Department of Labor Issues Final Rule Expanding Opportunities for “Bona Fide” Association Health Plans Under ERISA

Background

The Department of Labor’s (Department’s) final rule expanding opportunities for “bona fide” association health plans (AHPs) was published in today’s Federal Register (83 F.R. 28912, June 21, 2018). This final rule follows a proposed rule published earlier this year (83 F.R. 614, January 5, 2018). Previously, opportunities for establishing a “bona fide” AHP constituting a single ERISA plan were limited to those arrangements satisfying very strict criteria established through the Department’s so-called “sub-regulatory” guidance. As a result, few existing AHPs have qualified for the desirable ERISA status.

The final rule’s AHP expansion is intended to increase opportunities for small businesses and certain self-employed individuals to band together and purchase large group health insurance under a single policy or to self-insure on a larger group basis. While this final rule largely implements the same standards included in the proposed rule, a few distinctions and clarifications are worth noting.

Carve-out for “Bona Fide” AHPs Under Pre-Rule Guidance

The proposed rule would have made all “bona fide” AHPs subject to the same standards. However, in a seemingly significant modification, the final rule’s preamble states that the new rule is not intended to replace or supplant the Department’s existing “sub-regulatory” guidance regarding “bona fide” AHPs. Instead, the final rule provides an additional basis for groups or associations to meet the definition of “employer” under ERISA section 3(5). Thus, only those arrangements established pursuant to the new rule are subject to the new rule’s standards. This noteworthy carve-out essentially creates two distinct categories of “bona fide” AHPs.

• Existing “bona fide” AHPs should exercise caution in evaluating expansion opportunities under the new rule relative to the new standards that would apply by virtue of any such expansion.  For example, subject to state law, AHPs that qualify as “bona fide” under the DOL’s sub-regulatory guidance may continue to treat different employer members as distinct groups of similarly situated individuals for underwriting purposes, so long as this treatment is not based on an individual participant’s or beneficiary’s health status factor. (See footnote 40 to the final rule’s preamble.) This type of rating approach is not permissible for AHPs established pursuant to the new rule.
• Newly formed AHPs should weigh the pros and cons of both AHP categories in determining the most desirable structure.
• Any AHP relying upon the carve-out for AHPs under the Department’s pre-rule sub-regulatory guidance (as opposed to the criteria of the new rule) may wish to consider obtaining a formal advisory opinion from the Department as to the arrangement’s “bona fide” status.

“Bona Fide” AHPs under the New Rule

The final rule’s requirements for when a group or association will be deemed to act in the interest of an employer within the meaning of section 3(5) of ERISA remains largely unchanged from the proposed rule, although various modifications and clarifications are provided.

Primary Purpose of the Group or Association.  Under the proposed rule, a group or association could exist for the sole purpose of sponsoring a group health plan. Modifications to the final rule, however, now require that the group or association must also have “at least one substantial business purpose unrelated to offering and providing health coverage or other employee benefits to its employer members and their employees.” With respect to this new standard, the Department includes in the final rule the following safe harbor – “a substantial business purpose is considered to exist if the group or association would be a viable entity in the absence of sponsoring an employee benefit plan … a business purpose includes promoting common business interests of its members or the common economic interests in a given trade or employer community[.]”

• The safe harbor’s seemingly low threshold should be easily satisfied by most groups seeking to establish AHPs under the new rule but should nonetheless be kept in mind and addressed in the entity’s organizational structure and governing documents.
• The substantial business purpose is not required to be a for profit activity.

Control Requirement.  The final rule also includes additional clarification regarding the control requirement – (1) the group or association’s members that participate in the group health plan must control the plan and (2) such control must be present in both form and substance.

• The Department’s clarifications make clear that documentation alone will not suffice in establishing and maintaining a “bona fide” AHP pursuant to the new rule. Newly established AHPs should seek qualified legal counsel in implementing policies and procedures to ensure that that the arrangement actually operates in a compliant manner.

Commonality of Interest.  Under the final rule, the commonality of interest test remains largely the same as under the proposed rule.  This test is satisfied when either (1) the employers are in the same trade, industry, line of business or profession or (2) each employer has a principal place of business in the same region that does not exceed the boundaries of a single state or a metropolitan area (even if the metropolitan area includes more than one state). The final rule adds additional clarification in the case of a group or association that is sponsoring a group health plan that is itself an employer member of the group or association. In these instances, the group or association will be deemed to be in the same trade, industry, line of business, or profession as the other employer members of the group or association.

Participation of “Working Owners.” Numerous comments were submitted in response to the Department’s proposed standards for AHP participation by certain self-employed individuals (“working owners”). The final rule confirms that working owners may be treated as both employers and employees for purposes of eligibility, and generally allows expanded eligibility for this class of participant compared to the proposed rule. Under the final rule, a “working owner” means an individual who (1) has an ownership right in a trade or business, (2) earns wages or self-employment income for providing personal services to the trade or business, and (3) works a minimum number of hours providing personal services to the trade or business or has wages or self-employment income from the trade or business at least equal to the cost of the working owner’s cost of coverage under the AHP.

