On June 19, 2018, the Department of Labor issued its highly anticipated final rule expanding the availability of association health plans (“AHPs”).   The core purpose of an AHP is to allow small employers to band together and obtain coverage in the large group insurance market, which generally imposes fewer coverage requirements.  For example, unlike the small group insurance market, policies issued in the large group insurance market are not required to cover “essential health benefits.”  According to the DOL, AHPs will “expand employer and employee access to more affordable, high-quality coverage.”  However, as explained below, AHPs are subject to regulation under state laws governing multiple employer welfare arrangements (“MEWAs”), and they are still subject to certain other federal mandates including coverage of mental health benefits, no lifetime or annual limits on certain benefits, and nondiscrimination provisions, which will add additional layers of complexity to these new plan designs.

New Rules for Bona Fide Associations

Under existing guidance, multiple employers are treated as a single “employer” under the Employee Retirement Income Security Act of 1974 (“ERISA”) if they are members of a bona fide group or association of employers.  To qualify as a bona fide group or association, the employer members must have a “commonality of interest,” which the DOL had narrowly defined. 

The new final rule revises prior DOL guidance regarding what constitutes a “commonality of interest,” providing that the association members have a commonality of interest if they are: (1) in the same “trade, industry, line of business or profession,” or (2) are located in “same state or metropolitan area even if the metropolitan area includes more than one state.” 

The determination as to what constitutes a trade, industry, line of business or profession is based on “all relevant facts and circumstances.”  While the DOL declined to provide specific definitions or sanction specific industry classifications, the preamble provides some examples of classifications that would not meet the new rule’s “commonality of interest” standard.  For example, classifications based on ownership characteristics, business models or structures, the size of employer, or shared religious or moral convictions would be considered too broad.  This language suggests that national associations based on such characteristics could establish subgroups along relevant industry or business lines or that associations form within states or metropolitan areas. 

The final rule also clarifies that the association must have at least one substantial business purpose unrelated to providing health coverage.  According to the final rule, a substantial business purpose exists if the association would be a viable entity in the absence of sponsoring an employee benefit plan. 

Further, AHPs must comply with certain nondiscrimination requirements of the Health Insurance Portability and Accountability Act (“HIPAA”). Specifically, AHPs may not condition eligibility for benefits or rate premiums based on health factors.  The rule makes clear through examples that employment-based classifications such as part-time or full-time employment status do not violate the HIPAA nondiscrimination requirements and may be used in determining eligibility or setting rates.

In addition to other requirements, the final rule also confirms that working owners and sole proprietors may be treated as employers for membership in an AHP and as employees eligible for coverage under the plan.  This new rule allows working owners and sole proprietors to participate in group policies, rather than individual policies.

Seen as a win for many employers and employer groups, the DOL included a specific provision that participation in an AHP will not subject employers to joint employer liability under any other federal or state law, rule or regulation.  It also clarified that businesses will not be considered an employer of its independent contractors merely by its participation in an AHP with those independent contractors that participate in the same AHP as working owners.

MEWA Regulation

Despite the promising new opportunities for AHPs, the regulations expressly state that the new guidance does not modify existing state authority to regulate MEWAs.  Under ERISA, the DOL and states have joint authority over MEWAS to ensure “appropriate regulatory and consumer protections for employers and employees relying on an AHP for healthcare coverage.”  The final rule affirms this joint structure and does not reduce the “historically broad role of the states” regulating MEWAs, including AHPs. 

In fact, the DOL notes that state-level MEWA regulations may limit employers’ flexibility to exclude certain essential health benefits:  “In addition, under ERISA’s provisions saving state regulation of MEWAs from preemption, States may also extend benefit mandates to self-insured AHPs.”  AHPs with employer members in multiple states may be subject to multiple competing sets of state-level MEWA compliance obligations.

Effective Dates

Fully insured AHPs may begin to provide coverage as of September 1, 2018.  Existing self-insured AHPs may have an effective date as of January 1, 2019 and new self-insured AHPs may be formed as of April 1, 2019.