The U.S. Department of Labor (DOL) has issued new guidance governing association health plans (AHPs). The new guidance narrows the circumstances under which an AHP can be considered an employer-sponsored plan under ERISA. This ruling will have significant implications for the future of AHPs—and may also foretell changes to the rules governing multiple employer retirement plans (MEPs).
This new guidance is only the latest iteration in a long saga—so some patience with the twists and turns is critical to understanding the importance of this new guidance.
Background
ERISA applies to “employee benefit plans”—defined as (either a retirement or health and welfare plan) established or maintained “by an employer.” In turn, the word employer is defined as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity….”
For many years the DOL did not issue regulations defining when an employer association was “acting for an employer in such capacity.” Rather, the DOL issued (less formal) advisory opinions to specific applicants ruling on whether each such applicant was acting as an employer under ERISA. Although formal regulations were not issued, the DOL identified three key principles that shaped its determinations:
- (1) whether the group or association has business or organizational purposes and functions unrelated to the provision of benefits (the ‘‘business purpose’’ standard); (2) whether the employers share a commonality of interest and genuine organizational relationship unrelated to the provision of benefits (the ‘‘commonality’’ standard); and (3) whether the employers that participate in a benefit program, either directly or indirectly, exercise control over the program, both in form and substance (the ‘‘control’’ standard).
89 Fed. Reg. 34107-34108 (April 30, 2024)
These principles applied both the health & welfare plans and retirement plans.
The ACA and the 2018 AHP rule
An association health plan is created when a group of (otherwise unrelated) entities join together to offer health insurance to employees of these entities. Such coverage can either be insured or self-insured. In other words, an AHP represents an effort by a group of employers to be treated as a single employer (for example, allowing 100 different employers with 20 employees each to be treated as a single employer with 2,000 employees).
Under the Affordable Care Act (“ACA”) the difference between being treated as 100 separate employers (with 20 employees each) versus a single employer with 2,000 employees became more significant. Employer plans in the “small group” market (under 50 employees) are subject to greater obligations under ACA than large employer plans. For example, plans in the small group are required to provide ten “essential health benefits” (including hospitalization, ambulatory services, emergency services, maternity and newborn care and prescription drugs). These additional ACA obligations increased pressure by small employers to seek to be treated as large employer plans.
This pressure yielded results in 2018, when the DOL issued new regulations defining when a group of employers could be viewed under ERISA as “acting as an employer” in sponsoring a health plan. Under this 2018 AHP rule the principles previously identified by the DOL were relaxed in a number of ways:
- The business purpose standard could be met under the 2018 AHP rules if a group of employers had at least one substantial business purpose unrelated to offering health insurance coverage; moreover, a low threshold was set for identifying a “substantial business purpose.” As noted in the preamble to the 2018 rule
- Thus, for example, a bona fide group or association could offer other services to its members, such as convening conferences or offering classes or educational materials on business issues of interest to the association members.
83 Fed. Reg. 28918 (June 21, 2018).
- Similarly, the commonality standard was relaxed and the new standard could be met by a group of employers if either:
- (i) The employers are in the same trade, industry, line of business or profession; or
- (ii) Each employer has a principal place of business in the same region that does not exceed the boundaries of a single State or a metropolitan area (even if the metropolitan area includes more than one State).
83 Fed. Reg, 28962 (June 21, 2018).
- Additionally, under the 2018 AHP rule self-employed individuals (with no employees) – referred to as “working owners” could be considered employers for purposes of joining AHPs—and as employees for purposes of receiving coverage under AHPs.
The 2018 AHP rule reflected presidential policy and was adopted in direct response to Executive Order 13813, issued by President Trump and directing the Secretary of Labor to “consider expanding the conditions that satisfy the commonality-of-interest requirements … [and] consider ways to promote AHP formation on the basis of common geography or industry.”
Reaction to the 2018 AHP rule was swift. Five weeks after the 2018 AHP rule was issued eleven states (and the District of Columbia) filed a lawsuit challenging the 2018 AHP rule. In effect, the lawsuit claimed that the 2018 AHP rule was in direct conflict with the provisions of the ACA and ERISA. The lawsuit focused on (i) how the 2018 AHP rule undermined the specific participant protections imposed by the ACA on small employers and (ii) the inclusion of self-employed individuals served to extend ERISA to plans outside of any employment relationship.
The district court agreed, concluding that the 2018 AHP rule was “an end-run around the ACA” and unlawful. The DOL appealed, but following the change in administration the parties agreed to suspend the appeal while the new leadership at the DOL sought to review the issues involved. The new DOL guidance –rescinding the 2018 AHP rule in its entirety–represents the outcome of that review.
The New (Old) Rules
The new guidance issued by the DOL (i) rescinds, in its entirety, the 2018 AHP rule; (ii) declines to issue new regulations; and (iii) in effect, reinstates the guidance issued in the various pre-2018 rulings.
Although reliance on the pre-2018 rulings requires more effort, the pre-2018 rulings provide a decent picture of the kinds of arrangements that will pass muster and reasonably constructed group plans should be acceptable. Moreover, an employer group can seek an opinion from the DOL regarding the status of their specific plan.
Association Retirement Plans: The Next Shoe?
In 2019 the DOL issued regulations defining who can act as an “employer” in relationship to an association retirement plan – also known as a MEP or multiple employer plan (not to be confused with collectively bargained multi-employer plans). The MEP regulations were issued to align the 2018 AHP rules for health plans with rules available to retirement plans and the 2019 MEP rule relied heavily on the 2018 AHP rule. Indeed, two of the criteria used in the AHP rules that were so heavily criticized in the new AHP guidance (describing the relaxed standards for mutuality of interest and commonality) are also included in the 2019 MEP regulation.
In issuing the new 2024 AHP guidance, the DOL did not act to rescind the 2019 MEP guidance (although, as noted, some of the flaws identified in the 2018 AHP rules are also contained in the 2019 MEP guidance). Moreover, the DOL noted some significant differences between retirement plans and health plans:
- Retirement plans and group health plans are subject to an array of different laws, regulators, and market forces. As just one example highlighted by commenters on the proposal, group health plans generally are subject to the ACA and retirement plans are not. Additionally, multiple employer retirement plans do not have a history of financial mismanagement or abuse to the same extent as multiple employer group health plans. Although this final rule rescinds the 2018 AHP Rule, the Department has made no decision on whether to rescind or modify the 2019 ARP Rule, which was promulgated through a separate notice and comment process.
89 Fed. Reg. 34123, April 30, 2024.
The DOL also stated that if they do seek to change the 2019 MEP rules it will offer a notice and comment period.
This distinction between AHPs and MEPs can be viewed as a reprieve for MEPS—but not a pardon. The DOL’s criticism of the 2018 AHP rule applies equally to the 2019 MEP rule and so we can expect the DOL to act on MEPs in the foreseeable future. In the meantime, MEPs would be well served to review the pre-2019 rulings to assess whether reversion to those pre-2019 rules will raise questions about their ongoing legal status.
Additional Perspective
As with so many other recent regulatory pronouncements, this new guidance reflects differences driven by changes in the political tides. For example, we are seeing the same political seesawing on the definition of investment fiduciaries, on permitted short-term limited duration insurance and on the use of ESG factors in ERISA plan investments.
Regardless of the reader’s political leanings, such regulatory oscillations undermine employers’ ability to plan and, in the long-term, undermine the establishment and growth of employee benefit plans. By insisting on their version of how plans should operate both sides of the political aisle undermine those very plans.