On June 19, 2018 the Department of Labor (“DOL”) issued final regulations expanding access to association health plans (“AHPs”). These final regulations are intended to provide increased health plan options by providing relief from some requirements of the Affordable Care Act (“ACA”) for small employers and self-employed individuals, as directed by Executive Order 13813. The DOL has established new criteria under Section 3(5) of ERISA for determining whether a group or association of employers will be treated as an “employer” that may sponsor a single multiple-employer welfare plan. These new regulations raise many questions about interpretation of their provisions and interaction with other laws, particularly state laws governing multiple employer welfare arrangements (“MEWAs”).
AHPs already relying on more stringent pre-regulatory DOL guidance may continue to do so. In addition, new AHPs may choose to follow either pre-regulatory DOL guidance or the new regulations. The new AHP regulations apply to new fully insured AHPs on September 1, 2018, to existing self-insured AHPs that wish to follow the new regulations on January 1, 2019, and to new self-insured AHPs on April 1, 2019.
On July 26, 2018 11 states and Washington, D.C. filed a lawsuit against the DOL alleging that the AHP regulations violate the Administrative Procedures Act and exceed the DOL’s regulatory authority. The states (New York, Massachusetts, California, Delaware, Kentucky, Maryland, New Jersey, Oregon, Pennsylvania, Virginia, and Washington) seek to have the entire regulation vacated.
New Definition of Bona Fide Group or Association
In order to be considered a “bona fide” group or association of employers within the meaning of ERISA Section 3(5), the regulations establish that an AHP must meet the following requirements:
1. While the primary purpose of the AHP may be to offer and provide health coverage, it must have at least one other substantial business purpose unrelated to offering and providing health coverage. The DOL does not define “substantial business purpose,” but provides a safe harbor under which a substantial business purpose is deemed to exist if the AHP would be a viable entity in the absence of sponsoring an employee benefit plan.
Note: The DOL clarified that offering conferences, classes, or educational materials would be sufficient other business purposes, as would advancing the well-being of its members’ industry through other non-health plan activity.
2. Each employer member of theAHP must act directly as an employer of at least one employee who is a participant in the AHP. For this purpose, a “working owner” (as discussed below) is considered to be both an employer and an employee.
3. The AHP must have a formal organizational structure with a governing body, bylaws, or other indications of formality.
4. The AHP’s functions and activities must be controlled by its employer members, and the employer members must control the group health plan, in both form and substance.
Note: The employer members are not required to manage the day to day affairs of the group or association or the plan. Control may be demonstrated based on all facts and circumstances, including the following factors: employer members may nominate and elect members of the governing body of the AHP, employer members may remove members of the governing body of the AHP, and employer members may approve or veto decisions relating to the formation, design, amendment, and termination of the plan.
5. The employer members must have a commonality of interest, meaning that they must either (i) be in the same trade, industry, line of business, or profession, or (ii) have a principal place of business in the same region not exceeding the boundaries of a single state or metropolitan area (which may include more than one state).
Note: This expands pre-regulatory requirements for commonality of interest. The DOL states in the preamble to the regulations that it will consider any generally-accepted classification system of the sort described in the preamble as sufficient to meet the commonality of interest requirement.
6. Group health coverage under the AHP must only be available to individuals that are (i) employees of a current employer member of the AHP, (ii) former employees of a current employer member of the AHP who became eligible for the AHP while the employer was a member of the AHP, or (iii) beneficiaries (e.g., spouse or dependent children) of such employees or former employees. For this purpose, a “working owner” is considered to be both an employer and an employee.
7. The AHP and the health coverage offered by the AHP must not discriminate on the basis of a health factor with respect to employer membership, eligibility for benefits, or premiums or contributions. The AHP may not treat employees of different employer members as distinct groups of similarly situated individuals based on a health factor of one or more individuals.
Note: Pre-regulatory DOL guidance does not include nondiscrimination requirements, and as a result,existing AHPs may choose not to utilize the new regulations in order to continue treating employer members as distinct groups for purposes of claims experience rating.
8. The AHP is not a health insurance issuer or controlled or owned by a health insurance issuer (or its subsidiary or affiliate), although a health insurance issuer may participate in an AHP as an employer member.
