A rule recently proposed by the U.S. Department of Labor (DOL) would give employers with a “commonality of interest” the chance to offer health coverage jointly through association health plans (AHPs).

The proposal, published January 5 (83 Fed. Reg. 614), would broaden the definition of “employer” under the Employee Retirement Income Security Act (ERISA) to include an association of employers linked by industry or geography that is formed to sponsor a group health plan for its employer members.

“Many small employers struggle to offer insurance because it is currently too expensive and cumbersome,” according to a DOL press release. “By joining together, employers may reduce administrative costs through economies of scale, strengthen their bargaining position to obtain more favorable deals, enhance their ability to self-insure, and offer a wider array of insurance options.”

Although employers of all sizes would be eligible for the rule’s new AHP option, employers currently in the small group or individual market are likely to be most interested, because combining in an association that covers 50 or more employees would put them in the large group market, where Affordable Care Act (ACA) requirements like essential health benefits (EHBs) do not apply.

The Health Insurance Portability and Accountability Act (HIPAA)’s portability rules already allow “bona fide associations” to offer group health coverage, but on far more limited terms. These associations must have a purpose unrelated to health coverage, and DOL usually looks to the size of each employer member in determining whether the large or small group market rules apply.

The proposed rule comes in response to Executive Order 13813, issued by President Trump in October. Among other things, the order called for loosening AHP commonality rules as one way to expand alternatives to the ACA exchanges and enhance competition in the market for healthcare coverage.

The DOL is accepting public comments on the proposal until March 6.

Defining Commonality of Interest

The “commonality of interest” test in ERISA’s employer definition is designed to distinguish bona fide association plans from state-regulated commercial insurance offered to the public at large. Historically, the DOL has interpreted this to require an organizational purpose and relationship unrelated to providing benefits, and control exercised over the program by employer participants.

However, the DOL has never been foreclosed from adopting a more flexible approach, according to the preamble to the proposed rule. The ERISA law itself is vague on what constitutes commonality, so “that determination may be broadly guided by ERISA’s purposes and appropriate policy considerations, including the need to expand access to healthcare and to respond to statutory changes and changing market dynamics.”

Under the proposed rule, “commonality of interest” would be satisfied by employers that were either (1) in the same trade, industry, line of business, or profession, or (2) located in the same state or metropolitan area. Such employers could form associations for the express purpose of offering health coverage to members.

As under the current rules, the group or association still would be required to have a formal organizational structure for controlling plan administration and other functions, either directly or indirectly. Only current and former employees of employer members (and their dependents) would be allowed to participate in the plan.

Working Owners

One major break from the existing rules would be the inclusion of “working owners” as employers eligible to form or join AHPs. Business owners without employees have traditionally been excluded from ERISA’s group health plan provisions, but the proposed rules would allow them to join AHPs as employers, and participate in the plan as employees.

To maintain the distinction between group and individual coverage, the rule would require that the individual earn income for providing personal services to the trade or business, and either (1) provide an average of at least 30 hours per week (or 120 a month) of these services, or (2) earn income from the business at least equal to the cost of coverage under the plan. The individual also could not be eligible for group health coverage from another employer or a spouse’s employer.

No More Look-Through

The DOL would no longer “look through” the association to its employer members when determining group size. Therefore, insured AHPs covering more than 50 employees in all would be treated as large group plans, meaning they would not be subject to many of the insurance rules that apply in the small group and individual markets—such as covering all of the ACA-listed EHBs, varying premiums only by certain parameters within certain ranges, and treating the small group and individual markets each as a single risk pool.

However, AHPs under the rule still would be subject to HIPAA’s nondiscrimination rules, which prohibit varying eligibility or benefits among “similarly situated individuals” based on a health factor. HIPAA allows variations according to certain bona fide classifications but, according to the DOL, such variations would not be permitted among employer-members of an association.

The AHP rule would not preempt state laws, so states could continue to regulate AHPs as multiple employer welfare arrangements (MEWAs), whether fully insured or self-funded, in addition to their longstanding authority over the insurers of these plans.

Implications

The AHP rule “will profoundly affect the health plan marketplace” if finalized in its current form, according to Mark Stember, an attorney with Kilpatrick Townsend. Expanding the definition of “employer” in this manner would “significantly broaden the circumstances under which an AHP is treated as a single employer group health plan under ERISA, ACA and State law,” he wrote in a blog post. Such AHPs also could affect the ACA exchanges by enabling small employers to bypass them, he added, even in states that otherwise would require them to participate.

However, because these AHPs would still be MEWAs, they would still have to file Forms M-1 and 5500, and be subject to varying degrees of state regulation, cautioned Stember, an advisory board member for BLR’s health benefits titles. “It is unclear how states will regulate these types of health plans, but the approach taken could impact the success of AHPs in that state (and those that cross state lines),” he explained. “In addition, the DOL has indicated that it would like input on possible approaches to exempt self-insured MEWAs from state insurance regulations.”

The health nondiscrimination provisions “may make it difficult for AHPs to project costs and set premiums, given that an AHP may not exclude costlier employers,” added Susan Nash and other Winston & Strawn attorneys in a client bulletin. “The discrimination rules could in some cases result in significant cross-subsidies between member employers,” they explained. “Thus, the size of an AHP may be an important factor in its ability to project costs and even out variations in the health costs of the different member employers.” (Nash is an advisory board member for BLR’s flex plan and fringe benefits products.)

Additional Resources

• Benefits Tab
• Affordable Care Act (Training Talk)
• HIPAA Topic Analysis