The Transgender Employee in a State With Active Legislative Hostility

This is one of two ADJ pieces where the employer should engage ERISA counsel before acting. The legal terrain is genuinely unsettled, and the exposure is real in both directions: the employer who covers gender-affirming care and the employer who excludes it both face potential legal challenges under different theories. What follows identifies the levers the self-funded employer controls. It does not constitute legal advice, and the employer who acts on any of these levers without counsel is taking a risk this article cannot quantify.

The Legal Terrain

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ERISA Section 514(a) preempts state laws that “relate to” employee benefit plans. Self-funded plans have historically been protected from state insurance mandates under this preemption. However, several states have attempted to restrict gender-affirming care through mechanisms that arguably apply to provider conduct rather than insurance regulation: prohibiting providers from performing certain procedures regardless of how they are paid. Whether ERISA preempts state laws that restrict gender-affirming care by regulating provider conduct rather than insurance products is an open question before multiple federal courts as of 2026.

The Supreme Court’s June 2025 decision in United States v. Skrmetti upheld a Tennessee law banning gender-affirming care for minors, finding that it did not constitute sex-based discrimination under the Equal Protection Clause. Most state bans on gender-affirming care for minors remain in effect or will take effect. In August 2025, a federal court in Dr. James Dobson Family Institute v. Kennedy blocked HHS from enforcing Biden-era Section 1557 guidance requiring employer-sponsored plans to cover gender-affirming care. CMS finalized a rule in June 2025 prohibiting gender-affirming care as an essential health benefit in individual and small group fully insured plans starting in plan year 2026. The Movement Advancement Project tracks active legislation: as of early 2026, 14 states explicitly exclude gender-affirming care from state employee health benefits, and two states (Arkansas and Mississippi) permit private insurers to refuse coverage.

For the self-funded employer in one of these states, the legal position is this: ERISA preemption likely protects the plan from state insurance mandates that would exclude coverage, just as it protects the plan from state mandates that would require coverage. The plan document governs. But state laws targeting provider conduct (rather than insurance products) may reach the plan indirectly by preventing in-state providers from performing the procedures the plan covers. The employer who includes gender-affirming care in a self-funded plan in a state that has banned providers from performing it may have a plan that covers care nobody in the state can legally provide.

What the Employer Controls

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Explicit plan document inclusion: The employer who wants to cover gender-affirming care should state the coverage explicitly in the plan document, following the World Professional Association for Transgender Health Standards of Care (Version 8, 2022), with prior authorization criteria based on diagnosis and clinical need rather than categorical exclusion. Explicit documentation creates a clear record of the employer’s intent and a basis for ERISA preemption defense if state law is asserted against the plan.

Stop-loss carrier position: Before including gender-affirming care coverage, the employer should verify the stop-loss contract does not exclude gender-affirming care claims from covered charges. Some stop-loss carriers include explicit exclusions. Identifying and negotiating this exclusion before a claim arises is essential. If the stop-loss carrier will not cover gender-affirming care claims, the employer is retaining the full risk at the plan level, which for surgical claims can exceed $100,000.

Out-of-state care facilitation: For employees in states with legislative restrictions on specific procedures, the employer can design the plan to cover the same services at out-of-state facilities, with travel cost-sharing assistance. This is an explicit plan design choice that several large employers have implemented publicly. Amazon, Starbucks, and other Fortune 500 companies announced travel benefit provisions for employees who need to access care in states where it is available. The small self-funded employer can make the same design choice at a smaller scale. The ERISA preemption issue attaches to the plan, not to the state where care is received. A plan that covers gender-affirming surgery at an out-of-state center of excellence is exercising plan design authority, not evading state law.

Behavioral health coverage for gender dysphoria: Even in states that restrict surgical and hormonal gender-affirming care, counseling services for gender dysphoria remain covered under most frameworks. The OPM’s 2026 directive excluding gender-affirming care from federal employee health plans explicitly preserved coverage for counseling services provided by licensed mental health providers. The self-funded employer can ensure that behavioral health coverage for gender dysphoria is explicit in the plan document, that the behavioral health network includes providers with competency in gender identity, and that telehealth access to affirming therapists is available where in-network options are limited.

The Honest Commitment

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The employer who wants to do right by transgender employees names the legal complexity honestly. Not “we cover everything” and not “the law prevents us from covering this.” The honest statement is: here is what the plan covers, here is the legal uncertainty that affects how coverage works in this state, here is what the employer is doing to ensure access. For the employee in a restrictive state, the employer who covers gender-affirming care through out-of-state facility access and provides travel cost-sharing has made a specific operational decision. The employee knows the care is covered, knows the plan will help them access it, and knows the employer looked at the legal complexity and made a choice rather than defaulting to exclusion.

Transparency about the constraint does not relieve the employer of the obligation to do what they can within the constraint. The third objective from TOS.PRE applies with particular force here: keep it honest. Tell the employee what the company can do for them, what it cannot do because of the legal environment, and what it has done to close the gap. The employer who communicates this clearly, in a benefits guide that the employee can read before making enrollment decisions, has met the standard. The employer who excludes coverage without explanation, or who includes it on paper while knowing that no in-state provider can deliver it, has not.