Employee Benefits Security Administration: Definition of 'Employer'-Association Health Plans

WASHINGTON, April 30 -- The U.S. Department of Labor Employee Benefits Security Administration has issued a rule (29 CFR Part 2510), published in the Federal Register on April 30, 2024, entitled "Definition of 'Employer'-Association Health Plans."

The rule was issued by Lisa M. Gomez, Assistant Secretary.

Here are excerpts:

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SUMMARY:

This document rescinds the Department of Labor's (Department or DOL) 2018 rule entitled "Definition of Employer Under Section 3(5) of ERISA--Association Health Plans" (2018 AHP Rule). The 2018 AHP Rule established an alternative set of criteria from those set forth in the Department's pre-2018 AHP Rule (pre-rule) guidance for determining when a group or association of employers is acting "indirectly in the interest of an employer" under section 3(5) of the Employee Retirement Income Security Act of 1974 (ERISA) for purposes of establishing an association health plan (AHP) as a multiple employer group health plan. The 2018 AHP Rule was a significant departure from the Department's longstanding pre-rule guidance on the definition of "employer" under ERISA. This departure substantially weakened the Department's traditional criteria in a manner that would have enabled the creation of commercial AHPs functioning effectively as health insurance issuers. The Department now believes that the core provisions of the 2018 AHP Rule are, at a minimum, not consistent with the best reading of ERISA's statutory requirements governing group health plans.

DATES:

Effective date: This rule is effective on July 1, 2024.

FOR FURTHER INFORMATION CONTACT:

Suzanne Adelman, Office of Regulations and Interpretations, Employee Benefits Security Administration, U.S. Department of Labor, (202) 693-8500 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION:

I. Executive Summary

This document rescinds the Department's 2018 rule entitled "Definition of Employer Under Section 3(5) of ERISA--Association Health Plans." The 2018 AHP Rule established an alternative set of criteria from those set forth in the Department's pre-rule guidance for determining when a group or association of employers is acting "indirectly in the interest of an employer" under section 3(5) of ERISA for purposes of establishing an AHP as a multiple employer group health plan. The 2018 AHP Rule was a significant departure from the Department's longstanding pre-rule guidance on the definition of "employer" under ERISA. This departure substantially weakened the Department's traditional criteria in a manner that would have enabled the creation of commercial AHPs functioning effectively as health insurance issuers. The 2018 AHP Rule's alternative criteria were, in large part, held invalid by the U.S. District Court for the District of Columbia in New York v. United States Department of Labor. The district court found the bona fide association and working owner provisions in the 2018 AHP Rule were based on an unreasonable interpretation of ERISA that was inconsistent with congressional intent that ERISA applies to employment-based benefit relationships. The Department, after further review of the relevant statutory language, judicial decisions, and longstanding pre-rule guidance, and further consideration of ERISA's statutory purposes and related policy goals, as well as the public comments received on the Department's proposed rule, now rescinds in full the 2018 AHP Rule in order to resolve and mitigate any uncertainty regarding the status of the criteria that were set under the 2018 AHP Rule, allow for a reexamination of the criteria for a group or association of employers to be able to sponsor an AHP, and ensure that guidance being provided to the regulated community is in alignment with ERISA's text, purposes, and policies. The Department now believes that the provisions of the 2018 AHP Rule that the district court held invalid are, at a minimum, not consistent with the best reading of ERISA's statutory requirements governing group health plans.

II. Background

A. Definition of Employer Under Section 3(5) of ERISA

ERISA regulates "employee benefit plans" (classified as "employee welfare benefit plans" and "employee pension benefit plans"), and generally preempts State laws that relate to or have a connection with such plans, subject to certain exceptions. An "employee welfare benefit plan" is defined in section 3(1) of ERISA to include, among other arrangements, "any plan, fund, or program . . . established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund or program was established or is maintained for the purpose of providing for its participants, or their beneficiaries, through the purchase of insurance or otherwise . . . medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, [or] death." Thus, to be an employee welfare benefit plan, the plan, fund, or program must, among other criteria, be established or maintained by an employer, an employee organization, or both an employer and an employee organization.

Section 3(5) of ERISA generally defines the term "employer" as "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan." Thus, ERISA defines the term "employer" to include the "direct" (or common-law) employer of the covered employees or "any person acting . . . indirectly in the interest of" the common-law employer, in relation to an employee benefit plan. Section 3(5) of ERISA also expressly identifies "a group or association of employers acting for an employer in such capacity" as falling within the definition of "employer." A group or association may establish an employee welfare benefit plan only when it is acting as an "employer" within the meaning of section 3(5) of ERISA. The Department's regulation at 29 CFR 2510.3-5, published in its 2018 AHP Rule,[1] which is the subject of this rescission, sought to define circumstances under which a group or association of employers constitutes an "employer" within the meaning of section 3(5) of ERISA with respect to sponsorship of a group health plan and the provision of health benefits.