If an AHP meets these requirements, it will be treated as a single ERISA welfare plan, and the DOL will determine whether the AHP is subject to federal small (50 or fewer employees) or large (more than 50 employees) group rules on an association basis. Pre-regulatory guidance often results in disregarding the group or association and instead looking through to each employer member to determine the size of each individual employer for small and large group rules. AHPs taking advantage of the new regulations will likely be designed to be subject to the large group rules (i.e., they will not have to offer essential health benefits or provide minimum value coverage).
Working Owners May Join AHPs
The regulations permit “working owners” to participate in an AHP, even if they have no other employees. Working owners without common law employees are treated as both employer members and employees. In order to qualify as a working owner, an individual must:
Have an ownership right in a trade or business of any nature,
Earn wages or self-employment income from the trade or business, and
Either (a) work on average at least 20 hours per week or 80 hours per month, or (b) have wages or self-employment income from the trade or business that at least equal the working owner’s cost of coverage for participating in the AHP.
The DOL clarified that an AHP may impose more stringent criteria for working owner participation, or may exclude working owners altogether, provided that such criteria are not discriminatory.
An AHP fiduciary is responsible for determining whether an individual meets these criteria when the working owner is first eligible and periodically thereafter. The DOL permits a reasonable determination by an AHP fiduciary to involve simply relying on an attestation by the working owner if there is nothing that would otherwise cause the fiduciary to question the accuracy of the attestation. However, AHPs or health insurance issuers may impose higher verification standards.
AHPs as MEWAs and Interaction with Other Laws
The DOL acknowledged that AHPs will be MEWAs and that states will retain their existing authority related to MEWA regulation and enforcement. Fully insured MEWAs are subject to state laws that regulate the maintenance of specific contribution and reserve levels. Self-insured MEWAs are subject to state law to the extent not inconsistent with ERISA. Since many states, including California, have substantially limited the establishment of MEWAs –particularly self-insured MEWAs –in order to avoid abuse, it is unclear whether the expanded availability on AHPs under the new regulations will even be feasible in some states. In fact, the California Insurance Commissioner made a statement on the day the AHP regulations were issued that California law prohibits the formation of any new MEWAs and cautioned against AHP fiscal insolvency and fraud. (Note: California prohibits new self-insured MEWAs but does not explicitly prohibit fully insured MEWAs; however, it is unclear whether a fully insured AHP would be able to form under current California law.)
Another hurdle for AHPs will be state mandates and definitions for small and large group insurance. AHPs remain subject to state and federal laws mandating the provision of certain benefits (other than essential health benefits). The DOL declined to rule on whether state laws that differ from the AHP rules regarding group size calculation would be upheld. For example, California’s definition of “small employer” for small group status has different criteria than the AHP regulations and does not reference working owners. Since the DOL specified that the AHP regulations do not modify existing state authority, it is not clear whether state laws would be superseded by the AHP regulations.
The regulations also result in differing treatment of AHPs under various federal laws. For example, the DOL states in the preamble that size of an employer for purposes of determining applicability of the Mental Health Parity and Addiction Equity Act (“MHPAEA”) should be determined based on the aggregate number of employees of all employer members in an AHP. On the other hand, the number of employees for purposes of determining whether an employer member is an “applicable large employer” under the employer shared responsibility rules of Internal Revenue Code Section 4980H is based on each individual employer member. This means that employers with 50 or more full time employees may be subject to tax if they are members of an AHP that does not provide minimum value coverage. The DOL declined to provide guidance on how COBRA would apply to an AHP and its employer members because COBRA is within the interpretive jurisdiction of the Treasury and IRS, but it intends to provide further guidance after consulting with the Treasury and IRS.
AHPs will be subject to all applicable ERISA requirements, including fiduciary duties and reporting and disclosure, such as Form 5500 and M-1.
Challenges Ahead
Some have argued that establishment of AHPs will result in increased premiums and instability in the individual and small group markets. The DOL also estimates that AHPs will increase the federal deficit by $317 million over 10 years. Despite noting that both the federal government and the states will have an increased regulatory and enforcement burden as a result of the AHP regulations, the recent budget bills considered by Congress did not address a DOL request for increased funding for AHP policy development and enforcement; instead, the bills would cut funding the DOL overall. These issues, along with the ongoing litigation, will likely come to a head in the near future as the new regulations become applicable.
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© Boutwell Fay LLP 2018, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of July 31, 2018.