In New York v. United States Dep’t of Labor, CV 18-1714 (D.D.C. Mar. 28, 2019), the U.S. District Court for the District of Columbia invalidated final regulations issued by the U.S. Department Labor (DOL) on the subject of association health plans (AHPs). Entitled Definition of “Employer” under Section 3(5) of ERISA – Association Health Plans, the disputed regulations were issued in response to an Executive Order directing the DOL to expand AHP access by small employers and self-employed individuals. Among other things the regulations sought to allow small employers and self-employed individuals to gain access to group health plan coverage and benefits heretofore generally available only to large groups.
The news of the District Court’s decision was greeted by the media, industry advisos, and blog posts (ours included) with headlines such as “Court Invalidates Rule On Association Health Plans.” An alternative headline − “Court Upholds and Strongly Endorses Prior Law Governing AHPs”− would have been equally accurate, however, if perhaps less flashy. This prior law was the subject of a set of Frequently Asked Questions (FAQs) recently issued by the DOL, which are the subject of this post.
As we have explained previously, the DOL refers to the prior rules governing AHPs as “Pathway 1,” and the expanded rules under the June 2018 final regulations as “Pathway 2.” Following the lead of the District Court, the DOL says in Q/A 1 of the FAQs that the “pre-rule sub-regulatory guidance (sometimes referred to as ‘Pathway 1 AHPs’) are unaffected by the district court’s decision.” According to the DOL:
The Department’s pre-rule guidance remains in effect and employer groups and associations that meet that criteria continue to be able to act as an “employer” for purposes of sponsoring an ERISA-covered AHP.
For a discussion of the prior guidance regarding Pathway 1, please refer to the DOL’s MEWA Guide.
In general, Pathway 1 AHPs are permitted to provide benefits to employees of employers who have a “sufficiently close economic or representational nexus to the group or association (such as those that are in the same trade, industry, line of business or profession).” In the parlance of the statute, these employers are referred to and regulated as “bona fide associations.” Bona fide associations, which include trade and industry groups, are treated as a single employer under ERISA; but “bona fide associations” do not include groups such as Chambers of Commerce that are comprised of divergent businesses. Further, to qualify under Pathway 1, an AHP may not include self-employed individuals (or “working owners” without other employees).
In Q/A 4, the DOL addresses when and under what circumstances an AHP might seek an advisory opinion attesting to an association’s status as a “bona fide association” that can act as a single employer. The question states: “My association was designed to meet the test established in the Department’s subregulatory guidance for purposes of acting as an ‘employer’ that is able to sponsor a “Pathway 1” AHP. May the association seek an advisory opinion from the Department to confirm that the association meets the test?” The DOL answers explaining that:
AHPs are not required to obtain an advisory opinion from the Department to qualify as Pathway 1 AHPs. However, if an AHP has a particular need for an official advisory opinion, the Department has published procedures for individuals or organizations to follow when asking for the Department’s official opinion on their status under ERISA.”
The DOL does not elaborate on what circumstances an AHP might have “a particular need for an official advisory opinion.” Status as a bona fide association is a narrow exception to the general rule that treats associations as a collection of individual (generally, small) employers and not as a single (generally, large) employer. In a state that recognizes Pathway 1, there is no need to seek the DOL’s opinion. Often, an association’s claim to bona fide association status, backed up by an opinion of counsel, will suffice.
Certain states, however, by statute or otherwise, categorically bar or object to large group AHPs (see, e.g., M.G.L. Ch. 176). In these states, small groups retain their status as such regardless of the size of the combined association. In these states, an advisory opinion is sometimes necessaryand, in a handful of states, even an advisory opinion may not be enough.
The value of a DOL advisory opinion can be best illustrated in the context of a fully insured 50-state AHP. (Since states have near plenary power to regulate self-funded AHPs, a 50-state self-funded AHP is, as a practical matter, not feasible. Such an arrangement would be considered an unlicensed insurance company in many states.) A fully insured plan might request an advisory opinion that confirms the association’s status as a bone fide group and declares the AHP’s status as fully insured.
While the DOL’s determination of a group’s status as a bona fide group is not binding on a state, in our experience, state regulators routinely, though not universally, accept that determination. In contrast, the DOL’s determination of a group’s status as “fully insured” has important legal consequences and is binding on the state. Unlike self-funded plans, a state’s ability to regulate fully insured plans is constrained. Where the DOL has declared that a plan is fully insured, states are limited to imposing only “standards, requiring the maintenance of specified levels of reserves and specified levels of contributions [ ].” Absent the DOL’s determination of a plan’s status as fully insured, a state remains free to comprehensively regulate an AHP that purchases comprehensive coverage from a licensed carrier, even if that arrangement is fully insured (as the term in commonly understood).
In our view, the District Court’s strong endorsement of Pathway 1 should settle the matter in favor of allowing fully insured, large group AHPs to operate unmolested. Nevertheless, a handful of states have issued guidance rejecting large group status of bona fide groups. This latter guidance pre-dates the District Court’s decision, however, so it may change.
A fair reading of the disparate ERISA provisions regulating AHPs – the definition of “employer” in ERISA § 3(5) and the rules governing the limited preemption of state laws in ERISA § 514(b)(6) – leads us to conclude that a fully insured, 50-state AHP sponsored by a bona fide association of employers should be able to operate with impunity in all states. States could still impose “standards, requiring the maintenance of specified levels of reserves and specified levels of contributions” on these AHPs, but, any such standards would largely duplicate existing law already regulating carriers generally.
There remains a lingering problem that the DOL’s FAQs gloss over: they assume that Pathway 1 is settled law. It is not. Guidance in several states, including Pennsylvania, Connecticut, and New York, appears to categorically reject Pathway 1. We do not yet know whether these states will reconsider their approach based on recent developments.
The set of state laws that can be applied to fully insured AHPs is smaller than the set of state laws that can be applied to self-funded AHPs. Stated otherwise, there are some state laws that are preempted in the case of fully insured AHPs. While this is a matter of black letter law, it is less clear precisely which state laws these are.
The combination of the District Court’s opinion and the FAQs will encourage the formation of more Pathway 1 AHPs. Sooner or later, the states will push back. When this happens, the boundaries and contours of the Pathway 1 will likely be tested.