• The final rule eliminates the proposed rule’s restriction on eligibility for working owners eligible to participate in subsidized coverage under another group health plan.
• Also relaxed is the hours worked requirement – reduced from 30 hours per week (or 120 hours per month) to 20 hours per week (or 80 hours per month).
• The eligibility of working owners must be made pursuant to reasonable procedures upon initial eligibility and periodically thereafter. Importantly, the final rule also makes this determination a fiduciary obligation.

Nondiscrimination Rules.  Notable clarifications and additional examples are included in the final rule’s nondiscrimination provisions, reinforcing the proposed rule’s prohibition against conditioning employer membership in an AHP on any health factor of any individual who is or may become eligible to participate in the AHP. In applying the nondiscrimination provisions, a group or association may not treat the employees of different employers as distinct groups of similarly-situated individuals. New examples are included in the final rule to clarify the extent to which an AHP may make distinctions between various classifications or groups based on factors other than health.

• For AHPs established pursuant to the new rule, Example 4 remains intact. This prohibits an AHP from charging a particular employer group more for premiums than it charges other employer members based on actual claims experience. Where an AHP implements any permitted distinctions in premiums as between its various employer member groups (i.e., based on geographic location, worker classification, etc.), careful consideration should be given to ensure that those distinctions may not be deemed to be based on health factors.
• A new Example 10 addresses commenters’ concerns surrounding application of the proposed rule’s nondiscrimination standards in the context of wellness incentives.  In this example, Association T sponsors a group health plan that offers a premium discount to participants who participate in a wellness program that complies with section 2590.702(f). The final rule concludes that providing such a reward (or a similar financial or other incentive or disincentive) in return for adherence to an otherwise compliant wellness program would not violate the final rule’s nondiscrimination standards.  

VEBAs, Preemption & Important Reminders

VEBAs.  A VEBA is a tax-exempt trust commonly used by AHPs to hold plan assets. VEBAs are governed by the IRS and are subject to strict requirements, some of which conflict with the new rule’s standards. Many commenters to the proposed rule requested that the Department coordinate with the IRS in a way that would allow AHP expansion pursuant to the new rule while still preserving VEBA status. The Department declined to do so in the final rule.

• All AHPs utilizing VEBA trusts should exercise caution in evaluating expansion opportunities under the new rule relative to VEBA status.
• Practically speaking, many AHPs do not benefit from VEBA trusts. VEBAs should be of limited, if any, tax benefit to fully insured AHPs. Even most large, self-insured AHPs can structure and manage non-exempt trusts in a tax-efficient manner. However, some states may require AHPs to utilize VEBAs as a prerequisite to self-insuring.

Preemption.  The new rule does nothing to alter ERISA’s preemption of state insurance laws (which is virtually nonexistent in the context of self-insured AHPs). All AHPs will need to consult qualified insurance counsel in determining any state-based legal constraints on AHP operations.  For those states which prohibit or limit self-insured AHPs, those prohibitions and limitations remain intact. Note that state insurance laws may also impact the availability (or desirability) of fully insured AHP products as well.

Important Reminders.  The Department’s general discussion of AHP regulation in its preamble to the final rule serves as a good reminder to both existing and prospective AHP sponsors and administrators of the multitude of compliance obligations that attach to such arrangements under various state and federal laws, including the fiduciary, reporting and disclosure obligations under Title I of ERISA. In addition, all AHPs constitute multiple employer welfare arrangements (“MEWAs”) under section 3(40) of ERISA. MEWA status alone has significant legal implications.

• A legally compliant and properly administered AHP requires much more than off-the shelf documentation and a group insurance policy.  Groups seeking to organize an AHP pursuant to the new rule should seek the assistance of qualified legal counsel.

Dates of Applicability

For fully insured AHPs intending to qualify under the final rule’s new standards, the final rule takes effect on September 1, 2018. For a self-insured AHP in existence on June 21, 2018 (and meeting the pre-rule sub-regulatory requirements for a “bona fide” AHP under ERISA) that chooses to expand pursuant to the final rule (i.e., to provide coverage to a broader group of individuals, such as working owners), the final rule takes effect on January 1, 2019. For any other AHP established pursuant to the new standards, the final rule takes effect on April 1, 2019.

Additional Comments

While proponents of AHP expansion have eagerly awaited the release of the new rule, any celebration may be premature at this point. It is widely expected that multiple states and some insurers will challenge the legality of the new rule. Such challenges may delay (or even eliminate) implementation of AHPs pursuant to the new rule.

There has also been much hype regarding potential cost-savings through participation in self-insured AHPs. Practically speaking, it is unlikely that many legitimate AHPs established pursuant to the new rule will be capable of self-insuring, at least initially. Most states strictly regulate self-insured AHPs, and the funding necessary to both obtain and maintain state licensure makes self-insuring unviable or unattractive for most. Thus, where self-insured AHPs established pursuant to the new rule are marketed, prospective employers and participants should proceed with caution.

Finally, keep in mind that any fully insured AHP established pursuant to the new rule would require carrier commitment. Historically, many carriers have viewed AHPs unfavorably due to their history of fraud and abuse. It remains to be seen whether the carriers will be eager to take on this somewhat novel form of risk, particularly in today’s environment of healthcare uncertainty.