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DOL Has Proposed New Regulations on Association Health Plans

DOL Issues Proposed Regulations Designed to Expand Association Health Plans

With apologies to the Coen Brothers, let’s start with a brief quote from “O Brother, Where Art Thou?”

Ulysses Everett McGill: “I am the only daddy you got; I am the damn paterfamilias!”

Daughter #2: “But you ain’t bona fide!”

The DOL’s proposed regulations would, for the first time, define the term “employer” for purposes of ERISA to include a bona fide group or association of employers.  And, just to make sure we get it, the term “bona fide” is repeated 24 times in the course of 23 densely-packed pages in the Federal Register.  First a bit of background, then we’ll take a look at the proposed regulations and speculate about the impact.

 

A bit of background…

ERISA has always provided that the term employer includes “any person acting indirectly in the interest of an employer in relation to an employee benefit plan.”  But historically, the DOL took a narrow view about which employer associations could qualify as ERISA “employers.”  In a series of advisory opinions, the DOL said that an employer group or association could not be treated as an ERISA employer unless it had organizational purposes and functions unrelated to the provision of benefits (and met certain other requirements).  As a result, only a few advisory opinions concluded that an employer group or association qualified as an ERISA “employer.”

The DOL’s narrow view became an issue under the ACA.  The ACA divides the health insurance market into three segments – the individual market, the small group market and the large group market.  Health insurance products sold in the individual and small group markets must cover essential health benefits, must observe the precious metal tiers (bronze, silver, etc.) and must comply with more restrictive rating requirements, including adjusted community rating and a single risk pool requirement.  Health insurance products sold in the large group market are not subject to these requirements. 

CMS guidance issued in 2011 followed the DOL’s narrow view and treated most association plans as a collection of either individuals or small groups, subject to the ACA’s more restrictive market requirements.  This interpretation forced most individual association plans out of business and pushed many employer members of employer association plans into the small group market.

The proposed regulations

Under the proposed regulations, a “bona fide” group or association of employers would be treated as an ERISA “employer” only if the following requirements are satisfied:

  • The group or association must exist for the purpose, in whole or part, of sponsoring a group health plan to its members.
  • The group or association must have a formal organizational structure with a governing body and by-laws or similar governing instruments.
  • The group or association must not condition employer membership based on health factors, and a group health plan sponsored by the group or association must comply with ERISA’s health status nondiscrimination rules (which generally prohibit ERISA plans from discriminating in eligibility, premiums or contributions based on health factors).
  • The functions and activities of the group or association must be controlled by its employer members through the regular nomination and election of directors, officers or similar representatives who control the group or association and the establishment and maintenance of the group health plan (the proposed regulations do not identify other specific “control” indicators).
  • The employer members must have a “commonality of interest” based on relevant facts and circumstances.  The existence of a commonality of interest may be established if the employers are in the same trade, industry, line of business or profession (none of these terms are defined), or if the employers have a principal place of business within the same State or the same metropolitan area, even if the metropolitan area includes more than one State (again, “metropolitan area” is not defined, but the preamble invites comments about an appropriate definition).
  • The group health plan sponsored by the group or association must be available only to employees and former employees of employer members (and the family members of those employees).  The employer members must be limited to employers that act directly as employers and have at least one employee who is covered by the group health plan sponsored by the group or association.  But the proposed regulations also provide that working owners can be treated both as employers and as employees.  For this purpose, a “working owner” is an individual who:
  • has an ownership right in a trade or business (including partners and self-employed individuals);
  • earns wages or self-employment income for providing personal services to the trade or business;
  • is not eligible to participate in subsidized coverage under a group health plan sponsored by another employer of the individual or the individual’s spouse; and
  • either works at least 30 hours per week (or at least 120 hours per month) providing personal services to the trade or business, or has earned income from the trade or business at least equal to the cost of the working owner’s coverage under the group health plan sponsored by the group or association.

The Impact

The proposed regulations would make it easier for health insurance carriers to write coverage for association health plans and broaden the permitted membership of those plans.  Assuming an association health plan covers the requisite number of employees (either 50 or 100, depending on State law), the plan would be treated as a large group plan, and would not be subject to the more restrictive ACA market requirements applicable to individual and small group plans.  This means carriers could write coverage for association health plans ignoring essential health benefits and taking medical underwriting into account.  Thus, associations with better than average claims risk could qualify for better premium rates.  

Nothing in the proposed regulations alters other applicable ERISA requirements, nor do the proposed regulations alter the definition of a MEWA.  Thus, group health plans sponsored by bona fide groups or associations must comply with all applicable ERISA requirements, including the requirements applicable to MEWAs (so, among other requirements, the group or association plan sponsor would need to file both a Form 5500 and the Form M-1).  The good news is that the ERISA and MEWA compliance responsibilities will fall on the group or association, not on the member employers, and this may simplify the administration of association plans. 

The proposed regulations also do not affect other federal laws or State law.  For example, the IRS has never formally approved “multiple-employer” cafeteria plans, suggesting that each member employer may need to sponsor its own cafeteria plan.  States will continue to regulate MEWAs and may impose additional requirements intended to protect consumers and/or to provide oversight of association plans.  Whether a bona fide group or association can self-insure a group health plan will depend entirely on whether that practice is permitted under State law.

The economic effects of the proposed regulations are unclear.  The preamble notes that the proposed regulations may create adverse selection in the individual and small group markets, but may also offer greater product selection and lower-cost health coverage for individuals who enroll in association health plans. The preamble also notes that the increased availability of association health plans could benefit millions of people (including, to be specific, some of the 25 million individuals under age 65 who are currently covered in individual markets, some of the 25 million individuals under age 65 who are currently covered in small group markets, some of the 28 million individuals under age 65 who have no health insurance coverage and some of the 5.6 million firms with fewer than 50 employees).   

For more information on the new proposed changes, click here: Federal Register - Proposed Changes to Association Health Plans

Guest Author: Chip Kerby, Liberté Group LLC