The Administration’s New Proposed Rule for Association Health Plans

January 24, 2018

The proposed rule from the Department of Labor’s (DOL or Department) Employee Benefits Security Administration (EBSA) proposes to broaden the criteria under ERISA section 3(5) for determining when employers may join together in an employer group or association that is treated as the “employer” sponsor of a single multiple-employer “employee welfare benefit plan” and “group health plan.”

Background

Before discussing the Administration’s new proposed rule for association health plans (AHPs), it is helpful to provide context for how AHPs worked prior to the Affordable Care Act (ACA). Prior to the ACA, national associations could pick and choose which states’ insurance rules they wanted to follow and use those rules to guide the plans they offered nationwide. These associations claimed ERISA preemption from state insurance regulation, identifying themselves as employers or employee organizations under ERISA.

Further, ERISA provided states regulatory authority over self-insured multiple employer welfare arrangements (MEWAs) and some regulatory authority over fully insured MEWAs to ensure solvency, require state licensure, and require financial reporting. AHPs are one type of MEWA.

Many states exempted the plans from having to comply with some of the rules that applied to commercial insurers, such as underwriting restrictions and benefit mandates. For example, the “realtors association” could choose to follow the rules, for example, of the Alabama insurance market, which mandates coverage of relatively few benefits, for all its realtors in New York, a state with many mandates. The ACA changed these rules by treating AHPs as small-group or individual plans, which were therefore required to cover all of the law’s mandated benefits, including essential health benefits.

Summary

The proposed rule from the Department of Labor’s (DOL or Department) Employee Benefits Security Administration (EBSA) proposes to broaden the criteria under ERISA section 3(5) for determining when employers may join together in an employer group or association that is treated as the “employer” sponsor of a single multiple-employer “employee welfare benefit plan” and “group health plan.”

The proposed rule does not address a second change that was part of the President’s executive order related to short-term insurance.

Key Provisions of the Proposed Rule

A. Bona Fide Purpose Other than Offering Health Insurance

First, the rule relaxes the requirement that associations must exist for a reason other than offering health insurance. This requirement—that a group or association must exist for a bona fide purpose other than offering health coverage to be an employer under ERISA—had been provided in previous DOL guidance. Under the proposed rule, an association could show commonality of interest among its members by either 1) being in the same trade, industry, or profession; or 2) being in the same principal place of business within the same state or a common metropolitan area (even if the metro area extends across state lines). These criteria are separate: associations whose members operate in the same industry can sponsor AHPs, regardless of geographic distribution, while members in the same geographic area may work in entirely different industries.

Under current rules, members must be part of the same industry to form an association health plan under the current rules. The proposed rule would change that, allowing workers in unrelated professions to band together to obtain coverage through an association health plan so long as they are in the same geographic region. The Department requests comments on whether more clarification would be helpful regarding the definition of a metro area, whether associations could manipulate geographic classifications to avoid employers with unhealthy risk, and whether the Department should establish a special process to confirm that all of an association’s members have a principal place of business in a metro area.

B. Organization Structure

The rule would require an association offering an AHP to have an organizational structure and be functionally controlled by its members. The association would need to have a governing body, by-laws, and maintain other legal formalities based on the type of entity the association is. The association’s employer members would be required to oversee its activities, either directly or by electing a board or other representatives.

While these requirements largely duplicate existing DOL guidance under ERISA section 3(5), they are being codified to ensure that associations are “genuine organizations with the organizational structure necessary to act ‘in the interest’ of participating employers.”

The rule notes concern with the possibility that commercial entities could form what they claim are AHPs but then operate as traditional insurers. The Department states that its control requirement will help keep away these bad actors who do not have an employment relationship and thus would not be acting in members’ best interests.

C. Eligibility: “Working Owners”, “Genuine Employment”, and “Dual Treatment”

In determining eligibility to join an AHP, the rule focuses on its intent “to cover genuine employment-based relationships, not to provide cover for the marketing of individual insurance masquerading as employment-based coverage.”

Under ERISA, enrollment in a group health AHP is limited to the association members’ employees, former employees, and their families or beneficiaries. The rule emphasizes that there has to be an employer relationship to obtain AHP coverage and that groups or associations sponsoring an AHP must be bona fide employment-based associations (not simply general membership organizations offering health coverage).

a.“Working Owners”

While this would conceivably prevent individuals from enrolling in group health AHP, the proposed rule expands the availability of AHP group coverage to self-employed individuals referred to as “working owners.” Under the rule, a working owner would be considered both an employer and an employee for purposes of enrollment in a group health AHP. This “dual treatment” would allow a self-employed individual to be an employer (to participate in the AHP and offer group coverage) and an employee (of their own business to qualify for the health coverage offered by the AHP).

