Warning: This article is technical, and it contains way too many acronyms. In fact, we had to engage our ERISA counsel, Amy Grace at ERISA Logic to make sure we got the facts straight. That said, it’s worth reading. This topic is one more example of unintended consequences. What started as a way to help employers save money on employee benefits, may ultimately result in some COBRA complications. Read on to get the details.

Background

On October 12, 2017, President Trump signed Executive Order 13813 calling for the expansion of Association Health Plans (AHPs). AHPs allow multiple employers to band together to purchase health insurance. Making it easier for small employers to form AHPs would theoretically create more favorable health coverage options for small employers and their families. 

Employers with fewer than 20 full-time employees are exempt from federal COBRA. The question with AHPs is … when counting the number of employees, do we look at each individual employer that is part of the AHP or the total number of employees covered by the AHP? The answer depends on whether ERISA finds one group health plan or multiple group health plans.

The Current Rule

The current rule almost always applies COBRA separately to each participating employer by finding multiple ERISA plans.

AHPs under ERISA are known as Multiple Employer Welfare Arrangements (MEWAs).[1] If the MEWA is the employer, one ERISA plan exists and the MEWA is responsible for ERISA compliance. Where ERISA applies at the MEWA level, the COBRA small employer exception is calculated by looking at the group as a whole. However, it is more common under the current rules for ERISA to apply at the level of the individual participating employers. Thus, each employer is deemed to sponsor and maintain its own ERISA welfare plan, and each is responsible for ERISA compliance. In that situation, the COBRA small employer exception applies to each employer separately.[2] 

ERISA applies at the MEWA level only when the MEWA itself falls under ERISA’s definition of “employer.”[3] The definition of “employer” includes a group or association of employers acting on behalf of its employer-members to provide benefits for their employees. This seems like a pretty broad definition. You might be wondering why all the fuss over new regulations. Can’t employers already join together to buy insurance? Of course, it’s not that easy.

The Department of Labor (DOL) has published its interpretation of the definition in its MEWA Guide. The DOL’s position is that if:

several unrelated employers merely execute identically worded trust agreements or similar documents as a means to fund or provide benefits, in the absence of any genuine organizational relationship between the employers, no employer group or association exists for purposes of ERISA § 3(5). Similarly, where membership in a group or association is open to anyone engaged in a particular trade or profession regardless of their status as employers (i.e., the group or association members include persons who are not employers) or where control of the group or association is not vested solely in employer members, the group or association is not a bona fide group or association of employers for purposes of ERISA § 3(5).[4] 

Now the definition is narrowing. Under this position, any AHP that covers self-employed individuals who do not have any employees cannot constitute a single ERISA plan. Likewise any group that does not have a purpose other than health insurance cannot be a single ERISA plan.  

The Newly Proposed Regulation   

The proposed rule makes it easier to form one ERISA plan and would likely apply COBRA to the group as a whole.

Published on January 5, 2018, the proposed AHP regulation’s stated goal is to treat, “the association itself as the employer sponsor of a single plan.”[5] The proposed regulation would combat the DOL’s MEWA interpretations by broadening the definition of employer under ERISA.

The proposed AHP rule allows a group to form solely for the purpose of providing health insurance. This is a major shift from the current rule which requires a purpose unrelated to the provision of health insurance. Under the proposed rule, a group can form based on geographic location alone.

The proposed rule also opens the door to groups that include self-employed individuals who do not have employees by treating these working owners as both employers and employees.

The proposed rule, which would allow the formation of one ERISA plan for unrelated employers, would provide a more affordable way for small business owners to obtain health insurance. However, by creating one ERISA plan, federal COBRA would now apply to small business owners who are otherwise exempt under the small employer exception.     

What Would a New Association Health Plan Look Like?

As part of expanding the use AHPs, the new regulation contains some required formalities. The association becomes the sole ERISA plan sponsor responsible for plan administration, annual reporting, participant disclosures and COBRA administration. To satisfy these obligations, the association must have a formal organizational structure with bylaws or similar operating rules. It must be controlled by its employer members either directly or by the election of directors, officers or representatives. 

The proposed rule requires that AHP coverage only be offered to employees, former employees and their beneficiaries. In addition, the association membership and AHP coverage must comply with HIPAA’s nondiscrimination rules and cannot restrict membership based on health factors.

What Are the Potential COBRA Challenges with a New Association Health Plan?

Employers joining an AHP will need to familiarize themselves with the COBRA requirements. Many of these small employers were likely exempt from COBRA before joining the AHP. Coordination between the association and its employer members will be essential. For example:

• COBRA contains specific deadlines by which the employers will have to notify the association of qualifying events so that the association can timely distribute mandatory COBRA notices.
• The association will need to determine how COBRA payments are handled – are they paid to each employer or to the association directly?
• The association must maintain current participant contact information in order to properly distribute required COBRA and other plan notices.
• The association and employers must coordinate to ensure eligibility for the AHP is limited to current and former employees and their beneficiaries. This requirement will likely demand regularly scheduled dependent eligibility audits.

To achieve adequate plan administration, the association will need to establish a system for AHP employer members to communicate events, maintain employee information, determine eligibility and transmit payments. 

If you are an employer or a broker considering participation in an AHP under the proposed rule, be sure to consider the potential COBRA implications.

This article was reprinted from the March 2018 issue of America’s Benefit Specialist Magazine featuring our very own Robert Meyers.

[1] ERISA §3(4)(A).

[2] See, DOL Booklet “Multiple Employer Welfare Arrangements under the Employee Retirement Income Security Act: A Guide to Federal and State Regulation” (Aug. 2013) (available at www.dol.gov/ebsa, as visited February 2, 2018); See also, Krogh v. Chamberlain, 708 F.Supp. 1235 (D. Utah 1989); and Johnson v. Reserve Life Ins. Co., 765 F. Supp. 1478 (C.D. Cal. 1991)(MEWA employer with only 12 employees not subject to COBRA).   

[3] ERISA §3(5).

[4] See, DOL Booklet “Multiple Employer Welfare Arrangements under the Employee Retirement Income Security Act: A Guide to Federal and State Regulation” (Aug. 2013) (available at www.dol.gov/ebsa, as visited February 2, 2018).

[5] 29 C.F.R. Part 2510, RIN 1210-AB85 (available at https://www.gpo.gov/fdsys/pkg/FR-2018-01-05/pdf/2017-28103.pdf, as visited February 2, 2018).