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By: John Hickman and Carolyn Smith, Alston & Bird LLP

PRIMARILY OF INTEREST TO SMALL EMPLOYERS AND BUSINESS OWNERS WITH 50 OR FEWER EMPLOYEES - MAY ALSO BE OF INTEREST TO SOME LARGE EMPLOYERS

In October 2017, President Trump directed the Department of Labor (DOL) to issue new guidance that would allow more employers to form association health plans (AHPs). AHPs offer an opportunity for otherwise unrelated small employers (i.e., employers that do not have adequate common ownership) to group together to be considered a single, large group health plan, thus avoiding certain Affordable Care Act (ACA) rules otherwise applicable to small group plans. AHPs are primarily of interest to small employers (50 or fewer employees), although some large employers may also have an interest in participating in an AHP, such as a franchisor sponsoring an AHP for its franchisees. Although not yet final, the DOL-proposed rules issued in January provide a view of the possible future of these types of plans.


Background

AHPs are already in existence today. Currently, if DOL rules are satisfied the association is considered the “employer” under ERISA and the AHP is considered a single health plan. If DOL rules are not satisfied, then each participating employer is treated as the sponsor of a separate group health plan. Fully-insured small employer group health plans are subject to additional ACA requirements that do not apply to large group or self-funded plans, such as the requirement to offer essential health benefits (EHBs) and modified community rating. Through an AHP, a small employer may be able to avoid these additional requirements, potentially resulting in lower cost coverage (although possibly a narrower set of benefits).

Under current DOL guidance, these requirements are fairly strict. Currently, two tests must be satisfied for an association to be considered the “employer” for health plan purposes. First, the employer members of the association must have sufficient “commonality of interest.” Second, the employers must exercise “control” over the association. Under current DOL guidance, it can be difficult to satisfy these tests. The proposed rule would relax these requirements, particularly the “commonality of interest” rule, making it easier to form AHPs.

Key provisions under the DOL proposed rule

Highlights of key provisions in the proposed rule include:

  • Association can exist solely to provide benefits. Under the proposed regulation, an AHP may exist solely to provide health coverage to its employer members. The AHP can offer coverage only to the AHP members’ employees, former employees, and their family members.
  • Nondiscrimination rules. The proposed rule aims to prevent discrimination based on health conditions by preventing AHPs from discriminating among and between employers or employees with regard to health status for eligibility or rating. An AHP may not treat member employers as distinct groups for applying the nondiscrimination rules (although certain other bona fide business distinctions other than health risk are permitted).
  • “Working owners” such as sole proprietors and partners can participate if certain requirements are met (even if the business has no employees other than the owner and spouse). A working owner must work at least 30 hours per week in the business enterprise or have earned income from the trade or business in excess of the cost of coverage. Additionally, a working owner cannot have access to other employer-subsidized group health plan coverage, such as coverage through a spouse’s employer.
  • Relaxed commonality of interest test: The proposed rule retains a modified version of the current AHP commonality of interest test. Under current guidance and court decisions, employers in the same line of business and same geographic location have been found to have requisite commonality of interest; however, employers that share only a common general interest, size, or geographic location do not demonstrate sufficient commonality. For example, the DOL found that a local chamber of commerce was not the “employer,” therefore not the proper sponsor of an AHP. The primary economic nexus between the member employers was a commitment to private business development in a common geographic area. Under the proposed rule, the employers participating in the AHP will share commonality of interest if they are in the same trade, industry, line of business or profession. Additionally, the employers will have a commonality of interest under the proposed rule if their principal place of business is in the same geographic region within a state or metropolitan area. For example, all employers in North Dakota would share commonality of interest, as would employers in the metropolitan Washington, D.C. area regardless of whether they are in D.C., Maryland, or Virginia. Those employers would not be required to share any additional business connection other than their location.
  • Control test. Historically, the DOL has not found that the participating employers exercise control unless they have the authority to direct, replace, and supervise the plan’s insurer/ administrator, and have the ability to amend the plan. Further, the DOL has typically required that each participating employer must be involved in designing and administering the plan offered to their employees. Typically, it has been difficult to determine if the participating employers satisfy the control test. Even the courts have had difficulty making this determination. The proposed rule does not seem to provide a significant relaxation of the current rule standards. The rule requires regular nomination and election of directors, officers, or representatives that control the AHP, as well as by-laws or similar formalities. An AHP will need to ensure the active involvement of participating employers.

Specific additional compliance concerns

Several hurdles may remain even after the proposed rule is finalized, including:

  • State laws and ACA taxes might still apply to AHPs. AHPs are multiple employer welfare arrangements (MEWAs) under both current law and the proposed rule. Thus, an AHP will be a MEWA even if it is considered a single plan at the association level rather than separate plans sponsored by each participating employer. One of the most significant consequences of this status is that ERISA has specific preemption provisions that allow states to regulate MEWAs, including self-funded MEWAS. Currently, some state laws prohibit self-funded MEWAs entirely or require significant registration and reserve requirements.

    ERISA provides the DOL with the statutory authority to issue regulations exempting self-funded MEWAs from certain state laws. However, the DOL has never issued any exemptions nor does the proposed rule recommend to do so. It is possible that the DOL will issue exemptions in the AHP final rule, but the DOL statutory authority to issue exemptions does not extend to state laws relating to reserve and contribution requirements. Depending on the DOL’s actions, new issues might arise as to which specific state law provisions are preempted by federal law. In addition to state regulation, MEWAs are subject to the ACA insurance sector fee tax – regardless of whether they are self-funded or fully insured. This tax applies in 2018, is suspended for 2019, and will again apply after 2019 absent further Congressional action.

  • Many state laws will need to be changed for AHPs. Current state insurance laws might also present challenges to the formation of AHPs. For example, most states require that the association already be in existence for a certain number of years (typically five) and be organized for purposes other than providing insurance. Some states have minimum participation requirements. For example, North Carolina requires an association to have a minimum of 500 persons. Some states limit the types of entities that can form AHPs. Thus, those considering forming AHPs will need to consider state law carefully. While state legislatures might change their laws to match federal requirements, these changes may occur slowly.
  • Guaranteed renewability requirements. Federal law, through the Public Health Service Act (PHSA), requires that fully-insured coverage provided to an employer through a bona fide association must be renewed by the insurer unless the employer’s membership in the association terminates. The definition of “bona fide association” in the PHSA is narrower than the definition of association under the proposed rule. Thus, even if an AHP is considered a single large group health plan under DOL guidance, the guaranteed renewal requirement would still apply unless the association meets the PHSA’s definition of bona fide association. That definition requires, among other things, that the association have been in active existence for at least five years and was formed and maintained in good faith for purposes other than obtaining insurance.

Conclusion

The DOL has received a large number of comments on the proposed AHP rule. Many of these comments are supportive and some even encourage the DOL to provide more flexibility. Others, however, raise a variety of concerns. Given that the directive for expansion of AHPs comes from the President, the DOL is expected to move forward and may issue a final rule as soon as early summer 2018. When the rules are finalized, AHPs may be a favorable option for many small employers, whether or not they currently offer health coverage to employees. As with any health coverage, employers who consider participating in an AHP should carefully review what it may mean for them and consult their own advisors before making a final decision.


The information above is provided for general informational purposes and is not provided as tax or legal advice for any person or for any specific situation.

Aflac herein means American Family Life Assurance Company of Columbus and American Family Life Assurance Company of New York.