-funded level funded plan can provide the same benefits on the same terms to employees in Texas and Massachusetts without complying with Massachusetts’ mandated benefit requirements. ERISA preempts those requirements as applied to the plan. The employer can maintain a single plan document, and employees in all states receive the same coverage under the same terms. That uniformity is the preemption’s primary operational value for multi-state employers.

The preemption’s limits are where multi-state complexity begins. Stop loss insurance is a separate contract between the employer and the stop loss carrier. It is regulated as insurance under state law. States can impose requirements on stop loss carriers operating within their jurisdiction, including minimum attachment point requirements, policy form filing requirements, and carrier licensing requirements, without violating ERISA preemption. The preemption covers the plan. It does not cover the insurance contract that sits alongside the plan.

New York Insurance Law Sections 3231 and 4317 prohibit stop loss insurance for employers with 50 or fewer employees. The employer with 25 workers, headquartered in Texas and adding remote employees in New York, cannot obtain stop loss coverage for the New York employees through the same arrangement that works in Texas. New York’s prohibition does not change because ERISA preempts the plan design question. The preemption applies to the plan. The state’s authority to prohibit stop loss for small groups applies to the insurance contract. These are legally distinct objects, and the distinction produces a compliance gap that many small employers and their TPAs do not discover until after the hire is made.

States with minimum specific attachment point requirements, including those that have adopted some version of the NAIC 1995 Stop Loss Insurance Model Act, may require different attachment point levels for the same plan in different states. A specific attachment of $20,000 that satisfies requirements in Texas and Ohio may not satisfy requirements in states with higher statutory minimums, or may require separate policy provisions to accommodate different state requirements under what the employer treats as a single stop loss contract.

The Department of Labor confirmed in Advisory Opinion 92-24A (1992) that ERISA preempts state regulation of plan design for multi-state self-funded plans and that stop loss does not convert a self-funded plan into an insured plan. The advisory opinion does not eliminate the uncertainty that arises at the boundary between plan design preemption and insurance regulation of the stop loss contract. Multi-state employers must understand which compliance questions involve the plan, where preemption provides a federal answer, and which involve the insurance component, where state-by-state analysis is required.

The Operational Complexity

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The compliance analysis is the beginning, not the end, of the multi-state level funded operational challenge. After establishing what the regulatory environment requires in each state, the employer must address what the product actually delivers.

Network access variation is the most immediate operational consequence. The leased PPO network that provides adequate coverage in suburban Indianapolis may have thin coverage for an employee working remotely from a rural county in North Carolina. As examined in LFP-07.03, HRSA designates approximately 20% of the U.S. population as living in primary care shortage areas, and over 60% of rural Americans live in mental health shortage areas. Remote employees are disproportionately likely to be located in areas where they chose to live rather than where providers are concentrated, because remote work freed them from that geographic constraint. The multi-state employer who assumes that national network access means uniform access across all employee locations will discover the assumption is wrong.

Stop loss placement requires state-level verification. Not all stop loss carriers are licensed in all states. The carrier that serves an employer’s Texas headquarters may not be admitted in a state where a new remote employee is located, or may require separate endorsements for states outside its standard market. Stop loss carriers whose appetite is built around specific geographies, particular industries, or specific employer sizes may offer less competitive terms for employees in states outside their core markets. The multi-state employer who adds employees in new states without verifying that the existing stop loss arrangement accommodates them may have coverage gaps regardless of what the plan document says.

Employee communication compliance intersects with preemption in ways that are not always obvious. ERISA requires specific disclosures, including Summary Plan Description delivery, Summary of Benefits and Coverage, and benefit statements. Those federal requirements are preempted from state modification. But some states have consumer notification requirements, often applicable to employers generally rather than to insurance products specifically, that may interact with employee benefit communications. Whether ERISA preempts these requirements depends on whether they relate to the employee benefit plan under the broad preemption analysis. Employers often comply with state requirements even when preemption analysis favors them, because litigating preemption is expensive and compliance is cheaper.

Tax treatment of the level funded arrangement varies at the margin. The employer’s contribution to the claims fund is not a premium and is not subject to premium tax under ERISA preemption analysis. The stop loss premium is insurance and is subject to state premium tax. For a multi-state employer with employees in several states, the stop loss premium may be allocated across states, and premium tax calculations may require state-level attribution. States with premium tax rates at the higher end of the national range add cost that single-state employers in permissive-treatment states do not face.

ICHRA as a complement to level funded creates a parallel geographic complexity for the multi-state employer. An employer offering level funded to full-time employees and ICHRA to part-time or remote employees with variable schedules encounters different marketplace conditions by state. The reimbursement amount that purchases a silver plan with adequate network access for an employee in Austin may be inadequate for an employee in a rural county where marketplace competition is thin and benchmark premiums are higher. The employer administering ICHRA as a uniform benefit across states is delivering coverage outcomes that vary by geography in ways the employer may not have mapped.

Multi-State as a Barrier to Adoption

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The operational complexity imposes costs that are most acute for the employers who should benefit most from level funded. A single-state employer with 30 employees in suburban Columbus, Ohio, has a clean situation: favorable Ohio regulatory environment, adequate network coverage in the Columbus metro, established broker and TPA infrastructure, competitive stop loss market with multiple carriers active in the geography. The multi-state employer with the same number of employees distributed across seven states has a compliance analysis, a network adequacy review by state, a stop loss placement process that accounts for carrier licensing in each state, and an employee communication framework that addresses the preemption boundary. The burden grows with each additional state, and the employer who expands without reassessing the level funded arrangement may have a plan that worked at founding and has accumulated compliance exposure with each remote hire.

The comparison to fully insured is clarifying. A national fully insured carrier handles multi-state compliance as part of the product. UnitedHealthcare, Anthem, Cigna, and Aetna file policy forms in each state, maintain network contracts across geographies, ensure consumer communications comply with applicable requirements, and manage the risk function internally without employer involvement in the state-by-state compliance analysis. The employer writes a single check. The carrier manages the complexity that the level funded employer must manage or delegate.

The TPA capacity question is not about the largest national TPAs with multi-state infrastructure. Those organizations can support multi-state employers with the systems and expertise the compliance footprint requires. The Society of Professional Benefit Administrators’ 2025 member directory lists 116 TPA firms covering approximately 55% of U.S. workers in non-federal health plans. Each firm in that directory reports its geographic regions served as a core attribute, which reflects the industry’s structure: most TPAs are built around defined geographic territories, not national footprints. Adding a client with employees in six states introduces compliance questions in states where the TPA may have no stop loss carrier relationships, no verified network adequacy data, and no working familiarity with the applicable state insurance commissioner guidance on stop loss filings. The compliance gap is not theoretical for these firms. It is structural.

The consequence is market segmentation the level funded market has not fully addressed. The employer profile that works best in level funded, meaning the employer with 15 to 50 employees in a favorable-treatment state with adequate network access, is increasingly a multi-state employer as remote work expands. The product that works for that employer in its home state may not work for that employer across its full geographic footprint. Some multi-state employers conclude that the compliance overhead of level funded outweighs the cost advantage relative to a fully insured national carrier product that handles the complexity for them. That conclusion pushes genuinely suitable employers toward a product that serves them less well on cost and transparency, because the level funded market has not built the infrastructure to serve their actual geographic reality.