Federal Judge Vacates Association Health Plan Provisions as Unreasonable Under ERISA

Practical Law Legal Update w-019-7774 (Approx. 6 pages)

Federal Judge Vacates Association Health Plan Provisions as Unreasonable Under ERISA

by Practical Law Employee Benefits & Executive Compensation

Background

The AHP final regulations were issued in response to a 2017 Trump Administration executive order that called for greater access to AHPs, including by expanding then-existing DOL commonality of interest standards interpreting the meaning of "employer" under the Employee Retirement Income Security Act of 1974 (ERISA) (Executive Order 13813 (Oct. 17, 2017); see Legal Update, Trump Administration Calls for Expanded Use of Health Reimbursement Arrangements). The DOL issued AHP proposed regulations in January 2018 and finalized those regulations in June 2018 (see Legal Update, DOL Final Association Health Plan Rules Expand Coverage Options for Small Employers). (Last fall, the DOL also proposed companion regulations addressing retirement plans (see Legal Update, DOL Issues Proposed Regulations on Association Retirement Plans).)

The AHP final regulations contained the following three-part applicability dates:

September 1, 2018, for fully-insured AHPs.
January 1, 2019, for existing self-insured AHPs that complied with the DOL's rules in place prior to the AHP final regulations.
April 1, 2019, for new self-insured plans formed under the AHP final regulations.

The AHP final regulations loosened the requirements under which groups or associations could sponsor a single "multiple employer" health plan under the Employee Retirement Income Security Act of 1974 (ERISA) (ERISA § 3(5) (29 U.S.C. § 1002(5)). Unless an association is treated as a single ERISA-covered plan, the size of each participating employer in the association determines whether the employer's coverage is subject to the small group or large group market rules. The AHP final regulations were generally designed to allow more groups and associations to establish AHPs (for example, based on common geography). The AHP final regulations also expanded existing DOL guidance by allowing AHPs to include "working owners" (that is, business owners with no common law employees).

However, eleven states and the District of Columbia challenged the AHP final regulations in federal court under the Administrative Procedure Act (APA), arguing that the regulations were an unreasonable regulatory interpretation of ERISA.

Standing

On a threshold issue, the district court held that the plaintiff-states demonstrated redressable injuries resulting from the AHP final regulations, and therefore had standing to challenge the regulations regarding self-insured AHPs. The court accepted the states' argument that the final regulations' expansion of self-funded AHPs would decrease state tax revenues because, for example, affected states would lose premium taxes when individuals chose coverage through a self-insured AHP (rather than purchasing small group and individual plan coverage on state insurance exchanges).

In addition, the court concluded that the states' standing was supported by increased regulatory costs under the AHP final regulations. For example, several states indicated that they had already hired additional staff and allocated more staff time to regulation and enforcement because of the final regulations – including to address inquiries about the formation and licensing of AHPs. According to the states, this increased enforcement was similar to their efforts to address fraud and abuse involving multiple employer welfare arrangements (MEWAs) in the past (see generally Legal Update, DOL Final Rules Target MEWA Abuses).

In reaching its conclusion on standing, the district court rejected the states' argument that the DOL might subsequently interfere with their sovereignty by enacting regulations to preempt state insurance laws as applied to AHPs. The court indicated that this rationale was too speculative to support standing.

Bona Fide Association Provision

After finding that the states had standing to challenge the AHP final regulations, the district court turned to the merits of their claim. Characterizing the AHP final regulations as an "end-run around the ACA" that did "violence to ERISA," the district court addressed why the AHP final regulations exceeded the DOL's regulatory authority.

Under longstanding DOL guidance, "bona fide associations" of employers generally could join to offer a health plan if they shared a common business purposes and commonality of interests unrelated to providing benefits, and if employer-members exercised control of the arrangement. The AHP final regulations adopted these same three overall criteria (that is, purpose, commonality of interest, and control), but relaxed two of the commonality of interest and purpose requirements.

