DOL Proposed Association Health Plan Rules Would Expand Coverage Options for Small Employers | Practical Law

DOL Proposed Association Health Plan Rules Would Expand Coverage Options for Small Employers | Practical Law

On January 4, 2018, the Department of Labor (DOL) issued proposed regulations under the Employee Retirement Income Security Act (ERISA) that would offer expanded options for small employers and sole proprietors to join together to provide health coverage. Public comments on the proposed regulations are due March 6, 2018.

DOL Proposed Association Health Plan Rules Would Expand Coverage Options for Small Employers

by Practical Law Employee Benefits & Executive Compensation
Published on 08 Jan 2018 • USA (National/Federal)
On January 4, 2018, the Department of Labor (DOL) issued proposed regulations under the Employee Retirement Income Security Act (ERISA) that would offer expanded options for small employers and sole proprietors to join together to provide health coverage. Public comments on the proposed regulations are due March 6, 2018.
On January 4, 2018, the DOL issued proposed regulations that would broaden the rules under ERISA's definition of "employer" for determining when employers may form employer groups or associations that are treated as a single multiple-employer "employee welfare benefit plan" and group health plan under Title I of ERISA (83 Fed. Reg. 614 (Jan. 5, 2018); ERISA § 3(5); 29 U.S.C. § 1002(5); see also the related press release). The rules would permit expanded use of association health plans (AHPs), consistent with an October 2017 order from the Trump Administration.
The proposed regulations, which were developed in consultation with the Departments of Health and Human Services (HHS) and Treasury, would:
The proposed regulations are intended to permit small employers, sole proprietors, and other working-owners to join together more easily to provide health care coverage.

Response to October 2017 Trump Administration Executive Order

The DOL issued the proposed regulations in response to a Trump Administration Executive Order (October 2017) in favor of facilitating the purchase of insurance across state lines (see Legal Update, Trump Administration Calls for Expanded Use of Health Reimbursement Arrangements). The order posited that large employers, owing to their larger pools of insurable individuals, can obtain better terms on health insurance relative to smaller employers. The Trump Administration suggested that expanded access to AHPs (whether insured or self-insured) would help small employers overcome this barrier and secure more affordable health care than is available under the Affordable Care Act (ACA).
As a result, the order directed the DOL – within 60 days – to consider proposing regulations or revising existing guidance to expand access to health coverage by allowing more employers to form AHPs. The order specifically instructed the DOL to consider:
  • Expanding the conditions for satisfying the commonality-of-interest requirements under current DOL advisory opinions interpreting ERISA's definition of an "employer."
  • Methods for promoting AHP formation on the basis of common geography or industry.

Existing Law Regarding Employer Association Health Coverage

Under current law, according to the DOL, health coverage offered through an employer trade association, chamber of commerce, or similar organization, to individuals and small employers generally is regulated by the same federal standards that govern insurance coverage sold by health insurers directly to these individuals and small employers. Exceptions to this general rule may apply if the association-sponsored coverage is a single ERISA plan. As a result, the association is commonly disregarded in determining whether the coverage is treated as individual, small group, or large group coverage.
ERISA's definition of employer, which governs the types of employers that may establish or maintain welfare benefit plans, includes a "group or association of employers acting for the employer." A commonality-of-interest standard used in interpreting this definition distinguishes between:
  • Bona fide groups or associations of employers that provide coverage to employees and dependents.
  • Arrangements that more closely resemble state-regulated private insurance.

Regulatory Requirements for a Bona Fide Group or Association of Employers

The proposed regulations include several requirements that a "bona fide group or association of employers" would need to meet in order to establish an ERISA group health plan (see Group Health Plans Toolkit). For example, the group or association would need to have a formal organizational structure with a governing body and by-laws (or other similar indications of formality) appropriate for the legal form in which the group or association is operated.
Additional requirements for bona fide groups or associations of employers would include:
Nondiscrimination standards under the Health Insurance Portability and Accountability Act (HIPAA) and the ACA would also apply. In addition, the group or association could not be a health insurer (as defined under ERISA Section 733(b)(2) (29 U.S.C. § 1191b)) or owned or controlled by a health insurer.

