June 19, 2018, the U.S. Department of Labor (DOL) released its long-awaited final rule on Association Health Plans (AHPs). The final rule attempts to create more opportunities for small employers and certain self-employed individuals to access affordable health coverage through AHPs.
AHPs are not a new concept. However, under prior guidance, it has historically been difficult for an association or group of employers to sponsor a health plan that would be treated as a single large group plan (thereby disregarding the size of the underlying small employer members).
While the final rule is not the panacea some may have hoped for, it does relax certain requirements and creates a new alternative for certain employers and working owners—particularly those with good risk profiles—to access more affordable health coverage through AHPs. The new rule allows small employers and individuals who join a qualifying AHP to avoid the community rating rules and other requirements imposed on small group and individual health insurance policies under the ACA.
But some practical challenges and uncertainties remain:
- The final rule does not in any way modify or restrict a state’s authority to regulate AHPs. AHPs are “multiple employer welfare arrangements” (MEWAs), which are regulated under state law. Many states prohibit or make it very difficult for MEWAs, particularly self-funded MEWAs, to do business in those states.
- It is uncertain whether insurance carriers will view AHPs as a risk worth taking and be willing to underwrite them.
- New nondiscrimination requirements under the final rule may make it difficult for AHPs to create stable risk pools.
Highlights from the final AHP rule:
“Sole Purpose” Associations Prohibited
The final rule relaxes the existing requirement that an association must exist for a bona fide purpose other than to offer health insurance. The proposed rule, issued in January 2018, would have allowed an association to exist for the sole purpose of offering health insurance. The final rule, however, requires that an association have at least one “substantial business purpose” other than offering health insurance, although the primary purpose of the association can be the provision of insurance.
The final rule establishes a safe harbor, which provides that a substantial business purpose will be deemed to exist if the association would be a viable entity even if it did not sponsor an AHP. According to the DOL, certain activities, such as holding conferences, offering classes or educational materials, or promoting common business or economic interests, if substantial, can satisfy this standard. Likewise, the safe harbor could be satisfied if the association acts as a standard-setting organization, engages in public relations for the industry, or otherwise “advance[es] the well-being of the industry.”
Commonality of Interest
The DOL also adopts a more flexible “commonality of interest” requirement as compared to prior guidance. Under the new rule, an association can show commonality of interest among its members if they are either:
- In the same trade, industry, line of business or profession; OR
- Have a principal place of business within the same state or metropolitan area.
In other words, the commonality of interest criteria under the final rule allows an association with members in the same industry (or segment of an industry) to sponsor an AHP, regardless of geographic location, while an association with members in the same geographic area can sponsor an AHP even if they work in unrelated industries.
The final rule clarifies that an association can satisfy the “line of business” commonality test even if it restricts membership to a particular segment of a trade, industry or profession (e.g., veteran-owned restaurants as opposed to all members of the restaurant industry, or dairy farmers as opposed to all members of the agricultural industry) so long as it is not a “subterfuge for discrimination based on a health factor.”
Organizational Structure and Member Control
The final rule requires that functions and activities of a group or association be controlled by its members. Further, members must control the AHP. Control must exist in both form and substance. An association must also have a governing body, by-laws and maintain other formalities required for the legal form of the association.
Whether sufficient control exists will depend on the facts and circumstances, but the DOL indicates that the following conditions generally demonstrate effective control:
- Members’ ability to regularly nominate and elect representatives of the governing body of the association and AHP;
- Members’ authority to remove representatives of the governing body with or without cause;
- Members’ ability to approve or veto decisions regarding plan formation, design, amendment and termination.
Working Owner Eligibility
Under prior guidance, only employees, former employees and their beneficiaries were eligible to participate in an AHP. The final rule expands the eligibility rules to include “working owners.” An individual is a working owner if he or she:
- Has an ownership interest in a trade or business;
- Earns wages or self-employment income; and
- Works at least 20 hours/week (or 80 hours/month) or has wages or self-employment income that equals or exceeds the cost of coverage under the AHP.
The DOL confirmed that AHPs have flexibility to establish their own membership requirements and are not required to cover working owners. If it chooses to cover working owners, an AHP can establish eligibility criteria that are more stringent than the final rules.
The final rule prohibits associations from conditioning membership in the association or AHP based on any health factor. AHPs also cannot discriminate in terms of eligibility, benefits or premiums based on a health factor. Health factors include health status, medical condition (physical or mental), claims experience, utilization, medical history, genetic information, evidence of insurability or disability.
Importantly, the nondiscrimination rule prohibits an AHP from setting different premium rates for different member groups or individual participants based on a health factor. The rules do not, however, prohibit underwriting based on other factors like age, industry, gender or geographic location.
Wellness Programs Permitted
The DOL clarifies in the final rule that the HIPAA wellness program provisions apply to AHPs. This will allow AHPs to implement wellness-based incentives or penalties of up to 30 percent (or 50 percent if the program is designed to prevent or reduce tobacco use) of the cost of coverage under the AHP.
The DOL also clarifies the following as part of the final rule:
- AHPs are not subject to any specific minimum benefit standards under federal law, although they are required to comply with the ACA, ERISA, and other federal requirements otherwise imposed on large group plans. In addition, fully-insured AHPs will be required to comply with state large group benefit mandates. Some critics of the proposed rule urged the DOL to set federal minimum benefit standards for AHPs, such as requiring AHPs to cover essential health benefits or comply with the ACA’s minimum value standard. These commenters expressed concern that allowing AHPs to offer “skimpy” coverage would lead to increased adverse selection in the individual and small group insurance markets. The DOL rejected these proposals, citing the need for AHPs to have flexibility without the burden of additional federal restrictions on plan design. Note, however, that to the extent an employer participating in an AHP is an “applicable large employer” under the ACA, the AHP coverage will need to satisfy the ACA’s “minimum value” standard in order for the employer to avoid shared responsibility penalties.
- The final rule does not change the traditional authority of states to regulate MEWAs, and AHPs are a type of MEWA. For fully-insured AHPs, states can set solvency standards. They can also impose licensing, registration, certification, financial reporting, examination, audit and other standards on AHPs doing business in that state. For self-insured AHPs, states can impose insurance laws to the extent they are not inconsistent with ERISA. Currently, many states prohibit self-insured MEWAs or otherwise make it extremely difficult to operate a self-insured MEWA in that state. The new final rule does nothing to disrupt or change this regulatory scheme. Further, some states have expressed strong opposition to the new rule and may take additional steps to prevent insurers from underwriting AHPs in those states. This could make it difficult for AHPs to be offered across state lines.
- The final rule confirms that it establishes an additional opportunity for associations to offer qualifying AHPs. It does not replace prior guidance. As a result, existing AHPs that are in compliance with prior guidance can continue to operate under those rules (or can comply with the new rule once it takes effect). A newly-formed AHP can choose to follow either the old guidance or the new rule.
The final rule establishes staggered applicability dates for different types of AHPs:
- For new or existing fully-insured AHPs, the final rule will apply beginning September 1, 2018;
- For existing self-insured AHPs, the final rule will apply beginning January 1, 2019;
- For new self-insured AHPs, the final rule will apply beginning April 1, 2019.
Associations and employer groups looking to establish an AHP under the new final rule will need to engage in careful planning and preparation, taking into account not only the requirements of the new rule, but also the impact of the existing state and federal regulatory framework. AHPs are ERISA plans, subject to the numerous requirements that apply to those plans, including notice and disclosure requirements, trust and fiduciary duty rules, and annual Form 5500 and M-1 filings. As MEWAs, it will also be critical for AHPs to understand and avoid running afoul of state MEWA regulations.