On June 21, 2018, the US Department of Labor (DOL) published a final rule making it easier for a group or association of employers to act as a single “employer” sponsor of an Association Health Plan (AHP) under the Employee Retirement Income Security Act of 1974 (ERISA). The AHP final rule (Final Rule) is intended to expand access to affordable health care for small employers and self-employed individuals by creating an opportunity for such employers and individuals to take advantage of the economies of scale that are usually only enjoyed by large employers. The Final Rule is limited to health benefits and AHPs; the rule does not expand the circumstances under which employers and individuals can sponsor multiple employer plans that provide retirement benefits or other welfare benefits.
An AHP is a specific type of multiple employer welfare arrangement (MEWA) offered by employer groups and associations to provide health coverage for employees. Under the previous legal framework, a MEWA was treated as a single ERISA plan only when established by a bona fide association of employers. A bona fide association was defined to mean associations of employers in the same industry and the same region. Accordingly, the DOL has historically treated very few MEWAs as single ERISA plans; such arrangements were typically considered separate, individual plans. In the absence of a single plan, the law disregarded (or “looked through”) the group or association in determining whether to apply the individual, small group, or large group rules to such coverage. As a result, different group or association members often had coverage that was concurrently subject to many different market rules, which made administration and legal compliance very complicated and difficult for such arrangements.
Summary of AHP Final Rule
The Final Rule establishes the following criteria for a “bona fide group or association of employers” that may establish a single-employer AHP under ERISA:
a) Purpose – The group or association must have at least one other substantial business purpose unrelated to the provision of health care to its members and their employees, even if the primary purpose of the group or association is to offer such coverage to its members. The rule includes a safe harbor under which a “substantial business purpose is considered to exist if the group or association would be a viable entity in the absence of sponsoring an employee benefit plan.” Additionally, a substantial business purpose will include the promotion of common business or economic interest and need not be a for-profit activity.
b) Organization and Employer Control – The group or organization must have a formal organizational structure with a governing body and by-laws or similar formalities. In addition, member employers must control the functions and activities of the group or association, including the establishment and maintenance of the group health plan. The control can be direct or indirect through the regular election of directors, officers or other similar representatives; however, control must be present both in form and in substance based on a facts and circumstances test.
c) Commonality of Interest – The group or organization must have a “commonality of interest” that allows groups of employers to form associations if they either share a trade, industry, line of business, or profession or a have a principal place of business within the same geographic location (even crossing state lines in the case of a metropolitan area). The DOL noted in the Final Rule that this requirement is meant to be broadly construed so as to facilitate the formation of AHPs, rather than impose additional restrictions. This requirement gives employers who do not share a trade, industry, line of business, or profession the ability to sponsor an AHP, provided that the geography standard and other requirements of the Final Rule are met.
d) Participation – The group or organization must offer health care coverage only to employees of a current member employer, former employees of a current employer member who became entitled to coverage under the group’s or association’s health plan when the former employee was an employee of the employer, and “beneficiaries” of such individuals (e.g., spouses and dependent children).
e) Nondiscrimination – The group or organization must comply with detailed nondiscrimination rules regarding prohibitions on membership restrictions and distinctions based on health factors. An association may not restrict membership based on health factors like health status, medical condition (including both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. Further, employer-by-employer risk-rating based on health factors of one or more individuals is not permitted; however, the Final Rule includes several examples that demonstrate the circumstances under which an AHP may charge different premiums to different member employers.
In addition, under the Final Rule, health insurance issuers may not constitute or control a bona fide group or association in their capacity as health insurance issuers. However, health insurance issuers may act as employers in sponsoring an AHP for the benefit of their employees and may also provide administrative services to an AHP.
Sole proprietors and self-employed individuals will be eligible to participate in AHPs without the need to employ at least one other person. This departure from previous sub-regulatory guidance could expand availability of AHPs to gig-economy workers, like Uber or Lyft drivers, if they meet the following requirements:
- The working owner must earn income from the trade or business. Mere passive owners are not eligible.
- The working owner must either (1) provide, on average, at least 20 hours per week (or 80 hours per month) of personal services to the trade or business, or (2) have earned income (either wages or self-employment income) from the trade or business that at least equals the cost of coverage under the AHP.
The analysis above must be conducted when the working owner is first eligible for coverage and must be reasonably monitored and confirmed periodically.
The Interaction of AHPs and Other Federal Laws
AHPs allow employer associations to offer insurance with lower costs and fewer regulatory requirements than the plans otherwise available to individual small employers. Most notably, AHPs need not purchase insurance that includes the “essential health benefits,” required by the Affordable Care Act (ACA). Essential health benefits include coverage for emergency services, hospitalization, maternity care, mental health services, prescription drugs, and pediatric dental and vision care. AHPs must still cover preexisting conditions and comply with a number of other requirements under the ACA and ERISA, including the document and disclosure requirements (e.g., plan document, SPD, SBC). While noting that an AHP must provide COBRA continuation coverage and certain other post-employment coverage, the DOL did not provide specific guidance on this point and stated that it anticipates issuing future guidance on the application of COBRA to AHPs.
AHPs must also still comply with MEWA rules. The Final Rule does not eliminate or supersede any MEWA existing guidance; it just provides an alternative mechanism for groups or associations to meet the definition of “employer” under ERISA. This means that self-funded MEWAs may be restricted in some states, or need to meet state law regulations regarding MEWAs. In addition, a group or association operating a MEWA will have to specify in plan documents whether there is a single multiple-employer plan under the new AHP rules or whether there are multiple single-employer plans.
Future Challenges to the AHP Final Rule
Opponents claim that the true purpose of the Final Rule on AHPs is to disrupt the ACA’s marketplace. New York and Massachusetts plan to sue the Trump administration over the Final Rule’s provisions that do not meet all of the ACA’s mandates. New York Attorney General Barbara Underwood (D) and Massachusetts Attorney General Maura Healey (D) argue the expansion of AHP will “invite fraud, mismanagement and deception” and erode consumer protections.
- September 1, 2018, for fully-insured AHPs.
- January 1, 2019, for existing self-funded AHPs that are in compliance with the DOL’s previous sub-regulatory guidance on bona fide groups or associations, and that choose to expand the group and its plan.
- April 1, 2019, for new self-funded AHPS.
McDermott will continue to monitor regulatory developments as the new rule goes into effect. Please contact one of the authors or your regular McDermott lawyer with any questions or concerns.