Control By Employer-Members

The group's or association's functions and activities, including establishment and maintenance of the group health plan, would need to be controlled by its employer-members. This control would be either directly or indirectly through the regular nomination and election of directors, officers, and other similar representatives that control:
  • The group or association itself.
  • Establishment and maintenance of the association plan.

Requirements Regarding Employees and Former Employees

Only employees and former employees of employer-members (and family/beneficiaries of those employees and former employees) could participate in a group health plan sponsored by the association. Also, the group or association could not make available health coverage offered through the association to anybody other than employees and former employees of employer-members and their families or other beneficiaries.
These requirements are intended to ensure that AHP sponsors are legitimate employment-based associations, and not mere membership organizations that essentially operate as unlicensed health insurers selling group health coverage commercially without the employment-based nexus envisioned under ERISA's definition of an employee welfare benefit plan (ERISA § 3(1); 29 U.S.C. § 1002(1)).

Commonality of Interest

The proposed regulations would include a commonality-of-interest requirement for employer-members of an association. Specifically, employers could join together to offer health coverage if they either:
  • Are in the same trade, industry, line of business, or profession.
  • Have a principal place of business within a region that does not exceed the boundaries of the same state or same metropolitan area (even if the metropolitan area includes more than one state; for example, the Kansas City metropolitan area).
In issuing the proposed regulations, the DOL requested comments on whether a US Census-based standard for designating metropolitan and micropolitan areas, or a standard similar to it, should be used regarding the principal place of business factor.
Under the proposed regulations, an AHP would constitute a single plan, and the determination of whether the plan is purchasing insurance as a large or small group plan would depend on the number of employees in the entire AHP.
The proposed regulations would depart from existing DOL guidance, under which a group or association must exist for a bona fide purpose other than offering health coverage in order to be an employer under ERISA Section 3(5). The proposed regulations would not require a group or association to be a pre-existing organization; new organizations would qualify.

Treatment of Working Owners

The proposed regulations would permit working owners (including sole proprietors and other self-employed individuals) to:
  • Elect to act as employers for purposes of participating in an employer group or association.
  • Be treated as employees of their businesses for purposes of being covered by the group or association's health plan.
The DOL indicated that an existing DOL regulation (29 C.F.R. § 2510.3-3) would not prohibit working owners of trades or businesses (and other self-employed individuals without common law employees) from joining a group health plan sponsored by an employer group or association.
The proposed regulations include parameters under which a working owner of a trade or business without common law employees may:
  • Elect to act as an employer for purposes of participating in an employer group or association.
  • Be treated as an employee of the trade or business for purposes of being covered by the employer group's or association's health plan.
The parameters would apply regardless of the legal form in which the business is operated (for example, sole proprietors or other working owners of businesses, whether incorporated or unincorporated).
Specifically, a working owner must earn income from the trade or business for providing personal services to the trade or business, and either:
  • Provide on average at least 30 hours of personal services to the trade or business per week or 120 hours of such service per month.
  • Have earned income derived from the trade or business that equals at least the cost of coverage under the group or association's health plan.
The individual also must not be eligible for other subsidized group health plan coverage under a plan sponsored by any other employer of the individual (or by a spouse's employer).
Viewed as a whole, these rules would permit an AHP to be comprised of participants who are:
  • Common law employees.
  • Common law employees and working owners.
  • Only working owners.

Practical Impact

Though the DOL's proposed regulations are intended to offer small employers, sole proprietors, and other working-owners greater flexibility in providing health coverage, the rules nonetheless include an extensive set of requirements that AHPs would need to satisfy, including nondiscrimination standards. Depending on the public comments that the DOL receives regarding its AHP proposed regulations (which must be submitted on or before March 6, 2018), these requirements may be changed when the regulations are finalized. Notably, if final regulations consistent with these proposed regulations conflict with any existing agency sub-regulatory guidance, the final regulations would supersede that guidance.