DOL’s Final Rule on Association Health Plans Expands Options

Small businesses can avoid some small group market requirements

Stephen Miller, CEBS By Stephen Miller, CEBS June 20, 2018
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Update: On Aug. 20, 2018, the U.S. Department of Labor issued Association Health Plans: ERISA Compliance Assistance. The guidance addresses issues such as Employee Retirement Income Security Act (ERISA) enforcement provisions that may apply to association health plans (AHPs), state authority over AHPs, and voluntary correction programs for employers or associations that make mistakes in operating an AHP.


A rule finalized by the U.S. Department of Labor (DOL) will make it easier for small businesses to band together to buy health insurance without some of the regulatory requirements that individual states and the Affordable Care Act (ACA) impose on smaller employers.

The DOL said the final rule, titled Definition of "Employer" under Section 3(5) of ERISA—Association Health Plans and published in the Federal Register and June 21, will help small businesses 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 rule, overseen by the DOL's Employee Benefits Security Administration, 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 an association health plan (AHP) to its members.

The broader interpretation of ERISA will let employers anywhere in the country that can pass a "commonality of interest" test  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 will be able to join small business health plans to provide coverage for themselves as well as their spouses and children.

The new rule does not affect previously existing AHPs, which were allowed—but with stricter geographic and commonality restrictions—under prior guidance. Such plans can continue to operate as before, or elect to follow the new requirements if they want to expand within a geographic area, regardless of industry, or to cover the self-employed, the DOL said. New plans can also form and elect to follow either the old guidance or the new rules.

"AHPs are about more choice, more access and more coverage," said Secretary of Labor Alex Acosta in a statement. "Many of our laws, particularly Obamacare, make health care coverage more expensive for small businesses than large companies," he said, referring to the ACA.

According to the DOL, the families of up to 11 million Americans who work for small businesses or who are sole proprietors lack employer-sponsored insurance. The Congressional Budget Office estimates that 400,000 previously uninsured people will gain coverage under AHPs.

The CBO estimates that 400,000 previously uninsured people will gain coverage under AHPs.

AHPs "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," said Chatrane Birbal, the Society for Human Resource Management's director of congressional affairs for health and employee benefits policy. For most midsize-to-large employers and their employees, however, the rule will likely result in no change in health coverage, Birbal said.

On June 20, the New York and Massachusetts attorneys general, both Democrats, said they would sue the Trump administration to overturn the rule and "to safeguard the protections under the Affordable Care Act," although their prospects for success weren't clear.

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.

The AHP rule will let 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, the DOL said, employers could:

  • Avoid regulatory restrictions that pertain only to the small group market.
  • Reduce administrative costs through economies of scale.
  • Strengthen their bargaining position to obtain more favorable deals.
  • Enhance their ability to self-insure.
  • Offer a wider array of insurance options.

The final regulations "level the playing field and allow small employers to band together by common geography or industry to purchase 'large group' insurance policies," said Stacy Barrow, a partner at Marathas Barrow Weatherhead Lentin LLP in Boston, and director of compliance at Benefit Advisors Network, a consortium of health and welfare benefit brokers. Large group plans are subject to fewer ACA mandates and have greater flexibility in plan design than small group plans, which must offer coverage in all 10 essential health benefit categories, he noted.

The regulations also enable AHPs to self-insure, subject to state oversight, Barrow said.

The expansion of AHPs under the final rule "is an exciting opportunity for small employers and solo practitioners who had previously been unable to access the economies of scale in the large group market," said Danielle Capilla, director of compliance for employee benefits at Alera Group, a national insurance and financial services firm.

She added, however, that employers should make note of a few important items:

  • The implementation dates are staggered, so associations won't be able to form a new self-funded health plan until April 2019.
  • The first opportunity to form an AHP, in September 2018, is only available to existing associations wishing to put a fully insured plan in place.

*Associations looking to form an AHP should ensure they are fully compliant with the nondiscrimination provisions in the regulations, which ensure that AHPs cannot discriminate on the basis of a health factor, or keep certain individuals or employers out of the AHP plan due to health conditions," Capilla said.

Associations with self-insured plans "should ensure they have the bandwidth to ensure compliance with state regulations in addition to federal regulations," she added.

"There are administrative costs—and resource burdens—connected with becoming part of an association," pointed out Kim Buckey, vice president of client services at DirectPath, an employee engagement and health care compliance firm in Birmingham, Ala. "Employers should look carefully at whether participating in an AHP is worth the additional administrative requirements."

