Was The Court of Claims Correct for the Wrong Reason?

In Iowa Bankers Benefit Plan v. United States, the Court of Federal Claims decided that the Iowa Bankers Benefit Plan, a group health arrangement, is within the Affordable Care Act ("ACA") definition of a "covered entity" under Section 9010 of the ACA, subject to the annual fee on health insurance providers. Section 9010 of the ACA is not codified, but is interpreted by the IRS regulation at 26 C.F. R. Part 57, and is only applicable if the covered entity's net premiums are over $25 million.

The Iowa Bankers Association ("IBA") claimed that its group health arrangement is not an entity subject to the annual fee for two alternative reasons: (1) because under Section 9010(c)(2)(D), the entity is a voluntary employees' beneficiary association ("VEBA") "established by an entity (other than by an employer or employers)," or (2) because under Section 9010(c)(2)(A) the entity constitutes a "single employer that self-insures its own employees' health risks." If the IBA entity had qualified for either statutory exclusion, it would have been entitled to a refund of its annual fee payments for 2014, 2015, and 2016, a total sum of about $3.7 million.

For both claims, the IBA argued that the IRS implementing regulation is an invalid interpretation of the statute. Initially, in its refund claim before the IRS and in its complaint, the IBA argued only that its group health arrangement is exempt from the covered entity fee because its VEBA was not established by employers, but was established by the IBA's wholly owned for profit subsidiary, IBIS. On this point, the Court concluded that the statute was ambiguous, but that the implementing IRS regulation was entitled to Chevron deference, and that under the regulation, exempt VEBAs were limited to those established by unions or other employee organizations, and IBIS was neither. The Court also noted that the IBA arrangement is a "multiple employer welfare arrangement," that stands for MEWA, "an employee welfare benefit plan, or any other arrangement [. . .], which is established or maintained for the purpose of offering or providing welfare benefits to the employees of two or more employers," and that under the IRS regulation, which reflected the Joint Committee on Taxation's Blue Book explanation of ACA Section 9010, VEBAs that are MEWAs are not excluded from the fee.

At the summary judgement stage, the IBA also argued that its arrangement was exempt as an arrangement of a "single employer" that self-insures its own employees, because the IBA and the IBIS were an "affiliated service group" which is treated as a single employer under the Internal Revenue Code Section 414(m), noting as well that under the Title I, Section 3(5) definition of employer, which the IBA argued applied to Section 9010, the IBA itself, as an employer group or association, is treated as a single employer. The Court held that this defense had been waived, but went on to hold that, on the merits, the claim failed as well because ERISA's 3(5) definition of employer did not apply to Section 9010, and in any case, the IBA only argued that the IBA and IBIS were a single entity, and did not (and arguably could not) present any argument for the status of the participating employers as a single entity under either ERISA or the Code. The Court also could have noted, but did not, that under the applicable IRS regulation, an entity that is a MEWA is precluded from relying upon the self-insured employer exclusion under ACA Section 9010(c)(2)(A), just as, the Court had previously noted, entities that are MEWAs are precluded from using the VEBA exclusion under ACA Section 9010(c)(2)(A).

Although the Court may well be wrong that the ERISA 3(5) definition of employer under Title I does not apply under ACA Section 9010, this ruling may not make a difference as the IBA could have, but chose not to raise this claim when there was an opportunity to provide a factual basis. If we assume that the Court may be correct that the IBA arrangement is a "covered entity," it shifts the focus to the IRS regulation implementing ACA Section 9010. The concern is that in the implementing regulation and the associated preamble, the IRS did not focus sufficiently on the distinction drawn by the DOL between plan MEWAs and non-plan MEWAs, a distinction clearly consistent with Section 3(40) of ERISA, that, in relevant part, describes a MEWA as an employee welfare benefit plan or any other arrangement. It is clear from the regulation and its preamble that IRS did not take into account (or, if it did take it into account, such consideration was reflected in neither the preamble or the regulations) that under longstanding DOL guidance, the definition of MEWA includes single ERISA-covered plans sponsored by either a bona fide employer group under ERISA Section 3(5) or sponsored by an employee organization under ERISA 3(4), to the extent that the plan covers members who are employees of different employers (as well as plans sponsored by both).

There are several specific points where the misunderstanding of Title I leads to significant anomalies in how the annual fee will be applied although, to be clear, we are expressing no view as to whether any of these anomalies are the type of inconsistencies that would result in the invalidation of the regulation under Chevron. First, Section 57.2(b)(2)(i) exempts from the fee self-insured plans of single employers, but not self-insured plans of bona fide employer groups. This misunderstanding is further highlighted by the fact that Section 57.2(b)(1)(v) of the regulation also exempts from the annual fee three types of non-plan MEWAs, entities that appear more like single plans than non-plan MEWAs - MEWAs with at least 25% common ownership of the employers involved, MEWAs created by a merger or acquisition, and MEWAs created by including in a plan individuals not employees of the sponsoring employer, such as company directors. This different treatment of these three types of MEWAs is worthy of a more detailed explanation for why long standing single plans under ERISA, the self-insured multiple employer plans, are treated like health insurance issuers, a result that seems to be at odds with the ERISA definition of employer as well as ERISA Section 514(b)(1)(B) (the deemer clause) under which self-insured plans are never to be deemed to be an insurance company or engaged in the business of insurance so as to constitute a State law regulating insurance.

Another anomaly has to do with the treatment of plans established or maintained by employee organizations. Assuming that the IRS interpretation in Section 57.2(b)(2)(iv) is correct, Congress intended this statutory exclusion to be a narrow one, limited to excluding VEBAs from the annual fee where the VEBA funds a plan sponsored by employee organizations. However, this section of the regulation also goes on to state that the exclusion does not apply if the VEBA is a MEWA (subject to the three regulatory exclusions described above). If the Title I coverage definitions apply to all parts of the ACA, as may well be the better view, the regulation places two irreconcilable conditions on plans of unions and other employee organizations not described in ERISA Section 3(40)((A)(i) otherwise entitled to use the VEBA exclusion.

The word MEWA does not appear in ACA Section 9010, and the absence of such statutory language makes it difficult to determine with any certitude the intention of Congress on the narrow question of whether there was an intended distinction between plan-MEWAs and non-plan MEWAs. It is also true that the meaning given to a term in one portion of a statute does not mandate that same definition be applied in another context. Notwithstanding those caveats, in the overall context of the ACA it may be that Congress, and likely the IRS as well, notwithstanding its position in the instant case, intended only to include non-plan MEWAs within the definition of covered entity subject to the annual fee, but not to include Title I plans that are also MEWAs, and therefore, perhaps, an interpretive remedy from the IRS, in lieu of modifying the applicable regulations, would be appropriate. These plan MEWAs, while perhaps a relatively small subset in light of the $25 million net premium threshold, could be regarded as the type of entities that Congress intended to exclude from the annual fee, and under an administration that wants to encourage association health plans, the imposition of this type of fee is a negative consideration.