On June 19, 2018, the EBSA issued final regulations related to the creation and maintenance of association health plans (AHPs) under ERISA. After considering over 900 public comments, the EBSA largely finalized the proposed regulations (see the Jan. 9, 2018, edition of Compliance Corner) with some clarification and a few modifications.
As a reminder, ERISA governs single-employer plans and multiple employer welfare arrangements (MEWAs). Prior to the final rule, ERISA would apply to a MEWA on the plan level, instead of on the individual employer level, only if all of the following criteria applied:
- The association was a bona fide organization with business/organization functions and purposes unrelated to providing benefits.
- The participating employers shared some commonality of interest and relationship outside of benefits. Commonality of interest was defined as being of the same industry, trade, line of business or profession AND same geographic location.
- The employers directly or indirectly exercised control over the program.
If the group met these criteria, it was considered a bona fide association, the group was rated collectively for insurance premium purposes, the plan was considered to be maintained at the plan level and the association complied with ERISA’s requirements, including providing a single Summary Plan Description (SPD) and filing the Form 5500 (if applicable). Alternatively, if the group didn’t satisfy the criteria, then the insurer could issue rates based on each separate employer member, the plan was considered to be maintained at the employer level, and each employer would be responsible for complying with ERISA and providing a separate SPD and Form 5500 (if applicable).
Importantly, the final regulations don’t replace the previous guidance. They provide an additional option for unrelated employers to come together to sponsor a single health plan. They expand the definition of an employer under ERISA and how employers may qualify as a single employer for group health plan purposes. Groups that previously qualified as bona fide associations under the previous guidance continue to qualify as AHPs. Further, if a group that otherwise qualifies to sponsor a single-group health plan under the new rules wishes to operate as separately sponsored employer plans, they may choose to do so with a description of such in the plan documents.
How AHPs Can Exist
In the proposed regulations, the requirement for the association to exist outside of the purpose of providing benefits was eliminated. The final regulations altered this provision slightly by adding a requirement that the association or group have at least one substantial business purpose unrelated to the provision of benefits, although the principal purpose may be the provision of benefits. This is in response to comments that claim that allowing associations to be formed solely for the purpose of providing benefits would result in:
- Diminishing value of existing trade and professional associations, and
- An increased risk of poorly managed AHPs and fraudulent practices.
While the rule doesn’t define “substantial business purpose,” it does include a safe harbor. A substantial business purpose is considered to exist where a group or association would be a viable entity even in the absence of sponsoring a benefit plan. For example, an association could offer members services such as conferences, classes or educational materials on business issues; be a standard-setting organization establishing business standards or practices; or simply advance the well-being of an industry through some substantial activity.
Similar to the proposed rule, the commonality of interest test will be satisfied if the employers are of the same industry, trade, line of business or profession OR same geographic location. The same geographic location includes the same state or metropolitan area (such as NY/NJ/CT, WA/DC/VA, and KS/MO). It could also include a Metropolitan Statistical Area or a Combined Statistical Area, as defined by OMB (and as used by U.S. government agencies for statistical purposes). This means that employers may come together on a national basis as long as they’re in the same industry, trade, line of business or profession and meet the other outlined requirements.
As with the proposed rule, member employers must exercise control over the plan. However, the final rule modified the control test slightly from the proposed version. Sufficient control is considered to be demonstrated if the employers regularly nominate a governing body for the association and plan, if employers have the authority to remove a director or officer without cause, and if employers have decision-making authority and opportunity related to formation, design, amendment and termination of the plan.
Who Can Join
ERISA generally doesn’t apply to an arrangement consisting only of a self-employed individual with no common-law employees. Participants must be employees, former employees or family members of such. However, the final rules permit sole proprietors and other self-employed individuals (called working owners) with no common law employees to join an AHP as member employers. Individuals must work at least 20 hours per week or 80 hours per month providing services to the trade or business (decreased from the proposed 30 and 120 hours, respectively) OR have earned income from such trade or business that at least equals the cost of coverage. The final regulations permit a working owner to self-certify their hours or income to the AHP, but they also permit an AHP to implement certification procedures as part of their ERISA fiduciary responsibility.
The final rule includes the proposed rule’s nondiscrimination provision, which is intended to limit adverse selection and apply the existing health nondiscrimination provisions under HIPAA. The HIPAA nondiscrimination rules generally prohibit discrimination based on a health factor as it pertains to eligibility, benefits or premiums within groups of similarly situated individuals. The rules don’t prohibit discrimination across different groups of “similarly-situated individuals” — defined as bona fide employment-based classifications consistent with the employer’s usual business practice. An employee classification is bona fide if the employer uses the classification for purposes independent of qualification for health coverage.
AHPs, like any other group health plan, cannot discriminate within a group of similarly situated individuals based on a health factor. This means that AHPs must comply with all of the following:
- May not treat employees of an employer member as a distinct group of similarly situated individuals based on one or more employees’ health factors (for purposes of benefits, premiums, etc.)
- May treat employees of subsets of employer members as distinct groups of similarly situated individuals based on bona fide employment based classifications (e.g., factors such as industry, location, or its employees’ ages or genders or occupations)
- May not restrict employer membership based on any individual’s health factor, such as claims experience, disability, etc.
Notably, it’s common for existing AHPs to experience-rate employer-members. The final rule doesn’t require associations that meet prior AHP guidance to comply with the nondiscrimination provision (although the HIPAA nondiscrimination rules continue to apply).
When New Regulations Become Effective
The regulations are effective 60 days following the publication in the Federal Register. However, the applicability date varies by plan: Sept. 1, 2018, for fully insured AHPs, Jan. 1, 2019, for existing self-insured AHPs and April 1, 2019, for newly formed self-insured AHPs.
AHPs are generally subject to ERISA, HIPAA and ACA market reforms. The size of the group for premium rating purposes will be based on the total number of employees of all employer members of the association. The applicability of COBRA for a small employer who would otherwise be exempt except for participation in an AHP is an issue that EBSA has referred to the IRS and Treasury for future guidance.
The most common questions remaining after the proposed regulations relate to state regulation of AHPs. For example: What about a state law that prohibits self-insured AHPs, the participation of self-employed individuals without common law employees, or the formation of an association based primarily on the purchase of insurance? Would these laws be preempted by the federal regulations? Unfortunately, the final regulations provide little information as to that issue. In the preamble, the EBSA encourages state cooperation, but states:
“The Department declines the invitation of the commenters to opine on specific State laws…The final rule is not the appropriate vehicle to issue opinions on whether any specific State law or laws would be superseded because of the final rule.”
The expectation is that states will review the final regulations and begin issuing guidance in the coming weeks and months. The preamble also indicates that future action may be taken in regard to preemption against state insurance laws that “go too far in regulating non-fully-insured AHPs in ways that interfere with the important policy goals advanced by this final rule.” We’ll continue to report any developments.
Who Will Benefit
While any size employer may join an AHP, AHPs may only be attractive to small employers that would avoid the current member-level billing, modified community rating, essential health benefit package and limited plan choice. AHPs may also be an attractive option for self-employed individuals looking to get out of the individual market.
For more information on how the final AHP regulations may apply to your benefit options, please contact your advisor.
EBSA Final AHP Regulations »
DOL News Release »