The Department Of Labor's Newly Issued Association Health Plan Proposed Regulations Include Welcome Changes For Employers But Would Present State Regulatory Challenges

On January 3, 2018, the Department of Labor issued proposed regulations that will make it easier for small employers to band together to form "association health plans" ("AHPs"), thereby providing access to more liberal underwriting and other rules governing large groups. This post provides context for, and summarizes the changes made by, these proposed regulations.

Background

Association health plans are programs providing health coverage, typically within an industry organization, to businesses that share an affinity or common interest. For example, a local or regional Chamber of Commerce may offer an association-type plan to its members. Under current law, small groups generally retain their status as such even where coverage is purchased through an association. Since AHPs are principally marketed to and purchased by small employers, AHPs are usually subject to more restrictive state small group insurance rating and other rules. (See our previous posts on AHPs available here and here.) At the heart of the debate over AHPs is the extent to which small employer groups can band together to form large groups to take advantage of more favorable underwriting and other rules.

The proposed AHP regulation was prompted by an Executive Order issued by the Trump administration on October 12 of last year, which, among other things, included the following instruction to the Labor Secretary:

Within 60 days of the date of this order, the Secretary of Labor shall consider proposing regulations or revising guidance, consistent with law, to expand access to health coverage by allowing more employers to form AHPs. To the extent permitted by law and supported by sound policy, the Secretary should consider expanding the conditions that satisfy the commonality of-interest requirements under current Department of Labor advisory opinions interpreting the definition of an "employer" under section 3(5) of the Employee Retirement Income Security Act of 1974. The Secretary of Labor should also consider ways to promote AHP formation on the basis of common geography or industry.

In response, the proposed regulation modifies the definition of the term "employer" in section 3(5) of the Employee Retirement Income Security Act ("ERISA"). Under ERISA, group health plans that cover employees of two or more unrelated employers are referred to as "multiple employer welfare arrangements," or "MEWAs." AHPs are, by their very nature, MEWAs.

MEWAs are subject to regulation under both state and Federal law (i.e., ERISA). Under a 1983 amendment to ERISA, states are generally free to regulate self-funded MEWAs, but they are limited to laws that require the maintenance of specified levels of reserves and specified levels of contributions in the case of fully-insured MEWAs that are subject to ERISA. States are also free to comprehensively regulate a fully-insured MEWA that does not qualify as a MEWA under ERISA. For a MEWA to be subject to ERISA requires that the arrangement be an ERISA-covered welfare plan, which means among other things that the MEWA be sponsored by a group of employers. Thus, how ERISA defines "employer" is of vital importance. The proposed regulations are aimed at fully-insured arrangements, although the Department of Labor has invited comments on how the rules might be applied to self-funded plans.

ERISA defines the term "employer" to mean:

[A]ny person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and...