Business groups and trade associations frequently offer health insurance to their members through association health plans (AHPs). AHPs allow small employers to band together to purchase coverage in the large group insurance market. This permits small employers to create large employer plans which, in addition to the potential for lower premiums, are not subject to certain Affordable Care Act (ACA) mandates applicable to the small group and individual insurance markets, such as mandatory coverage of essential health benefits.

Historically, groups or associations of employers could come together to purchase health insurance coverage if the group or association had a commonality of interest and met many other requirements.

On June 19, 2018, the U.S. Department of Labor (DOL) released a final rule expanding access to AHPs by modifying the Commonality of Interest requirement as well as allowing self-employer “working owners” to obtain coverage through AHPs. AHPs, under the rule, are still subject to state rules overseeing multiple employer welfare arrangements (MEWAs), and they are still subject to other federal mandates including coverage of mental health benefits, the prohibition on lifetime and annual limits for certain benefits, and HIPAA’s nondiscrimination provisions.

The rule was developed in response to Executive Order 13813, issued in October 2017, from President Donald Trump that directed the Secretary of Labor to expand access to health coverage through the use of AHPs, short-term limited duration insurance, and health reimbursement arrangements.

In January 2018, the DOL released its proposed rule on AHPs, which contained an acknowledgement of the uncertainty of “the incidence, nature and magnitude of both positive and negative effects.” In the wave of uncertainty, several states began taking action to shield their insurance markets from the AHP rule. Proposals have been advanced in at least nine states, including Washington, California, Connecticut, and the District of Columbia. 

In May of this year, New Jersey enacted its own ACA-like individual mandate as the state attempts to stabilize its health insurance markets. The state law implements a statewide fee for New Jersey residents who don't obtain health insurance through their job, Medicaid or another source. Additionally, attorneys general in at least two states, New York and Massachusetts, have already stated that they will file a lawsuit claiming that the final rule undercuts consumer health protections imposed by the ACA. On the opposite side of the spectrum, states such as Ohio have expanded access to non-ACA compliant plans.

‘Commonality of Interest’ test.

The final rule amends the definition of “employer” under the Employee Retirement Income Security Act of 1974 (ERISA) to include an association of employers linked by industry or geography that is formed to sponsor a group health plan for its employer members. The DOL has now adopted a more flexible test for the commonality of interest requirement, revising prior DOL guidance.

The rule’s “commonality of interest” test will now be satisfied by employers that are either:

  1. In the same trade, industry, line of business, or profession, or -
  2. Located in the same state or metropolitan area, even if the metro area extends across state lines.

These requirements are separate: associations whose members operate in the same industry can sponsor AHPs, regardless of geographic distribution, while members in the same geographic area may work in entirely different industries.

Substantial business purpose.

The final rule also clarifies that the group or association must have at least one substantial business purpose unrelated to providing health coverage. A substantial business purpose exists if the association would be a viable entity in the absence of sponsoring an employee benefit plan.

For example, an association could offer services to its members such as convening conferences or offering classes or educational materials on business issues of interest to the association members. An association could also act as a standard-setting organization that establishes business standards or practices or could engage in public relations activities such as advertising, education, and publishing on business issues of interest to association members unrelated to sponsorship of an AHP.

Organizational structure.

The final rule requires a group or association to have an organizational structure and be functionally controlled by its members, either directly or by electing a board or other representatives. The rule also requires an association to have a governing body and by-laws and to maintain other legal formalities based on the nature of the entity.

Nondiscrimination based on health factors.

In applying HIPAA’s nondiscrimination provisions, AHPs are not permitted to separate experience-rated employer members, but must treat all businesses within a particular category the same regardless of the health factors of their employees or their claims experience. Separate groups can be created and separately rated, provided that the different classifications are legitimate and not based on health factors.

Where an AHP implements any distinctions in premiums between its various employer member groups (ex. based on geographic location, worker classification, etc.), careful consideration should be given to ensure that those distinctions may not be deemed to be based on health factors. HIPAA’s wellness program provisions apply to AHP coverage under the final rule. This permits AHPs to vary the cost of coverage to employees based on whether an individual satisfies a wellness program’s standards.

So, AHPs can use rewards or penalties of up to 30 percent of the total cost of plan coverage (or up to 50 percent if the wellness program is designed to prevent or reduce tobacco use).

Working owners.

The final rule expands the availability of AHP group coverage to self-employed individuals referred to as “working owners.” The rule requires that the individual earn income for providing personal services to the trade or business, and either:

  1. Provide an average of at least 20 hours per week (or 80 a month) of these services, or -
  2. Has wages or self-employment income from the business at least equal to the cost of coverage through the AHP.

State regulation of AHPs.

The final rule expressly states that the new guidance does not change or limit existing state authority to regulate AHPs and MEWAs. Under ERISA, the DOL and states have joint authority over AHPs and MEWAs to ensure “appropriate regulatory and consumer protections for employers and employees relying on an AHP for healthcare coverage.” 

States have the authority to impose licensing, registration, certification, financial reporting, examination, audit, and any other standards on fully-insured AHPs. For self-insured AHPs, states can apply insurance laws to the AHP so long as the state law is “not inconsistent” with ERISA (These state laws are generally not preempted by ERISA).

Effective date.

Fully-insured AHPs may begin to provide coverage as of September 1, 2018.  Existing self-insured AHPs that wish to expand under the final rule (ex. offer coverage to working owners) may have an effective date as of Jan. 1, 2019 and new self-insured AHPs may be formed under the new standards as of April 1, 2019.