Cutting through the controversy
By Stacey L. Stewart
The Department of Labor helped heat up the summer by issuing its highly anticipated final regulations on association health plans on June 19, 2018. Despite the relative similarity to its previously issued proposed regulations, the final guidance set the benefits world abuzz. It seems like everyone is trying to figure out what these regulations really mean for the health insurance market and what will happen next.
But let’s not get ahead of ourselves! Before we can speculate as to the future, first we must understand our past and present. This article will break down the basics behind the association health plan concept to hopefully give you a better foundation to understand the excitement and controversy surrounding them.
Since association health plans are intended to be a type of ERISA plan, perhaps the best place to start is with how ERISA characterizes the types of plans an employer may offer its employees. ERISA generally breaks down plans into three main types: single employer plans, multiemployer plans and multiple employer plans. So where does an association health plan fall? Knowing the answer to that question is absolutely central to understanding much of the conversation around these plans.
The single employer plan
The first type of plan, a single employer plan, is one maintained by one employer or employers who are sufficiently related based on common ownership (under what are generally referred to as the “controlled group” rules) to be considered one employer for benefit plan purposes. While these rules are quite complicated, the bottom line is they set the ownership bar relatively high – requiring generally at least 80% common ownership.
The multiemployer plan
A multiemployer plan is a type of plan maintained pursuant to one or more collective bargaining agreements with multiple contributing employers, i.e. “union plans.”
The multiple employer plan
Finally, a multiple employer plan is one maintained by more than one employer who are not sufficiently related to be considered a single employer for benefit plan purposes under the controlled group rules mentioned above (and which is not a multiemployer plan).
Finding the right fit with MEWA
Looking at the three basic plan types, you can likely easily tell that an association health plan fits into the third category of plans – multiple employer plans. More specifically, as a group health plan, that makes it a type of multiple employer plan referred to as a multiple employer welfare arrangement or “MEWA.” So there it is! The one little acronym that can elicit all manner of big reactions.
The historical significance of MEWA
MEWAs have a troubled past, to put it mildly, going back to at least the 1970s. A common scenario kept arising where unrelated employers pooled funds for typically self-funded health coverage (perhaps at the recommendation of a promotor) only to find that when it came time to pay significant claims there were little to no funds available. There were issues with promotors charging large administrative fees, general fund mismanagement, failure to maintain adequate reserves, and even outright fraud. To many, the key problem was lack of proper regulation, particularly of self-funded MEWAs who often claimed that ERISA prevented state insurance law from regulating such plans.
Congress responded with legislation in 1983 to specifically subject MEWAs to both federal AND state law. Since then some states have taken decisive action in this area. When states act, it is typically to institute requirements such as registration, annual reporting, minimum reserves and actuarial opinions and audits to assess fund solvency. California, for example, enacted substantial MEWA-related regulations going so far as to prohibit the formation of any new self-funded MEWAs after 1995. Other states have been slower to act, and we do still have some MEWA friendly states. But the bottom line is that MEWAs, particularly self-funded ones, are potentially subject to extensive regulation under both ERISA and state law which, depending on the state, may be robust or even insurmountable.
The new rules
Now that we have the historical background down, let’s turn to why a group of employers might want to form an association health plan or MEWA. The stated purpose of the new DOL rule, prompted by President Trump’s Executive Order on October 12, 2017, is to expand access to affordable health coverage. How does this structure, as a technical matter, further that goal? We need just a little more background to answer that question.
When you have a MEWA, ERISA either applies at the plan level so that, in essence, the plan is treated as a single employer plan or it applies at the employer level so that each participating employer is viewed as having its own plan. For ERISA to apply at the plan level to a MEWA, a bona fide association of employers must sponsor it and their “bona fide” status is generally determined based on a commonality of interest test.
The new rules provide an alternate, easier path to be considered a bona fide association of employers so that ERISA applies at the plan level. For example, the new path allows for employers, including some sole proprietors, in same trade, industry, line of business or profession or that have a principal place of business within same state or metropolitan area to meet these requirements. Also, an association may be formed for the primary purpose of offering insurance so long as it also has at least one substantial business purpose that is not related to that purpose.
If ERISA applies at the plan level, then all of its requirements, such as the Form 5500 filing, plan document and summary plan description (SPD) requirements, can be satisfied at the plan level. Contrast this with the opposite scenario where each employer is considered, in effect, to maintain their own plan and must separately satisfy applicable ERISA requirements.
Perhaps the most significant advantage of ERISA applying at the plan level is that the combined employee count of all participating employers determines whether the small or large insurance market rules apply. Hence, small employers grouping together under these new rules can possibly access the more favorable large employer market potentially avoiding the community rating rules and the requirement to provide an essential health benefits package. Plus they may benefit from increased bargaining power in the marketplace.
At last we have reached the answer! The new association health plan rules provide an easier path for employers to group together in a MEWA where ERISA applies at the plan level potentially allowing them access to more affordable coverage. But we cannot forget our history. Association plans are not new! They are MEWAs and, as such, carry a lot of baggage. Are MEWAs really the best protagonist for our story? Time will tell. Many groups, from carriers to insurance brokers to state authorities, are mobilizing to work with or against association health plans. One thing is for sure – it will be an interesting ride.
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