The Department proposes a broad definition of “working owner.” A working owner is a person who has any ownership right in a trade or business (whether that business is incorporated or not), earns wages from self-employment income, is ineligible to participate in a subsidized group health plan for another employer, and works at least 30 hours/week (or 120 hours/month) or has earned income that equals the cost of coverage in the AHP. The group or association would not be required to verify the working owner’s eligibility, instead the AHP sponsor could “reasonably rely” on written representations from the individual, such as an attestation, so long as the association has no knowledge to the contrary.

b. “Genuine Employment”

The proposed rule includes these criteria “to ensure that a legitimate trade or business exists” and that AHP coverage is being offered in the context of an employment relationship. Without these criteria, the Department notes the concern that the rule could “effectively eliminate the statutory distinction between offering and maintaining employment-based ERISA-covered plans, on the one hand, and the mere marketing of insurance to individuals outside the employment context, on the other.” The proposed rule provides examples of what would constitute “genuine employment”, noting enrollees would need to actually be involved in an ongoing business, not merely offer a “single on-demand ride for a fee, or knitting a single scarf to be offered for sale on the Internet.” The Department invites comment on whether to adopt additional or different criteria to help ensure that “working owners” who join an AHP are genuinely self-employed.

c.“Dual Treatment”

The proposed rule does nothing to disturb the ability of self-employed individuals to deduct the cost of health insurance under federal tax law (or any associated reporting requirements) even though the dual treatment approach would consider working owners as both employers and employees for purposes of the AHP. The rule request comments on the dual treatment approach, as well as on a provision that would exclude from AHP membership individuals who are offered other subsidized group health plan coverage.

In adopting this “dual treatment” approach, the Department acknowledges a shift from previous interpretations and notes conflicting advisory opinions and other guidance. In making this change, DOL asserts that the term “employer” under ERISA is ambiguous, leaving room for agency discretion in interpreting its meaning, and cites its authority to supersede previous interpretations in non-binding advisory opinions “to address marketplace developments and new policy and regulatory issues.”

D. Nondiscrimination

The proposed rule adopts nondiscrimination protections that groups and associations must comply with when offering AHPs. These build upon existing health nondiscrimination provisions applicable to group health plans under HIPAA, as amended by the ACA, but they are applied slightly differently.

AHPs will be prohibited from restricting membership or charging differential premiums based on health factor (defined as health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability for similarly situated individuals.

While the proposed rule includes provisions to prohibit these types of discrimination, it is important to note the changes could allow some association health plans to stop covering mental health care or other services. For example, by excluding coverage for mental health issues, those individuals needing expensive mental health services would be generally unlikely to select the association plan.

In addition, while these rules generally prohibit health discrimination within groups of similarly situated individuals, they do not prohibit discrimination across different groups of similarly situated individuals. Thus, plans may treat participants as distinct groups based on bona fide employment-based classifications (such as full-time versus part-time, different geographic location, the date of hire, and different occupations, among others). Plans can also treat participants and beneficiaries as distinct groups and make distinctions based on the relationship between the participant and beneficiary (such as marital or student status). But plans cannot make these distinctions if doing so is directed at an individual or group based on health factors.

In applying these existing rules to AHPs, the Department prohibits associations from treating different employer members as distinct groups of similarly situated individuals. This limits the ability of associations to engage in employer-by-employer risk rating (by, for instance doing health status underwriting for one employer in the association but not another). The Department requests comment on whether the nondiscrimination protections appropriately balances risk selection issues and the ability of employers to innovate.

The proposed rule maintains existing reporting requirements under ERISA but requests comments on whether it should adopt notice requirements to ensure that members of associations as well as participants and beneficiaries are adequately informed of their rights or responsibilities with respect to AHP coverage. Comments are also requested on the impact of these proposals on the risk pools of the individual and small group markets as well as any data, studies, or other information that would help estimate the benefits or costs of the rule.

E. Applicability of ACA Requirements

AHPs will be classified the same way as large employers’ insurance, meaning AHPs will no longer have to include essential health benefits that the ACA requires.

The plans would also be exempt from an ACA rule requiring insurers to spend at least 80 percent of premium revenue on medical care. Self-insured AHPs, while not subject to state mandate benefits, would still be governed by the employer mandate. The mandate requires employers to offer a “minimum value,” meaning it covers at least 60% of a member’s benefit costs.

As AHPs would be treated as a group health plan, they would still be barred from prohibiting people with pre-existing conditions and annual lifetime limits. The plans would still have to cover young adults up to age 26 on their parents’ plans and cover preventive services at no cost.

F. Sale Across State Lines and Compliance with State Regulations

While the proposed rule permits AHPs to be sold across state lines, the plans must comply with state regulation. The rule invites public input “about the relative merits of possible exemption.”

State authority over such plans would vary depending on whether the plans were self-insured, (which exempts them from some state coverage and benefit rules) or fully insured (which means they must meet state mandates). No matter how plans are funded, states would retain oversight of their solvency.

Contributed by Greenberg Traurig, LLP

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