By: HUB’s EB Compliance Team
On March 28, a federal district court in Washington, D.C. vacated part of the expanded association health plan (“AHP”) rules issued last summer (in a case Hub wrote about here). Specifically, the judge said the following parts of the rules were inconsistent with federal law:
- those allowing “working owners” (like sole proprietors, for example) to form and participate in an AHP; and
- the rules regarding what constitutes a “bona fide association.” Specifically, the court rejected the “commonality of interest” rules which, among other options, would allow associations to be formed based on geography and stated that the rules requiring associations to have another substantial business purpose beyond offering a health plan were not strong enough.
If this ruling stands, it would mean that organizations like Chambers of Commerce may not form a “bona fide group” and sponsor an AHP and that organizations that want to cover their self-employed individual members under an AHP cannot.
The court’s fundamental concern was that the final rule was not a fair interpretation of federal law. Specifically, the rules under ERISA (which govern employee benefit plans) generally require that a plan be offered by an employer to its employees.
However, in some circumstances, an association can act essentially like an employer in offering a plan to the employees of the association’s members. (This guidance existed prior to the final AHP rule last year and continues to be available, even after this ruling.) To do so, the association first had to have meaningful operations beyond just offering a plan. Secondly, members need some kind of common bond. Historically, that has mostly meant that they all worked in the same industry.
According to the court, the final rule departed from this framework in three critical respects.
- The rule treated “working owners” as both employers (of themselves) and employees (of themselves). According to the court, this stretched the concept of employer and employee too far.
- The rule also allowed employers to band together based on common geography. However, the court’s view was a bunch of employers that happen to be near each other don’t necessarily share a common bond. Under the final rule, a dry cleaner, doctor’s practice, restaurant, law firm, and graphic design firm could be spread across an entire state and still have enough of a “common bond” to form an AHP. The court was not convinced.
- Finally, the final rules allowed an association to be formed for the primary purpose of offering an AHP, as long as the association had at least one other “substantial business purpose.” However, the court did not think the additional business purposes were “substantial” enough. According to the court, this could be as simple as preparing a newsletter, which did not seem substantial enough. As a result, the AHP would function basically like a commercial insurer rather than a plan, in the court’s view.
The AHP rule includes a severability provision that allows the rest of the rule to survive. The court sent the rule back to the Department of Labor (“DOL”) to remove the parts of the rule that the court said violated federal law. The DOL has three options:
- The reality is that not much is left, so it is possible the DOL may just remove the final rule altogether.
- The DOL can issue a new rule that removes the provisions the court found objectionable (or potentially revises them to make them more acceptable).
- The DOL may also decide to appeal to try and keep the rule intact.
Shortly after the ruling was issued, the DOL issued some FAQs on its response to the case. In short, the DOL has not decided what to do yet. State insurance regulators will also need to weigh in on the effect on AHPs in their states. However, they may wait to see the DOL’s next move before issuing their own guidance.
For now, AHPs that formed under these new rules should consult with counsel on next steps. Until more is known about how the DOL plans to respond, it is difficult to gauge appropriate next steps in all instances.
The good news is that associations formed under the old DOL guidance that existed before the final rule are not affected by this ruling. Recall that the new AHP rules were an additional way for AHPs to form, but the new rules did not replace the old guidance. Therefore, while this ruling leaves the fate of the new rules unanswered, the old rules remain intact.
Employers considering joining an AHP should ask whether they were formed under the old rules or the new rules, and what effect (if any) this ruling has on the AHP. Of course, they also need to consider whether the AHP will work under the insurance laws of the state where the coverage is offered.
HUB International will continue to monitor these developments and provide updates as appropriate.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.