In February, we reported that the Department of Labor (DOL) issued a proposed rule that could make it easier for small businesses to join together to purchase health insurance. That proposed rule sparked considerable debate on the general merits of association health plans (AHPs), as well as on the nuances of the proposed rule. Some commentators and experts remained skeptical of such arrangements, citing to the history of AHPs being used as a vehicle for fraud. Others were clearly in favor of any rule that might provide small employers with a new avenue to provide health coverage to their employees. And still others were cautiously optimistic, reserving judgment until some of the open issues in the regulations were resolved.
Well, the debate can now begin in earnest, as the DOL has issued the final regulations.
These final regulations answer many of the questions raised in the proposed regulations. For example, we now know that the DOL does not intend to alter existing ERISA preemption rules, which authorize State insurance regulation of AHPs, either through the health insurance issuers through which they purchase coverage or directly in the case of self-insured AHPs. We now also know that existing AHPs that meet current sub-regulatory guidelines to be considered an AHP do not need to satisfy these new rules to maintain that AHP status. The nondiscrimination provisions in the new rule also limit the opportunity for new AHPs to engage in risk selection by effectively eliminating the ability to medically underwrite individual employer members.
While much is now known, what remains to be seen is how effective the new rule is in meeting the stated goal of providing smaller employers the opportunity to obtain cost-effective coverage. On the one hand, the ability to band together with other small employers may very well give members of properly formed AHPs the ability to achieve some level of cost savings. However, because these new AHPs are limited under the new nondiscrimination rules in how they can set premiums for members, the true cost-effectiveness of this option will likely depend on the demographics of the employer members, which would presumably fluctuate over time.
That being the case, associations and employer groups considering this option need to engage in a careful analysis with trusted advisors to see if the new AHP model is a viable, long-term health plan solution. A starting point is to analyze the AHP requirements to determine if it is even possible to fit within the AHP framework (existing or new). The chart below, which compares the old vs. new AHP rules, provides a broad overview of the applicable AHP legal requirements. If the AHP framework is possible, the next step is to determine whether the AHP would provide members with a cost-effective solution. If so, the association/employer groups then need to ensure the arrangement has the proper legal structure to fall within the new AHP guidelines. While that process requires some heavy lifting on the front end, it may (yes, MAY) provide associations and small employer groups with an opportunity to provide cost-effective coverage to their employees.
Changes to the definition of “employer” under ERISA Section 3(5)
* The new rule does not invalidate previous guidance, but provides another way to meet the definition of “employer” under ERISA Section 3(5).
| Purpose of group/association: | |
| Pre-rule guidance | New rule |
| In order to act as an “employer” for purposes of sponsoring a group health plan, previous guidance required a group or association to exist for purposes other than providing health benefits. | The provision of health benefits may be the primary purpose of the group or association, so long as the group or association has at least one substantial business purpose unrelated to the provision of benefits. A safe harbor is expressly available under the new rule: if the group or association is a viable entity even if it does not sponsor a benefit plan, then it has a substantial business purpose.
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| Organizational structure: | |
| Pre-rule guidance | New rule |
| A formal organizational structure with a governing body, by-laws, and other indications of formality is required. The type of structure is not prescribed.
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| Control test: | |
| Pre-rule guidance | New rule |
| Employer-members of the group or association must control and direct the activities and operations of the benefit plan by being actually involved, directly or indirectly, in designing and administering the benefit plan. Control must be in both substance and form. | Employer-members of the group or association must control, directly or indirectly, both the functions and activities of the group or association and the group health plan (if the employer-member participates in the group health plan). Control must be in both substance and form. The new rule does not require the employer-member to manage the day-to-day affairs of the group or association or the plan.
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| Commonality of interest test: | |
| Pre-rule guidance | New rule |
| A group or association only has commonality of interest among its employer-members if they are both (1) in the same line of business and (2) in the same geographic location | Commonality of interest can be found if the employer-members are either (1) in the same trade, industry, or profession or (2) have their principal places of business within the same state or metropolitan area (even if that metropolitan area crosses state lines).
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| Eligible participants: | |
| Pre-rule guidance | New rule |
| Participation in a group health plan sponsored by a group or association was limited to employees and former employees of employer-members and their families or other beneficiaries. The definition of employee used precluded from participating individuals who were not common law employees or former common law employees of employer-members. | Allowable participants in a group health plan now include employees of a current employer-member, former employees of a current employer-member who became entitled to coverage when the former employee was an employee of the employer-member, and beneficiaries of those individuals. An individual who is not a common law employee, but is considered a “working owner” under the rule, may participate in the group health plan as both the employer and employee of an employer-member.
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| Working owner requirements: | |
| Pre-rule guidance | New rule |
| A working owner of a trade of business without common law employees may be considered both an employer and employee for the purpose of participating in a group health plan if they: (1) own a trade or business; (2) have earned income from that trade or business by providing personal services; and (3) either (a) work at least 20 hours a week or 80 hours a month or (b) have enough income to cover their (and their beneficiaries) cost of coverage for participating in the group health plan.
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| Health insurance issuer: | |
| Pre-rule guidance | New rule |
| A health insurance issuer (or its subsidiary or affiliate) cannot be, own, or control a group or association. It can, however, participate in the group or association as an employer-member or provide administrative or other services to the group or association.
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| Nondiscrimination: | |
| Pre-rule guidance | New rule |
| Group health plans must comply with HIPAA nondiscrimination provisions, as amended by the ACA. | Arrangement that become an AHP under the new rules (1) must comply with the existing HIPAA/ACA nondiscrimination provisions AND (2) may not treat the employees of different employer members of the group or association as distinct groups of similarly-situated individuals based on a health factor of one or more individuals. This second requirement prohibits new AHPs from charging employer-members different premiums or contributions based on health factors. New AHPs may, however, differentiate between employer-members based on non-health attributes.
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