Employee Benefits Compliance, Uncategorized

Repeal of 2018 Association Health Plan Rules Clarify More Stringent Rules Apply

On April 29, 2024, the Department of Labor (DOL) issued a final rule rescinding the 2018 Association Health Plan (AHP) rule that made it easier for companies to band together under an association in order to obtain lower cost health insurance. See the DOL announcement. The 2018 rule, released during the Trump Administration, created another, variant pathway while the original pathway remained, causing confusion as to the requirements to create an AHP. In 2019, the 2018 rule was blocked by a federal judge (see the prior Leavitt Group article), finding the 2018 rule was too broad and an unreasonable interpretation of ERISA. However, the rule remained in place. The DOL is not aware of any AHP created under the 2018 rules but repealed the 2018 rule to avoid any further confusion. For more details on AHP, see the prior Leavitt Group article.

Background

The 2018 rule made it easier for companies to band together to be considered a single ERISA plan. In order to be an ERISA plan, the plan must be established by an employer and/or employee organization. No bona fide group or association of employers can exist for this purpose if several unrelated employers without any genuine organizational relationship merely execute participation agreements to fund ERISA-covered benefits. The 2018 AHP rules also:

  • Allowed the group or association acting as an employer to have the provision of health coverage as its primary purpose. The pre-rule guidance requires that the group or association exist for purposes other than providing health benefits.
  • Deemed groups or associations of disparate businesses in the same state or metropolitan area to have a sufficient common interest. The pre-rule guidance requires that employers must share a common purpose and have a genuine organizational relationship apart from offering benefits, as geography alone is not sufficient to establish commonality.
  • Allowed working owners without any common-law employees to participate in AHPs as both “employers” and “employees.” The pre-rule guidance generally does not recognize these owners as either employers (for the purpose of participating in a bona fide employer group or association) or as employees who could participate in an ERISA-covered employee benefit plan.

The 2018 AHP was challenged by eleven states and the federal court in New York invalidated the rule’s definition of a bona fide group or association of employers and the language allowing working owners without common-law employees to be treated as employers and employees when participating in an AHP. The court concluded that:

  • The “substantial business purpose” and “geographic commonality” requirements were not drawn narrowly enough to limit groups or associations to those that act in the interest of participating employers, as required by ERISA.
  • The expansion of the term “employer” to include working owners without common-law employees was unreasonable because it was contrary to ERISA’s text and central purpose of regulating employment-based relationships.

The 2018 AHP Rule reflected a substantial departure from the Department’s longstanding pre-rule guidance on ERISA’s definition of “employer.” The rule struck the wrong balance between ensuring a sufficient employment connection and enabling the creation of AHPs. As a result, the 2018 AHP rule is rescinded. The rescission of the 2018 AHP Rule leaves in place the longstanding pre-rule guidance that has been consistently supported and relied upon in numerous judicial decisions. The pre-rule guidance applies a facts-and-circumstances approach to determine whether a group or association of employers is a bona fide employer group or association capable of sponsoring an ERISA plan on behalf of its employer members. Under this approach, there are three general criteria:

  1. Whether the entity has business or organizational purposes and functions unrelated to the provision of benefits;
  2. Whether the employers share a commonality and genuine organizational relationship unrelated to the provision of benefits; and
  3. Whether the employers that participate in a benefit program, either directly or indirectly, exercise control over the program, both in form and substance.

The Department’s pre-rule guidance sets forth a variety of factors that are relevant when applying these three general criteria to a particular group or association. These factors include:

  • How members are solicited;
  • Who is entitled to participate and who actually participates in the group or association;
  • The process by which the group or association was formed;
  • The purposes for which it was formed;
  • What, if any, were the preexisting relationships of its members;
  • The powers, rights, and privileges of employer members that exist by reason of their status as employers;
  • Who actually controls and directs the activities and operations of the benefit program; and
  • The extent of any employment-based commonality or other genuine organizational relationship unrelated to the provision of benefits.

Impact

The puzzle of whether a company can form or join an AHP does not end with the federal law analysis. AHPs are Multi-Employer Welfare Arrangements (MEWAs). States may apply and enforce their State insurance laws with respect to AHPs. In general, ERISA allows for the application and enforcement of State insurance laws with respect to any MEWA (meaning, federal ERISA law will not preempt all State insurance rules, rather allow them to apply as well).

The extent to which State insurance laws may be applied to a MEWA that is an ERISA-covered plan is dependent on whether or not the plan is fully insured. For more detailed information on State MEWA laws, see the NAIC Model Chart. For more guidance on the topic of State MEWA laws, see the Department of Labor publication, “Multiple Employer Welfare Arrangements Under ERISA, A Guide to Federal and State Regulation.”

Be sure to work with your Leavitt Group representative to help you analyze whether an AHP is right for your organization.