B. Historical Guidance Prior to the 2018 AHP Rule--"Bona Fide" Group or Association of Employers

Based on definitions in Title I of ERISA, and because Title I's overall structure contemplates employment-based benefit arrangements, the Department has long recognized that, even absent the involvement of an employee organization, a group or association of employers may sponsor a single "multiple employer" plan if certain criteria are satisfied. If a group or association satisfies these criteria, then it is generally referred to as a "bona fide" employer group or association according to the Department's pre-rule guidance first issued more than forty years ago.[2] Under that pre-rule guidance, health coverage sponsored by a bona fide employer group or association can be structured as a single, multiple employer plan covered by ERISA. The criteria specified in the pre-rule guidance are intended to distinguish bona fide groups or associations of employers that provide coverage to their employees and the families of their employees from arrangements that more closely resemble State-regulated private health insurance coverage.The Department's pre-rule guidance is consistent with the criteria articulated and applied by every Federal appellate court, in addition to several Federal district courts, that have considered whether an organization was acting in the interests of employer members.[3] Moreover, to the Department's knowledge, no court has found, or even suggested, that the pre-rule guidance criteria too narrowly construed the meaning of acting "indirectly in the interest of an employer" under section 3(5) of ERISA.

Historically, the Department has taken a facts-and-circumstances approach to determine whether a group or association of employers is a bona fide employer group or association that may sponsor an ERISA group health plan on behalf of its employer members. The Department's longstanding pre-rule guidance, largely taking the form of a collection of advisory opinions issued over more than four decades, has expressed the Department's view regarding whether, based on individual circumstances, a particular group or association was able to sponsor a multiple employer welfare plan.[4] While the language in the Department's pre-rule advisory opinions was tailored to the issues presented in the specific arrangements involved, the Department's interpretive guidance has consistently focused on three criteria: (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).

A variety of factors were set forth in the Department's longstanding pre-rule guidance as relevant when applying these three general criteria to a particular group or association. These factors include how members are solicited; who is entitled to participate and who actually participates in the group or association; the process by which the group or association was formed; the purposes for which it was formed; the preexisting relationships, if any, of its members; the powers, rights, and privileges of employer members that exist by reason of their status as employers; who actually controls and directs the activities and operations of the benefit program; and the extent of any employment-based common nexus or other genuine organizational relationship unrelated to the provision of benefits.[5]

C. Association Coverage Under the Public Health Service Act

The Public Health Service Act (PHS Act) establishes health coverage requirements in Title XXVII that generally apply to group health plans and health insurance issuers offering group or individual health insurance coverage. The provisions of Title XXVII of the PHS Act have been amended by the Affordable Care Act (ACA)[6] and other Federal laws. These PHS Act provisions are administered by the Department of Health and Human Services (HHS), Centers for Medicare & Medicaid Services (CMS). With respect to health insurance issuers, States are the primary enforcers of these PHS Act provisions, and if a State fails to substantially enforce them, CMS enforces them.

Under Title XXVII of the PHS Act, "individual market coverage" is any health insurance coverage that is not offered in connection with a group health plan.[7] Conversely, the term "group health insurance coverage" refers to health insurance coverage offered in connection with a group health plan.[8] The PHS Act derives its definitions of "group health plan" and "employer" from the ERISA definitions of "employee welfare benefit plan" and "employer."[9] Thus, reference to ERISA is needed when determining whether a group health plan exists for PHS Act purposes and determining whether an ERISA-covered health arrangement is properly treated as a single plan operating on behalf of multiple employers or, instead, a collection of separate and discrete employer-sponsored plans.

In guidance issued in 2002 and 2011, CMS explained how the requirements of Title XXVII of the PHS Act apply to health insurance coverage sold to or through associations.[10] Specifically, as stated in the guidance, the test for determining whether association coverage[11] is individual or group market coverage for purposes of Title XXVII of the PHS Act is the same test as that applied to health insurance coverage offered directly to individuals or employers. In other words, CMS will generally ignore--"look through"--the association to determine whether each association member must receive coverage that complies with the requirements arising out of its status as an individual, small employer, or large employer.

Consequently, coverage that is issued to or through an association, but not in connection with a group health plan, is not considered group health insurance coverage for purposes of the PHS Act. Under the PHS Act, such coverage is considered coverage in the individual market, regardless of whether it is considered group coverage under State law.[12]

In situations involving employment-based association coverage where coverage is offered in connection with a group health plan, the coverage is considered group health insurance coverage under the PHS Act. In cases where an association is not considered an employer under ERISA, each employer member of the association is considered to sponsor its own group health plan under the PHS Act. In those cases where an association is determined to be an employer that is "acting indirectly in the interest of its employer members" and sponsors a plan under ERISA, the association coverage is considered a single group health plan under the PHS Act.