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.
  • Clarifying that an AHP cannot restrict coverage of an individual based on any health factor.

AHPs "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."

Employer Protections

"The DOL included a specific provision that participation in an AHP will not subject employers to joint employer liability under any other federal or state law, rule or regulation," according to an analysis by law firm Littler. The DOL "also clarified that businesses will not be considered an employer of its independent contractors merely by its participation in an AHP with those independent contractors that participate in the same AHP as working owners."

State and Federal 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.

According to the DOL, the final rule "does not diminish state oversight, which remains in place. States will share enforcement authority with the federal government."

AHPs, as they currently exist, "are already regulated by both states and the federal government. It is confusing and will continue to be so," as AHPs expand under the new regulations, said Juliana Reno, a partner in the New York City office of Venable.

The compliance challenges of navigating the intersection of federal and state law "will probably be addressed by the association," she noted. "The small business challenge will be doing an apples-to-apples comparison of their options, because small group plans and AHPs may be following different rules."

Whether AHPs will be an attractive and affordable option for associations and small businesses "will hinge on the various states and state laws" regarding group size, rating rules and other factors, noted Annette Bechtold, senior vice president of regulatory affairs and reform initiatives at benefits broker OneDigital. She expects the states to respond by modifying their existing laws and rules, and "at that point, the advantages and disadvantages will become clearer," she said, adding, "Implementation is always the hard part."

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

Pros, Cons and Costs

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."

However, AHPs can build large insurance pools of small employers, and "spreading the risk across large numbers of participants in an insurance pool is thought to bring insurance premium stability," said Perry Braun, executive director at Benefit Advisors Network.

He added, "It will be interesting to see [which brokers] enter the market to aggregate small businesses" into the new plans.

"These plans may provide limited benefits—for example, not covering maternity care or mental health care," Buckey said. "Depending on the employer, there might not be a lot of interest in coverage if the plan offered doesn't meet the needs of their employees."

A study by staffing firm Randstad found that 42 percent of employees are considering leaving their current jobs because their benefits packages are inadequate, Buckey noted. AHPs, if benefits are limited, "may have the unintended consequence of causing more employee turnover," she said.

"Employees of franchisees and small business may be winners here," said Ryan McCostlin, a team member at Bernard Health, a benefits brokerage and HR software company in Nashville, Tenn. Now that franchisees can band together to create an association, they'll likely be able to provide more affordable health insurance options to employees."

But if healthier Americans opt out of ACA compliant health plans and instead choose an association health plan that may be less expensive because it provides less comprehensive coverage, "the impact could be that ACA plans are left with Americans in poorer health and, as a result, monthly premiums will continue to rise," McCostlin said.

If employers participating in an AHP opt for a plan without certain essential health benefits, Braun added, "it will be interesting to study whether or not excluding those benefits means that costs would be higher in the future, since participants without coverage for those services may delay treatment until later, when it could be more costly."

A Better Game-Changer?

Despite the easing of restrictions on AHPs, health care "costs aren't going to reverse themselves and coverage options aren't going to explode," predicted Shandon Fowler, founder and principal of benefits consultancy Four8 Insights in Charleston, S.C. "Employer-based coverage in the small and midmarket has declined 16 percent since 2000. I'm not sure loosening up AHP's and adding coverage across state lines is going to reverse that trend."

A "real game-changer," he added, would be expanding the use of stand-alone health reimbursement arrangements (HRAs), funded by employers, to allow workers to buy coverage on the individual market and through the ACA's marketplace exchange. Currently, qualified small employer HRAs that can pay premiums for nongroup coverage are limited to organizations with fewer than 50 full-time employees, and among small businesses awareness of this option remains low.

"Give employers an option that enables them to keep their tax advantage for health coverage and removes administrative burdens, while giving employees a potentially much more affordable option in the individual market, and then you have something transformative," Fowler said.

Up Next

An executive order from President Donald Trump last October directed the Secretaries of the Treasury, Labor, and Health and Human Services to consider rule-making to expand the availability and use of AHPs, short-term, limited-duration insurance (STLDI) and stand-alone HRAs used in conjunction with nongroup coverage, potentially for employers of all sizes.

The Trump administration has now issued a final rule on AHPs and, in February, a proposed rule on STLDI [Update: a final rule on short-term health plans was issued in August 2018]. 

Expected shortly is a proposed rule that would allow large employers to fund stand-alone HRAs, SHRM's Birbal said.

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