On June 19, 2018, the U.S. Department of Labor (DOL) released its long-awaited final rule on Association Health Plans (AHPs). AHPs are not a new concept. However, under prior guidance, it has been difficult for an association or group of employers to sponsor a health plan that would be treated as a single large group plan.
The final rule relaxes certain requirements and creates a new alternative for employers and working owners 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 remain – particularly for employers in California.
Highlights from the Final Rule
The final rule relaxes the existing requirement that an association must exist for a bona fide purpose other than to offer health insurance. Instead, it 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 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 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.
Finally, the 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.
Challenges for California Employers
Importantly, 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 – including California.
California law requires self-funded MEWAs to obtain a certificate of compliance from the Department of Insurance in order to operate within the state. But under the law, the Department of Insurance ceased providing such certificates in 1995, effectively precluding the formation of any new self-funded AHPs.
While insured MEWAs are not outright prohibited in California in the same way as self-funded MEWAs, the state is no less critical of these arrangements. In response to the DOL’s release of the final rule, California Insurance Commissioner Dave Jones issued a statement expressing his opposition to the rule and stressing California’s prohibition on the formation of any new MEWAs. Jones’ statement signals that the regulatory environment in California is one that will likely be inhospitable even to insured AHPs. As a result, employers may find it difficult to find an insurance carrier willing to take on the risk of underwriting an AHP.
In sum, the final rule provides meaningful opportunities for small employers to provide more affordable health insurance to employees. But AHPs continue to be highly regulated. Employers 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 existing state and federal regulation (including ERISA). Consequently, California employers may find the opportunities afforded by the final rule to be largely out of reach.