Under the PHS Act, the number of employees of the employer sponsoring the group health plan determines whether the employer is a small employer[13] or large employer[14] and thus whether health insurance coverage provided in connection with a group health plan sponsored by the employer falls into the small group market or large group market. In the situation where each employer member of the association is considered to sponsor its own group health plan, the size of each employer participating in the association determines whether that employer's coverage is subject to the small group market or large group market rules. In those instances where the group or association of employers is, in fact, sponsoring the group health plan and the association itself is deemed the "employer," the number of employees employed by all the employers participating in the association determines whether the coverage is subject to the small group market or large group market rules. Accordingly, the status of an association as a single "employer" within the meaning of section 3(5) of ERISA, and of the AHP as a single plan has important legal consequences. As a general matter, small group and individual market coverage is subject to Federal protections not applicable to large group market coverage, such as the ACA's premium rating requirements, single risk pool, and essential health benefit (EHB) requirements. Thus, to the extent the arrangement is not a single plan, but rather an aggregation of individual plans (or individuals), the participants covered by the arrangement are subject to these more robust protections applicable to plans in the small group market (or to individual coverage, when the insured parties are simply individuals purchasing insurance coverage outside the group market).[1516]

D. The 2018 AHP Rule

On June 21, 2018, the Department published the 2018 AHP Rule,[17] which was intended to broaden the types of employer groups and associations that may sponsor a single group health plan under ERISA. The Department issued the 2018 AHP Rule in response to a 2017 Executive Order (E.O.) that was rescinded in 2021.[18] Relative to the longstanding pre-rule guidance, the 2018 AHP Rule substantially loosened the requirements for groups or associations to be considered bona fide groups or associations that were eligible to establish employee welfare benefit plans or to otherwise meet the definition of "employer" under section 3(5) of ERISA.[19] As published, the 2018 AHP Rule altered many of the guardrails in pre-rule guidance, which had been intended to distinguish bona fide employer associations united by common employment-based relationships from mere commercial ventures aimed at marketing insurance to employers and individuals.

Thus, paragraph (b)(1) of the 2018 AHP Rule abandoned the requirement in pre-rule guidance that the group or association acting as an employer must exist for purposes other than providing health benefits. Instead, the 2018 AHP Rule only required that the group or association must have at least one substantial business purpose unrelated to offering and providing health coverage or other employee benefits to its employer members and their employees. In a significant departure from pre-rule guidance, the rule specifically stated that "the primary purpose of the group or association" could be "to offer and provide health coverage to its employer members and their employees."[20]

Similarly, paragraph (c) of the 2018 AHP Rule provided for a looser commonality standard than the pre-rule guidance, which had insisted on a genuine commonality of interests between employer members. Under the 2018 AHP Rule, a group or association of employers satisfied the commonality of interest requirement if either: (1) its employer members were in the same trade or business; or (2) the principal places of business for its employer members were located within a region that did not exceed the boundaries of the same State or metropolitan area, such as the Washington Metropolitan Area of the District of Columbia (which also includes portions of Maryland and Virginia). No other common interests were required.[21] Under the pre-rule guidance, geography alone would not have been sufficient to establish commonality between businesses. For example, barbers, mechanics, and lawyers would not have been treated as having the requisite commonality of interest merely because they all have a principal place of business in the State of New York.

In a particularly striking departure from ERISA's employment-based structure, paragraph (e) of the 2018 AHP Rule specifically allowed working owners without any common-law employees to participate in AHPs, stating that the working owner would be treated as both an "employer" and "employee" for purposes of participating in, and being covered by, an AHP, notwithstanding the absence of any employment relationship with any common-law employees.[22] Under the pre-rule guidance, working owners without common-law employees generally were not permitted to be treated as employers for the purpose of participating in a bona fide employer group or association,[23] or as employees who could be participants in an ERISA-covered employee welfare benefit plan.

In part because the 2018 AHP Rule had relaxed the standards for treating arrangements as single group plans--making it easier for small employers and working owners to purchase coverage in the large group market which is not subject to all the legal protections applicable to coverage in the individual and small group markets--the 2018 AHP Rule expressly added nondiscrimination standards as an additional safeguard against abuse.[24] These standards aimed to reduce the danger that the new AHPs would abuse their status by cherry-picking groups of relatively healthy participants, such as by charging one participating business more for premiums than it charges other members because that business employs several individuals with chronic illness, and excluding others at the expense of the broader insurance market, which would cover a relatively sicker and more expensive population. In particular, the 2018 AHP Rule incorporated and adapted existing health nondiscrimination provisions already applicable to group health plans, including AHPs, under the Health Insurance Portability and Accountability Act of 1996 (HIPAA).[25]

