The Department of Labor’s (DOL’s) Final Rule creates an additional method for forming association health plans (AHPs).
On the heels of the Final Rule, eleven states and the District of Columbia sue the DOL for taking liberties with ERISA’s “employer” definition alleging the rule’s new interpretation of “employer” exceeds the intent and purpose of the Employee Retirement Income Security Act of 1974 (ERISA) and the Affordable Care Act (ACA).
On March 29, 2019, the district judge, hearing the allegations and rebuttals of the eleven states and the Rule’s drafter, the Department of Labor (DOL), agrees with the states and takes action to vacate the Rule. This latest action has current AHPs and their participants, along with those entities in formation and other AHP-hopefuls, wondering what the future holds.
Background of the Executive Order and Corresponding Lawsuit
President Trump’s 2017 Executive Order focuses on three regulatory methods for increasing choice and affordability in health care coverage for consumers. This order targets the expansion of association health plans (AHPs), short-term limited duration insurance (STLDI) policies, and health reimbursement arrangements (HRAs). The DOL’s responsibility is to write the rules for the AHP expansion. After drafts and consideration of over 900 public comments, the DOL’s final rule on AHPs emerges on June 21, 2018.
Soon thereafter, California, Delaware, the District of Columbia, Kentucky, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Virginia, and Washington sue the DOL alleging an overreach and misinterpretation of law. Specifically, the definition of “employer,” the criteria qualifying entities as bona fide associations, and the working owner provisions are the crux of their case. Further, the states anticipate these new AHP plans will not offer all the essential health benefits that the ACA requires causing individuals to be underinsured and leaving the states to become responsible for those individual’s costs or the full cost of those who cannot afford coverage.
The states cite other forms of economic harm, including:
- loss of tax revenue and administrative fees they receive for small group and individual exchange insurance plans
- if more individuals join AHPs, the AHPs will be large enough to self-insure resulting in fewer groups purchasing small group or individual fully-insured health coverage, which are the plans subject to state premium taxes and other fees
- an increase in regulatory burden for the states
- with more AHPs forming, state agencies will ramp up oversight activities, e.g., review of new and existing AHPs to ensure compliance with state law, review of AHP’s financial stability as a protection to consumers, response to consumer complaints, and fraud and abuse enforcement
- consumer education
- states anticipate additional costs in educating consumers through media campaigns and other methods
ERISA’s primary purpose is to govern employee benefit plans arising from employment relationships and, in doing so, provide certain protections to participating employees. The creation of the ERISA law in 1974 was specific to employee benefit plans as oversight and rules to provide security and protections to the millions covered through employer-sponsored plans. It does not extend to individuals beyond those that are in an employment relationship. ERISA identifies its scope by defining its key terms:
- Employee welfare plan – a “plan, fund or program . . . established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries”
- Participant – includes “any employee or former employee of an employer, or any member or former member of an employee organization”
- Employee – “any individual employed by an employer”
ERISA’s Allowance of Association Health Plans
In defining an employer, ERISA does authorize some employer associations who act “in the interest of an employer” to qualify as an employer. In other words, these associations would need to take on the responsibilities of an employer regarding the operation and administration of the benefit plan. The DOL has been very selective in determining which associations satisfy this requirement. Only those entities satisfying the requirements of a “bona fide association” qualify as acting “in the interest of an employer.”
The chart below shows the methods of determining “bona fide association” status under both the pre and post executive order rules.
AHP Rules Pre-Executive Order
AHP New Rules – Post-Executive Order
|“Bona fide association”||An organization with business/organizational purposes and functions unrelated to the provision of benefits||Organization may form solely for the purpose of providing benefits but must also possess one substantial business purpose|
|Employer commonality of interest||A genuine relationship unrelated to the provision of benefits||Employers must be either within the same trade or industry or common geography|
|Participation requirements||Groups with two or more employees||Groups with one or more employees or who satisfy the definition of a working owner|
|HIPAA nondiscrimination||Must not condition membership on health status-related factors||Must not condition membership in association or within a group on health status-related factors|
|Program control||Participating employers must exercise control over the program||Participating employers must exercise control over the program|
In either set of rules above, if the entity:
Passes all the tests
- Market rules will apply based on the aggregate size of all employers participating
- The association will be considered a single large employer whose size is determined by adding all the employees of all participating employers together
- The advantage to the employer is the opportunity to be part of a large employer resulting in fewer coverage and cost mandates and regulations
Fails one or more of the tests
- Market rules will apply individually to each employer
- A participating employer with 20 employees will still be considered a small group and be responsible to comply with all rules and regulations appropriate for groups of that size
- The sole advantage of participating is simply having a choice of a different health plan
The Decision of the District Court Judge
Judge Bates’ opinion covers all the challenges by the states along with the responses and rationale of the DOL. Specifically, the judge cites these areas of concern in the new rule.