Applying Chevron Deference, the district court concluded that ERISA's definition of "employer" is ambiguous but that the DOL's interpretation of this term under its AHP final regulations was not reasonable. The court emphasized that ERISA and its key defined terms were intended to regulate employee benefit plans arising from the employment relationship, and not commercial insurance relationships. In particular, the court reasoned that although ERISA applies to groups or associations of employers acting in the interest of employers, ventures selling insurance for a profit to unrelated groups fall outside of ERISA's scope.

The court concluded that the DOL's interpretation of "bona fide association" under the AHP final regulations exceeded ERISA's definitional limits and was therefore unlawful. In the court's view, although the final regulations adopted the same three overall criteria for what is a bona fide association, the DOL's interpretation of the terms under its AHP final regulations failed to provide meaningful limits on associations that would qualify as bona fide ERISA employers.

Purpose

Regarding the "purpose" criterion, the court concluded that the DOL's new interpretation failed to set meaningful limits on an association's character and activities. The court observed that an association could now form for the primary purpose of establishing an AHP if it also had merely one other "substantial business purpose" – which could consist of activity as minor as publishing a newsletter on business concerns. The court concluded that the purpose test under the AHP final regulations – which the court characterized as a low bar that would be better characterized as the "other business task" test – did little to limit associations to those acting in the interest of employers.

Commonality of Interest

Similarly, the court concluded that the "commonality of interest" test under the AHP final regulations offered no meaningful limit on associations. Under the final regulations, this criterion could be met through a common industry/line of business standard or a common geography standard. The court reasoned that common geography does not correlate to having a common interest. As a result, the court viewed this provision as allowing associations of unrelated employers in multiple, unrelated industries from associating – potentially with conflicting interests. The court viewed this standard as undercutting ERISA's requirement that an association act in the interest of employer members.

Control

The district court was also critical of the final regulations' control criterion, under which the functions and activities of a group or association must be controlled by its employer members (as evidenced by employer members' ability to nominate, elect, and remove directors, or to approve or veto material amendments). In the court's view, however, the control test was only meaningful if employer-members' interests were already aligned. If the members' interests were opposed, the control test would do nothing to resolve those differences.

Working Owner Provision

The district court concluded that the AHP final regulations' changes involving working owners also exceeded ERISA's statutory text. Before the final regulations, DOL took the view that sole proprietors without common law employees could not be treated as employers for purposes of participating in a bona fide association under ERISA. The final regulations, however, permit working owners without common law employees to qualify as both an employer and an employee of a trade or business for purposes of participating in an AHP.

The district court rejected the DOL's argument that two sole proprietors without employees could join in an association, which could then sponsor an ERISA plan for the two owners' benefit. Characterizing this argument as absurd, the district court reasoned that Congress did not intend for working owners without employees to be included within ERISA.

Practical Impact and DOL Response

The district court remanded the non-vacated aspects of the AHP final regulations (see Practice Note, Association Health Plans: Nondiscrimination Requirements) to the DOL to consider how a severability provision (which the DOL added in finalizing its rules) applied to the remaining parts of the regulations. The severability rule applies if any provision of the regulations is either:

Held to be invalid or unenforceable by its terms (or as applied to any person or circumstance).
Stayed pending further administrative agency action.

(29 C.F.R. § 2510.3-5(g).)

Given that the AHP final regulations reflect a stated policy priority for the Trump Administration, the DOL may ultimately appeal the district court's ruling. In the meantime, however, the vacated provisions cannot be the basis for forming new self-insured AHPs. (As noted above, the AHP final regulations otherwise would have applied to new self-insured AHPs formed under the regulations effective beginning April 1, 2019.)

In FAQ guidance (April 2, 2019) issued after the district court's ruling, the DOL indicated that it disagreed with the ruling and was considering all available options – in consultation with the Department of Justice (DOJ) – in response. These options may include:

Appealing the district court's ruling.
Requesting the district court to stay its decision pending an appeal.

At present, however, the DOL indicated that it had not decided how to proceed. The FAQs instruct AHP participants to contact an AHP's plan administrator with questions concerning how the AHP's structure and operations may change in response to the district court's ruling.

The DOL also noted that the district court's ruling did not reduce regulatory oversight of AHPs under state insurance laws and regulations.

Federal Judge Vacates Association Health Plan Provisions as Unreasonable Under ERISA | Practical Law