DOL Proposes Rule to Expand Association Health Plans for Small Employers

Small businesses could avoid some small group market coverage requirements

By Stephen Miller, CEBS Jan 8, 2018
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A proposed rule by the U.S. Department of Labor (DOL) would allow small businesses to band together and purchase health insurance without some of the regulatory requirements that the individual states and the Affordable Care Act (ACA) impose on smaller employers.

Advocates of the proposal say that it will make it easier for small businesses to afford better coverage for their employees. Critics contend that it's a way to get around the ACA requirement that plans cover essential health benefits.

The proposal, published in the Federal Register on Jan. 5, expands access to what the rule calls "small business health plans," which are more commonly known as association health plans.

The proposed rule attempts to achieve many of the objectives of the Small Business Health Fairness Act introduced in Congress last year, which also sought to allow small businesses to offer employees health coverage through association health plans.

The rule modifies the definition of "employer" under the Employee Retirement Income Security Act (ERISA) regarding entities—such as associations—that could sponsor group health coverage. An association can be formed for the sole purpose of offering the health plan.

A broader interpretation of ERISA could potentially allow employers anywhere in the country that can pass a "commonality of interest" test to join together to offer health care coverage to their employees. An association could show a commonality of interest among its members on the basis of geography or industry, if the members are either:

  • In the same trade, industry or profession throughout the United States.
  • In the same principal place of business within the same state or a common metropolitan area, even if the metro area extends across state lines.

Sole proprietors also could join small business health plans to provide coverage for themselves as well as their spouses and children.

"Many small employers struggle to offer insurance because it is currently too expensive and cumbersome," the DOL said in a press release. "Up to 11 million Americans working for small businesses/sole proprietors and their families lack employer-sponsored insurance. … These employees—and their families—would have an additional alternative through Small Business Health Plans (Association Health Plans)."

"With the passage of the tax bill, which eliminates the individual mandate penalty starting in 2019, it's very likely that many people will drop their health care coverage in the individual marketplace," said Chatrane Birbal, the Society for Human Resource Management's senior advisor for government relations. Association health plans "could provide an option for small employers to offer competitive and affordable health benefits to their employees, thereby increasing the number of Americans who receive coverage through their employer," she noted.

For most midsize-to-large employers and their employees, however, the proposed rule will likely result in no change in health coverage, Birbal said.

Large Group Treatment for Small Employers

The ACA requires that nongrandfathered insured health plans offered in the individual and small group markets provide a core package of health care services, known as essential health benefits. Large employer group plans and self-funded plans are not required to comply with the essential benefit requirements.

Last October, President Donald Trump signed an executive order directing the DOL and other agencies to issue regulations that would allow more employers to band together and purchase health care plans, including across state lines. The DOL's proposed rule would do this by allowing employers that currently can only purchase group coverage in their state's small group market to join together to purchase insurance in the less-regulated large group market. The 50 states most often limit the large group market to employers with 50 or more employees, while a handful of states limit this market to employers with 100 or more employees.

By joining together, employers could not only avoid those regulatory restrictions that pertain only to the small group market, but also could reduce administrative costs through economies of scale, strengthen their bargaining position to obtain more favorable deals, enhance their ability to self-insure, and offer a wider array of insurance options, the DOL said.

Employee Protections

The proposed rule would maintain current employee protections by:

  • Preserving nondiscrimination provisions under the Health Insurance Portability and Accountability Act (HIPAA) and the ACA. with regard to association health plans.
  • Clarify that an association health plan cannot restrict coverage of an individual based on any health factor.

"Small Business Health Plans (Association Health Plans) cannot charge individuals higher premiums based on health factors or refuse to admit employees to a plan because of health factors," the DOL said. The Employee Benefits Security Administration "will closely monitor these plans to protect consumers."

State Regulation

Association health plans are a type of a multiple employer welfare arrangement (MEWA), which are required to file a Form M-1 and a Form 5500 annually unless otherwise exempt.

"The applicability of state laws depends on whether the MEWA is self-insured or fully insured, and on the laws of the particular state," said Mark Stember, a partner with Kilpatrick Townsend in Washington, D.C. "It is unclear how states will regulate these types of health plans" and those that cross state lines, he said, but "the DOL indicated that it would like input on possible approaches to exempt self-insured association health plans from state insurance regulations."

"While these proposed regulations will, if adopted as a final rule, be welcomed by employers, they will also pose daunting challenges to federal and state regulators as they grapple with enforcement," said Alden Bianchi, a benefits attorney with Mintz Levin in Boston. "It has been the states, and not the federal government, that have typically taken the lead in policing MEWAs," he noted. "The proposal would change this. State regulators will also be worried about the impact of the proposal on their small group markets, which could be fragmented by the expanded adoption of [association health plans]."

[SHRM members-only toolkit: Managing Health Care Costs]

Differing Reactions

Expanding access to association health plans is opposed by those who see it as an effort to weaken the ACA's coverage requirements. For instance, insurance sold nationwide through associations of small employers "would have to comply with far fewer standards" than current small group market plans, according to a statement by the Commonwealth Fund, a nonprofit foundation that supports expanding health care coverage to low-income and uninsured Americans. "Federal administrative changes that allow some health plans to bypass state and federal rules but not others create an uneven playing field, destabilize insurance markets, and put consumers at risk."

"Allowing the expansion of association health plans could mean the proliferation of coverage that does not provide the essential benefits people with diabetes need to effectively manage their disease and to prevent devastating and costly complications," said a statement from the American Diabetes Association.

The proposal, however, is supported by the National Retail Federation. "Main Street retailers need more affordable health care options and a level playing field with larger companies that are better positioned to negotiate for lower insurance costs," said David French, senior vice president for government relations at the federation, in a statement.

"These changes could be attractive to small employers with relatively healthy employees and who would not need the full range of benefits offered by the ACA's exchange plans" for the small group market, said Beth Halpern, health law partner at Hogan Lovells in Washington, D.C.

Like Trump's executive order, the proposed regulation seeks "to liberalize the rules to build large insurance pools of small employers," said Perry Braun, executive director at Benefit Advisors Network (BAN), a Cleveland-based consortium of health and welfare benefit brokers. "Spreading the risk across large numbers of participants in an insurance pool is thought to bring insurance premium stability," he said, adding, "It will be interesting to see [which brokers] enter the market to aggregate small businesses" into the new plans.

The DOL will accept comments on the proposed rule during a 60-day period ending on March 6.

"There are likely to be a number of changes to the proposed regs before they become final, and there really are a number of issues related to the proposal which need to be answered," said Robert Toth, principal at Toth Law and Toth Consulting in Fort Wayne, Ind.

Related SHRM Resource:

Health Care Reform Resources for Employers


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