Association Health Plans – A New Frontier?

On June 21, 2018, the Department of Labor published the final association health plan (“AHP”) rule, which can be accessed at: https://www.gpo.gov/fdsys/pkg/FR-2018-06-21/pdf/2018-12992.pdf.  83 FR 28912 (June 21, 2018).  The final rule is short, just shy of three pages in length (see page 28961 to 29964), and provides that a bona fide group or association shall be deemed to be able to act in the interest of an employer within the meaning of section 3(5) of ERISA by satisfying the criteria set forth in the final rule.  The requirements are relatively straightforward and are summarized below:

• Bona fide group or association of employers – There are eight requirements that must be met to satisfy this standard.  Key, however, is that “the primary purpose of the group or association may be to offer and provide health coverage to its employer members and their employees; however, the group or association also must 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.”  
• Commonality of interest – Employer members of a group or association will be treated as having a commonality of interest if the employers are in the same trade, industry, line of business or profession or 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).
• Nondiscrimination – Based on existing HIPAA nondiscrimination rules, the final rule prohibits an AHP from conditioning employer membership in the AHP on any health factor (including health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability).  The final rule also prohibits an AHP from treating member employers of the AHP as distinct groups of similarly situated individuals.  Distinctions based on factors other than health factors are permitted and several examples are provided in the final rule.
• Dual treatment of working owners as employers and employees – The final rule allows working owners to participate in an AHP if plan fiduciaries reasonably determine certain requirements are met, including that the working owner must work at least 20 hours per week (80 hours per month) or have sufficient earnings from the business to pay for coverage under the AHP.

Some of the potential pros and cons of establishing an AHP are as follows:

PROS

• Exemption from various Affordable Care Act requirements  – The final rule allows unrelated small employers and self-employed individuals to join together for the purpose of providing health insurance coverage to their employees.  The AHP coverage is exempt from various requirements of the Affordable Care Act (“ACA”), the most notable of which is the requirement to cover essential health benefits (“EHBs”).
• Reduced reporting and disclosure requirements – AHPs that meet the requirements of the final rule are treated as a single employer plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  This means that the AHP will need only a single ERISA plan document and a single summary plan description (“SPD”).  In addition, the AHP will need to file a single Form 5500 annual report and a single Form M-1.  This differs significantly from current law under which each employer member is treated as maintaining its own health plan and having its own reporting and disclosure requirements.
• Economies of scale – The AHP structure will provide employer members greater bargaining power and reduced administrative costs.  The ability to spread the administrative costs of the AHP over the employer members may be significant.

CONS

• AHPs are MEWAs  – The single biggest impediment to forming an AHP may be that the arrangement will be a multiple employer welfare arrangement (“MEWA”).  The preamble highlights the fact that AHPs are MEWAs numerous times.  In one instance the preamble provides “AHPs are MEWAs and, as such, are subject to existing federal regulatory standards governing MEWAs.  Sponsors of AHPs will need to exercise care to ensure compliance with those standards, including those established by the ACA.”  The drawback of being a MEWA is that under ERISA, states may regulate both fully insured and self-funded MEWAs.  In some states MEWAs are illegal.  For AHPs that operate in a single state, MEWA status may not be a significant impediment.  However, for AHPs that operate in a number of states, MEWA status could pose a significant problem.
• AHPS are subject to ERISA and other laws that apply to group health plans  – The preamble provides that an “AHP sponsored by a bona fide group or association under this final rule is a group health plan and an employee welfare benefit plan under ERISA. Accordingly, the AHP is subject to all ERISA provisions applicable to group health plans and employee welfare benefit plans, including Title I of ERISA.”  In no uncertain terms, AHPs must comply with the full array of laws that apply to an ERISA single employer plan such as
  • Fiduciary responsibility rules
  • Prohibited transaction rules
  • ERISA disclosure requirements including SPD, SMMs, and SBCs
  • Form 5500 filings
  • Form M-1 filings
  • COBRA
  • Mental Health Parity
  • ACA mandates (such as coverage for kids to age 26, bans on preexisting condition exclusions, free preventive care, and no annual or lifetime dollar limits on essential health benefits

An AHP must also comply with HIPAA portability, privacy, and security rules.

• Small employers may become subject to Mental Health Parity, COBRA, and other requirements that apply to large employers  – Small employers are sometimes exempt from various requirements depending on their size.  The preamble clarifies that for purposes of determining whether the Mental Health Parity Act applies, it is the size of the AHP as a whole, not the size of each individual employer that controls.  A similar rule may apply for COBRA, but as the preamble indicates, Treasury and IRS will have to issue guidance clarifying how COBRA applies to AHPs.   The preamble also provides that “AHPs covering employers with 15 or more employees would need to ensure compliance with Title VII in connection with [maternity benefits].”  The final rule gives no insight on how a wide variety of federal laws and regulations that are not grounded in ERISA, but may implicate or apply to AHPs, will apply.   Examples include the Code Section 4980H employer shared responsibility provisions and Medicare secondary payer rules.  We must wait to see how various federal laws will apply to AHPs.
• Taxation of health coverage and benefits  – The preamble is silent on how the taxation of health coverage under Code Sections 104, 105, and 106 apply to AHPs.  Clarification is needed that participation in an AHP does not change how health coverage and benefits are taxed.  It is also silent on Code Section 125 cafeteria plans.  Under current law, only related employers may sponsor a single cafeteria plan.  Accordingly, each employer member in an AHP may have to sponsor its own Section 125 premium payment plan in order for its employees to pay AHP premiums on a pre-tax basis.  In other words, absent guidance, the AHP may not sponsor a single Section 125 premium payment plan in which all employer members participate.
• Liability concerns – The preamble clarifies that compliance with applicable legal requirements rests with the bona fide group or association that sponsors the AHP.  Accordingly, if the AHP fails to comply with applicable law, it appears that in most cases the liability for such failure will rest with the AHP sponsor.  An example in the preamble highlights that the AHP would be subject to penalties for failing to timely provide SBCs.  Worth noting, failure to timely provide SBCs triggers a $100 per day per affected participant excise tax, which equates to an annual excise tax of $36,500 per participant.  Another issue to be resolved is what happens if an AHP fails to meet some or all of the requirements of the final rule.
• Legal uncertainty – Given that AHPs are a new creation, they will inevitably face legal challenges, creating uncertainty regarding their long-term viability.  For example, the Attorneys General of Massachusetts and New York have already indicated that they intend to challenge the final rule on the theory that it allows some plans to avoid compliance with various provisions of ACA.  Some commenters on the AHP proposed rule argued that redefining the criteria for a bona fide group or association of employers is inconsistent with ERISA and is in excess of statutory authority, which may also trigger lawsuits.  In addition, states that are opposed to AHPs and MEWAs may pass legislation more heavily regulating such arrangements.  The future of AHPs may rest on how the various states decide to regulate them.