- The new rule does not sufficiently identify bona fide associations able to “act in the interest of an employer” as is shown in the standard tests that determine bona fide associations
- The Purpose Test in the new rule (bona fide association criteria in the chart above) requires “at least one substantial business purpose” but fails to specifically define this term. The safe harbor examples shown in the final rule indicate that an association need only provide advertising, education, or other communications to satisfy the criteria. The judge opines that this is not enough to meaningfully establish an association that is bona fide to “act in the interest of an employer.”
- The Commonality of Interest Test under the new rule can include disparate employers whose only connection is geographic location. In other words, an association can define its membership solely based on business location. The judge opines that a formation of an association solely based on employers sharing a particular location does not establish the commonality of interest that ERISA intended.
- The judge’s review of the Control Test acknowledges that this test is directly related to commonality of interest. Without a true commonality of interest, control by the employer members may result in furthering the interests of some more than others, rather than benefiting all the employers in the organization. For this reason, the judge again finds that the ability under the rule for the association to “act in the interest of an employer” is not met.
- In ERISA’s history, individual working owners, without employees, have never been classified as employers nor able to join associations
- Outside of an association, these working owners are not employers but individuals able to purchase only individual health coverage, not employer group coverage
- Individuals, and their insurance coverage are outside the scope of ERISA
- Practically, one cannot employ oneself, so, therefore, cannot be considered either an employer or an employee
- Working owners do not satisfy the definition of “employer” or “employee” under the ACA
- An example cited by the judge demonstrates the Court’s rationale—an association of fifty-one working owners, without employees, will still total zero employees and zero employers when using ACA’s definitions of employee and employer
- Allowing this calculation will result in a group of individuals being considered a large group, who, if large enough, will have no requirement to offer the ACA’s essential health benefits that are inherent in the individual and small group market plans
The Court finds the bona fide association and working owner provisions of the Final Rule to be unreasonable interpretations of ERISA. Further, the judge asserts that the Rule’s intention was to circumvent ACA requirements by unreasonably expanding the definition of “employer.” As a result, the judge vacates these two provisions.
Subsequently, the Court sends the Final Rule back to the DOL for consideration of how the removal of these two provisions will affect the rest of the rule, as allowable under the severability provision.
The DOL’s April 29 statement response provides the following guidance and reassures employers that they will minimize any impact:
- Employers participating in AHPs formed under the new rules, may maintain their coverage through the end of the plan year or contract term, whichever is later
- At the end of the plan year or contract term, “…the issuer would only be able to renew the coverage for an employer member of an AHP formed pursuant to the Department’s final rule if the coverage complies with the relevant market requirements for that employer’s size (such as, for insurance sold to small employers, the essential health benefits requirements and premium rating rules)”
- In response, we anticipate these AHPs to either offer coverage under a new master policy that complies with the market rules or offer separate coverage to each employer outside of the association
- HHS further commits itself to working with employers and plan fiduciaries to help minimize the effects and while keeping them compliant and confirms
- The DOL also affirms that they will not pursue any enforcement actions against employers, providers, issuers, etc. for any good faith actions taken prior to this latest ruling as long as the AHP maintains their promise to continue to provide coverage and pay claims through the remainder of the plan, or contract, year
The DOL’s appeal of the US District Court decision sends the case to the appellate court for consideration. The appellate court will, presumably, hear the case sometime in the fall. If there is no resolution after that, the Supreme Court will be its next stop sometime in 2020.
On the heels of the DOL guidance, it unknown whether the Court will issue a stay allowing the current AHP rule to continue until the case makes its way through all the courts. That is something we will watch. Additional watch will be on individual states as they try to determine how they will enforce the AHP rule decision and the DOLs guidance. These will remain the outstanding questions and concerns in the months to come.
As always, we will inform you of important developments. To stay on top of legislative updates, visit OneDigital's Compliance Confidence blog.