The US Department of Labor (“DOL”), after consultation with the Department of Health and Human Services, the Centers for Medicare and Medicaid Services, the Department of the Treasury and the IRS, has issued final regulations on association health plans (“AHPs”). Among other things, these regulations change the rules that determine when a multiple employer group health plan may be treated as a single plan.
President Trump, in an Executive Order issued on October 12, 2017, introduced the term “Association Health Plan” to the lexicon of health plan regulation. The Executive Order directed the DOL to expand access to AHPs. An AHP, effectively, is a type of Multiple Employer Welfare Arrangement (“MEWA”) that can be treated as a single plan for Affordable Care Act (“ACA”) and other purposes.
On January 5, 2018, the DOL issued a proposed regulation, Definition of “Employer” Under Section 3(5) of ERISA – Association Health Plans, 83 Fed. Reg. 614 (Jan. 5, 2018). Following a comment period, the final regulations were released on June 21, 2018, with an effective date of August 20, 2018. They provide that a MEWA can qualify as an AHP by satisfying either the “old” requirements (those in place prior to the Executive Order), or the new ones.
The final regulations allow a broader group of employers and their employees, including certain self-employed individuals to band together in a group or association to establish and operate a group health plan that would be treated as a single plan. Just as the plans of large employers are not subject to the ACA’s essential health benefit rules, the DOL expects the new rule to give small employers and the self-employed the ability to band together to similarly create their own plan designs, covering their own menu of benefits, in the hope that the associations will be able to obtain lower-cost health insurance coverage not currently available to them. This change may deprive this population of protections Congress thought it needed when enacting the ACA, but the Administration believes that the AHP rules will provide them with enough protection, in that they will have the same protections currently provided to the employees of large employers.
Under both current law and the final regulations, these arrangements are MEWAs, and as such are both subject to ERISA and governed by state law. In fact, New Jersey on May 30, 2018 adopted state-level standards regulating MEWAs in anticipation of the adoption of the final regulations. Also, the Attorneys General of New York and Massachusetts have announced that they intend to file a lawsuit challenging the legality of the final regulations.
Under the final regulations, in order to be considered a “single employer,” capable of establishing a group health plan through an AHP:
- A group or association of employers (i) must exist for the purpose of sponsoring a group health plan for its employer members, and (ii) must have at least one substantial business purpose unrelated to offering group health benefits. Under a safe harbor, a substantial business purpose exists if the group or association would be a viable entity even if it did not sponsor the AHP. The business purpose could include promoting common business or economic interests of its members in a given trade or employer community. An example in the preamble to the regulations notes that the organization could provide conferences, classes, or educational programs on business issues of interest to its members.
- Each employer member of the group or association participating in the group health plan must have at least one employee who is covered under the plan. That sole employee could be the self-employed owner of the employer member.
- The group or association must have a formal organizational structure with a governing body, and with by-laws or other indications of formality that are appropriate for the legal form in which it operates. It could be a tax exempt organization if it meets the requirements for such status. Control by its members must be both in form and substance, based on all the facts and circumstances.
- The functions and activities of the group or association, including the establishment and maintenance of its group health plan, must be controlled, directly or indirectly, by its employer members. The DOL considers the following factors relevant in determining control: (i) whether the employer members regularly nominate and elect directors, officers, trustees, or other similar persons that constitute the governing body or authority of the employer group or association and the plan; (ii) whether the employer members have the authority to remove any director, officer, trustee, or other similar person, with or without cause; and (iii) whether the employer members that participate in the plan have the authority and opportunity to approve or veto decisions or activities that relate to the formation, design, amendment, and termination of the plan – for example, material amendments to the plan, including changes in coverage, benefits, and premiums.
- The group or association must not be a health insurance issuer, or be owned or controlled by a health insurance issuer. This provision is considered by the DOL as critical to differentiate between an employer-sponsored arrangement controlled by ERISA versus a commercial insurance arrangement.
- The employer members must have a commonality of interest either (i) as employers in the same trade, industry, line of business or profession, or (ii) as having a principal place of business in the same state or metropolitan area (even if the metropolitan area includes more than one state). This latter geographical commonality factor is permitted even if the membership is comprised of unrelated employers in multiple unrelated trades, industries, lines of business or professions (e.g., chambers of commerce). The DOL specifically rejected a request to use the VEBA rule that permits the arrangement to cover three contiguous states. This commonality of interest rule is intended to be construed liberally, and compliance with it is based on the relevant facts and circumstances.
- The group health plan coverage offered by the association must be available only to employees and former employees of employer members, and their family members and other beneficiaries. This includes owners working 20 or more hours per week, or who have sufficient income from their businesses to pay for their coverage and that of their dependents.
- The health coverage must comply with nondiscrimination requirements that prohibit discrimination based on health factors. The final regulations contain an extensive set of examples to illustrate what are valid distinctions based on factors other than health and invalid factors directly or indirectly based on health. Distinctions may be based on a factor other than a health factor (such as industry, occupation, or geography), provided they are not directed at individual participants or beneficiaries based on a health factor of one or more of those individuals. This clarification is consistent with the HIPAA health factor nondiscrimination rules with which large employer plans must comply. AHPs can draw distinctions based on non-health attributes of a particular member employer (e.g., the industry or region in which it operates) or based on non-health factors of a member employer’s workforce (e.g., adjusting the member employer’s rate based on its employees’ occupations.
The new regulations, effective as of August 20, 2018, have different applicability dates based on the type of the health coverage provided–i.e., fully insured, existing self-insured and new self-insured AHPs. The regulations become applicable:
- On September 1, 2018, with respect to fully-insured AHPs;
- On January 1, 2019, with respect to already existing self-insured AHPs that choose to meet the new regulations’ requirements; and
- On April 1, 2019, with respect to new self-insured AHPs.
In conclusion, the DOL has made great efforts to issue regulations that would expand AHPs to both large and small employers. The DOL and the states have dual jurisdiction because of the MEWA rules and the exception to ERISA with regards to state insurance law (based on Section 514(b)(6) of ERISA, which was enacted to permit states to regulate MEWAs). There is tension between the Administration’s desire to make access to AHPs as broad as possible and certain states’ concerns that this access would lead to abuse.