On January, 4, 2018, the Department of Labor, issued a Notice of Proposed Rulemaking relating to Association Health Plan (the “Proposed AHP Rule”) which expands the large group treatment of AHP coverage. The Proposed AHP Rule achieves this by expanding the commonality of interest requirement currently used to determine whether an association, or the individual employers, are the sponsors of group health coverage. The Proposed AHP Rule also permits associations to include groups of any size and sole proprietors. Under the Proposed AHP Rule, AHPs must comply with HIPAA nondiscrimination rules preventing health status discrimination; while states continue to have the authority to regulate AHPs as “multiple employer welfare arrangements” (“MEWAs”) directly.
The Proposed AHP Rule does not reference PEOs or PEO-sponsored coverage, and accordingly, does not directly implicate or call into question a PEO’s ability to sponsor health coverage. However, it does have the potential to significantly impact the coverage options available to small employers, and therefore could have a profound effect on PEOs as drafted.
Initial reaction from stakeholders is likely to be mixed. As described more fully below, the Proposed AHP Rule does not appear to provide for broad preemption of state insurance law rules as they relate to fully insured or self-funded AHPs. This is because they continue to constitute MEWAs. Thus, we would expect state insurance departments and the National Association of Insurance Commissioners (NAIC) to continue to assert their regulatory authority over any AHPs offered in their states. As for carriers, their reaction will likely depend on the extent to which they underwrite coverage in the individual and small group insurance markets, as this rule has the potential to siphon risk/lives out of those markets. Notably, as discussed below, the Proposed AHP Rule imposes fairly rigorous nondiscrimination requirements that may make it difficult for AHPs and their carriers (if the AHP is fully insured) to secure relatively preferential risk from the community-rated insurance markets or even manage the ongoing risk profile of the AHP long-term.
Below is a summary of the major topics raised by the Proposed AHP Rule, but note that additional topics are likely to arise as analysis continues.
- “Commonality of Interest” test. The Proposed AHP Rule expands the current test to determine whether an association is the employer plan sponsor of group coverage by allowing any size employer and working owner to join a self-funded or insured AHP if (i) the employers are in the same trade, industry, line of business or profession, (regardless of geographic location), or (ii) employers in geographically limited areas, such as a single state or a certain metropolitan area (even if it crosses state lines, e.g., the New York Metropolitan area includes parts of NY, CT, and NJ). The Proposed AHP Rule achieves this by loosening the definition of employer found in section 3(5) of ERISA to effectively define the association as an “employer.” Importantly, associations will be able to sponsor plans even if the association exists solely for the purpose of offering health coverage. DOL believes that a sufficient employment relationship/employment-based nexus is required in other aspects of rules to meet the requirements of ERISA.
- Organizational requirement and functional control. The Proposed AHP Rule would require the AHP to have a formal organizational structure with a governing body and bylaws (or other similar indications of formality), and it would need to be controlled by the association’s or group’s employer members, including the establishment and maintenance of the group health plan itself.
- Nondiscrimination rule: Generally, the Proposed AHP Rule prohibits premium rating (i) at the individual employer level based on the health status of individual employees, or (ii) based on an individual’s health status. However, the proposal does allow associations to set rates based on bona fide employment classes (such as part-time or full-time), or based on industry type. The bylaws of associations can have eligibility requirements, but those cannot be based on health status. It appears these rules would only apply to AHPs, and not to existing arrangements sponsored by PEOs.
- Sole proprietors. Allows for inclusion of sole proprietors (including those who lack W-2 employees) as “working owners.” The Proposed AHP Rule defines “working owner” as any individual who has an ownership right of any nature in a trade or business, whether incorporated or unincorporated, including partners and other self-employed individuals; who is earning wages or self-employment income from the trade or business for providing personal services to the trade or business; who is not eligible to participate in any subsidized group health plan maintained by any other employer of the individual or of the spouse of the individual; and who either works at least 30 hours per week or at least 120 hours per month providing personal services to the trade or business, or has earned income from such trade or business that at least equals the working owner's cost of coverage for participation by the working owner and any covered beneficiaries in the group health plan. The group or association sponsoring the group health plan may reasonably rely on written representations from the individual seeking to participate as a working owner as a basis for concluding that these conditions are satisfied. The Preamble makes clear that an AHPs can consist solely of working owners. In general, this appears to be most aggressive position taken in the proposal, and may be subject to viable challenge on legal basis. It also could have a significant negative impact on the individual insurance markets.
- Large versus small employers. The Proposed AHP Rule does not limit participation to employers of any specific size (such as small employers); however, it is unclear the extent to which large employers would want to participate on this type of pooled arrangement.
- State law interaction. Importantly, nothing in the rule suggests state law is otherwise preempted with respect to the proposed AHPs. As a result, states can continue to regulate AHPs as they currently do so MEWAs. Under this rule, there is no “look through” at the federal level to the size of the participating employer – i.e., the entire group receives large group treatment. However, because state law continues to apply to the insurance contract (in case of insured AHPs) or the AHP itself (in the case of a self-funded AHP), a state can effectively regulate any flexibility that these AHPs may have enjoyed under the proposal.
- Exemption. DOL did not create an individual or class exemption from existing state regulation of self-funded MEWAs, but did request comments on its exemption authority. A footnote in the regulations makes clear that AHPs under the proposal are single plan MEWAs (both self-funded and fully insured).
- PEO Implications. As mentioned above, the Proposed AHP Rule does not reference PEOs or PEO-sponsored coverage, and accordingly, does not directly implicate or call into question a PEO’s ability to sponsor health coverage. However, it does have the potential to significantly impact the coverage options available to small employers, and therefore could have a profound effect on PEOs as drafted.