On June 19, 2018 the Department of Labor (“DOL”) issued its final regulations on association health plans (“AHPs”). According to the DOL, the regulations are intended to help level the playing field between small and large employers by placing AHPs in the same regulatory field as large employers. The new regulations make several substantial changes to previous DOL guidance, and apply:
- September 1, 2018 for fully-insured AHPs
- January 1, 2019 for existing self-insured AHPs that are in compliance with previous DOL guidance
- April 1, 2019 for new self-insured AHPs formed pursuant to the final regulations
In order to qualify as an ERISA welfare benefit plan, a plan must be established or maintained by an employer. ERISA currently defines an “employer” as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for the employer in such capacity.” Under ERISA, different rules for welfare benefit plans apply depending on whether the plan is provided by a single employer or multiple employers.
Under previous guidance, in order for employer groups or associations to form an AHP, courts and the DOL generally required that: (1) the group or association be a “bona fide” organization or association with primary business purposes unrelated to the provision of benefits; (2) the employers share a “commonality of interest;” and (3) the employers that participate in the AHP exercise control over the program. Among other things, the DOL’s new regulations remove the previous bona fide organization standard and provides an expanded commonality of interest test. In theory, AHPs enable small businesses to come together at an association level and pool their employees as a group, reducing administrative expenses while providing additional value to the employees. These changes are intended to make it easier for employer groups or associations to be treated as an ERISA employer, and will likely encourage the formation of AHPs.
New Regulations for AHPs
The DOL’s new regulations include a number of changes that will be of particular interest to small employers, as well as partners, sole proprietors, and other self-employed individuals. First, the new regulations expand the ERISA definition of “employer” to include working owners of a trade or business that have no common law employees. These individuals will now qualify as both an employer and employee for purposes of forming an AHP, making them eligible to participate. Second, the regulations change the method used to determine whether a formed AHP qualifies as a “small” or “large” employer for certain Affordable Care Act and health insurance purposes. Employees of all the employer members of an AHP are now counted in the aggregate. This means that by forming an AHP, employers that would otherwise be considered “small” employers can become “large” employers, subject to more flexible rules under the ACA.
In general, under the new regulations, in order for a group or an association of employers to be considered to be a “bona fide” association that may form an AHP:
- The association of employers must have a reason for existing other than the provision of benefits. However, providing health benefits may be the primary purpose. The group or association must not be a health insurance issuer or be owned by a health insurance issuer, other than to the extent such entities participate in their capacity as employer members.
- Each employer member must be a person acting directly as an employer of at least one employee. As noted above, working owners with no common law employees qualify as both an employer and employee for this purpose.
- The association must have a formal organizational structure with a governing body and by-laws.
- The association’s employer members must control the group health plan in both form and substance.
- The employers must be in either the same trade, industry, line of business, or profession, or have a principal place of business that is in the same state or metropolitan area (the metropolitan area may encompass more than one state).
- The association and health coverage offered by the association must comply with certain nondiscrimination provisions, such as not conditioning employer membership on a “health factor” of any individual who may become eligible to participate in the AHP, and not discriminating with respect to eligibility of benefits or payment of premiums.
AHPs and MEWAs
In general, a multiple employer welfare arrangement (“MEWA”) is any arrangement that provides employee welfare benefits to the employees of two or more unrelated employers. For most MEWAs, each participating employer is considered to have established a separate group health plan for its own employees. Where each participating employer has a separate group health plan, each employer is independently subject to ERISA’s compliance requirements. However, in certain circumstances, a MEWA can be regarded as a single ERISA plan, where the compliance obligations belong to the MEWA itself.
An AHP is a welfare benefit plan that is sponsored by a “bona fide” association of “employers.” An AHP is unique in that it is simultaneously both an ERISA-covered plan and a MEWA. Therefore, AHPs are subject to all ERISA provisions that are applicable to group health plans, including fiduciary responsibility and prohibited transactions. In addition to complying with ERISA’s group health plan provisions, AHPs are also subject to the existing federal regulations that govern MEWAs. For example, AHPs need to file a Form M-1 prior to operating in any state, and file an annual Form 5500 regardless of the size of the plan.
By relaxing the standards for AHPs, the new regulations will make it easier for MEWAs to be treated as single ERISA-covered plans. Because an AHP is still a MEWA, it is subject to significant state regulation. The state regulations may contain additional requirements, which often differ from state to state. The state regulation of MEWAs will present challenges for AHPs attempting to operate in a metropolitan area consisting of multiple states, as well as those being offered to a trade, industry, or profession nationally.
Under the new AHP regulations, more employers, particularly small employers and self-employed individuals, may be interested in forming or joining AHPs as a way to provide health insurance coverage and avoid certain protections and requirements that apply to health insurance purchased in the individual or small group market under the Affordable Care Act. Similarly, health insurance issuers may want to expand their product lineup to accommodate the growing demand for AHPs. Moving forward, there are several important things to keep in mind:
- While a health insurance issuer still cannot sponsor an AHP in its capacity as an insurer, nothing in the new regulation precludes a health insurance issuer from providing administrative services.
- Although the regulations did make it easier to form an AHP, those AHPs will still be required to satisfy a number of other regulations, including the nondiscrimination provisions under HIPAA.
- Because AHPs are considered MEWAs, they must adhere to both the existing federal regulations governing MEWAs, as well as applicable state regulation of MEWAs. Further, because AHPs can provide benefits to participants in more than one state, some AHPs will need to simultaneously comply with multiple state regulations.
- Current AHPs that are in compliance with previous guidance are not required to make any changes to retain their status as AHPs. However, many existing AHPs may be interested in expanding their operations. Fully-insured AHPs may begin expanding operations pursuant to the new regulations starting September 1, 2018, while self-insured AHPs will need to wait until January 1, 2019.
- Associations or groups of employers who wish to establish an AHP pursuant to the new regulations must wait until April 1, 2019. Those associations should carefully consider all applicable laws (state and federal) that govern MEWAs, and ensure the AHP is fully compliant with the applicable nondiscrimination requirements.
If you have any questions regarding the DOL’s final rule on AHPs or would like to explore to possibility of forming an AHP, please contact a member of our Employee Benefits Practice Group.