In applying the HIPAA health nondiscrimination rules for defining similarly situated individuals under the 2018 AHP Rule, the group or association could not treat employer members as distinct groups of similarly situated individuals if it wished to qualify as a bona fide group or association for purposes of sponsoring an AHP.[26] For example, a group or association could not separately experience-rate each employer member of the association based on the health factors of their employees and meet the criteria to be a bona fide group or association of employers under the 2018 AHP Rule. The pre-rule guidance does not incorporate nondiscrimination requirements in the definition of employer, although plans must comply with all applicable laws, including the HIPAA nondiscrimination rules. As the Department noted in the preamble to the 2018 AHP Rule, the HIPAA nondiscrimination rules apply to group health plans, including AHPs, and therefore AHPs, like any other group health plan, cannot discriminate in eligibility, benefits, or premiums against an individual within a group of similarly situated individuals based on a health factor.

E. Decision Finding Core Provisions of the 2018 AHP Rule Invalid

In July 2018, eleven States and the District of Columbia (collectively, the States) sued the Department in the U.S. District Court for the District of Columbia. They argued that the 2018 AHP Rule violates the Administrative Procedure Act (APA), 5 U.S.C. 551 et seq., because it exceeds the Department's statutory authority and is arbitrary or capricious. The States moved for summary judgment, and the Department moved to dismiss the lawsuit for lack of standing and cross-moved in the alternative for summary judgment. On March 28, 2019, the Federal district court denied the Department's motions and granted the States' motion for summary judgment. In granting the States' motion, the district court held invalid the 2018 AHP Rule's definition of bona fide group or association of employers and the language permitting working owners without common-law employees to be treated as employees when participating in an AHP.[27] Specifically, the district court concluded that the 2018 AHP Rule's criteria for establishing AHPs unreasonably construed ERISA's requirement that the association act "indirectly in the interest of an employer" because the 2018 AHP Rule's "substantial business purpose" and "geographic commonality" requirements were not drawn narrowly enough to limit AHPs to those that act in the interest of employers, thus unreasonably expanding the definition of "employer."[28] In addition, the district court ruled that the 2018 AHP Rule's expansion of the term "employer" under ERISA to include working owners without common-law employees (when members of an association) was unreasonable because it was contrary to ERISA's text and central purpose of regulating employment-based relationships.[29] Regarding ERISA's text and purpose, the district court held that Congress did not intend for working owners without common-law employees to be included within ERISA--either as individuals or when joined in an employer association.[30] In conclusion, the district court held that the 2018 AHP Rule was inconsistent with ERISA and the APA because the provisions unlawfully failed to limit bona fide associations to those acting "in the interest of" their employer members, within the meaning of ERISA, thus exceeding the Department's statutory authority.[31] The district court remanded the 2018 AHP Rule to the Department to consider how the severability provision of the 2018 AHP Rule affects any of its remaining provisions.[32] The Department's longstanding pre-rule guidance was not affected by the district court's decision.

In 2019, the Department appealed the district court's decision.[33] Thereafter, the U.S. Court of Appeals for the District of Columbia Circuit granted the Department's request to stay the appeal.[34] Subsequently, the Department informed the appeals court that it would undertake notice and comment rulemaking on a proposal to rescind the 2018 AHP Rule. The appeal pending before the D.C. Circuit remains stayed.

The Department considered the severability clause issue raised by the district court and concluded that, without the core provisions that the district court found invalid, the 2018 AHP Rule could not be operationalized and would provide no meaningful guidance. To minimize consequences of the district court's decision on AHP participants, the Department announced a temporary safe harbor from enforcement on April 29, 2019.[35] Specifically, the Department announced that it would not pursue enforcement actions against parties for potential violations stemming from actions taken prior to the district court's decision and in good faith reliance on the 2018 AHP Rule, as long as parties met their responsibilities to association members and the AHP's participants and beneficiaries to pay health benefit claims as promised.[36] In addition, the Department announced that it would not take action against existing AHPs for continuing, through the remainder of the applicable plan year or contract term that was in force at the time of the district court's decision, to provide health benefits to members who enrolled in good faith reliance on the 2018 AHP Rule before the district court's order.[37] Because the 2018 AHP Rule ceased being an alternative pathway for entities to be treated as bona fide employer groups or associations after the district court's decision in 2019, the Department anticipated that parties who established AHPs in reliance on the 2018 AHP Rule would wind them down and that no new AHPs would be formed in reliance on the 2018 AHP rule until the judicial process ended. The Department's temporary safe harbor from enforcement expired long ago, and the Department is not aware of any AHPs that currently exist in reliance on the 2018 AHP Rule.[38]

[FR Doc. 2024-08985 Filed 4-29-24; 8:45 am]

BILLING CODE 4510-29-P

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The document was published in the Federal Register: https://www.federalregister.gov/documents/2024/04/30/2024-08985/definition-of-employer-association-health-plans

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