Association Health Plans

Brian W. Berglund and Sarah L. Bhagwandin, Bryan Cave Leighton Paisner LLP

This article discusses the requirements for Association Health Plans (AHPs) under the Employee Retirement and Income Security Act of 1974 (ERISA) and describes how the final rule issued by the U.S. Department of Labor (DOL) may shape how you advise clients wishing to either establish a new AHP or reevaluate the operations of an existing AHP.

IN PARTICULAR, THIS ARTICLE FOCUSES ON TWO THRESHOLD questions that must be addressed by any association seeking to establish an AHP, in light of the DOL final rule: (1) whether the association qualifies as a bona fide association under ERISA and therefore meets the definition of employer, capable of sponsoring an ERISA health plan; and (2) if the association only qualifies as an employer under the final rule rather than the historical rule, whether it can adopt a viable AHP.¹

On March 28, 2019, the U.S. District Court for the District of Columbia held in New York v. United States Dep't of Labor, 2019 U.S. Dist. LEXIS 52725 that the DOL’s expansion of the definition of “employer” to include associations of employers regardless of their business connection was unlawful. The court set aside that portion of the DOL’s June 2018 Final Rule on AHPs. While the defendants may appeal this decision and the full impact is uncertain, be mindful of it when advising clients about AHPs.

Overview of AHP Regulatory Setting

An AHP is a health plan arrangement sponsored by a group or association of employers that have banded together and, collectively, based on DOL criteria, qualify as an employer under ERISA. ERISA governs, with limited exceptions, all employee benefit plans that are maintained by employers, employee organizations, or both.² An employer for ERISA purposes is “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan.”³ The term expressly includes a group or association of employers acting for an employer in such capacity.⁴

AHPs are not only governed by ERISA, they are subject to all the laws that regulate health plans, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (ACA). For purposes of the ACA, a qualifying AHP is treated as a single group welfare arrangement, and the number of employees covered by the entire AHP determines the group size. Group medical coverage refers to a single policy issued to a group (like a business with employees). This contrasts with a single policy issued to a single person or family. Under these rules, for ACA purposes, AHPs are treated as offering large group coverage to member employers and therefore are not subject to ACA’s small group requirements relating to community rating and mandated essential health benefits.

Finally, AHPs are subject to state insurance laws. A discussion of how state insurance laws impact AHPs is beyond the scope of this article, but practitioners should be aware that state insurance laws will also apply.

Until recently, guidance around what entities may qualify as an association and what it means to act “indirectly in the interest of an employer” had been developed through a somewhat inconsistent hodgepodge of 40 years of case law and DOL advisory opinions. Read together, these authorities narrowly defined which associations could qualify as an employer capable of sponsoring an AHP.

On June 21, 2018, the DOL published its final rule expanding the types of entities that are eligible to serve as an employer qualified to sponsor an AHP.⁵ The rule was prepared in response to President Donald J. Trump’s executive order “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States,” signed October 12, 2017. That order specifically directed the DOL to consider proposing new rules that would expand AHP availability.⁶

As a result of the final rule, interest in forming AHPs on the part of entities wishing to serve small employers has intensified. At the same time, certain states have become actively hostile toward the expansion of AHPs. For example, 11 states and the District of Columbia sued the DOL in the U.S. District Court for the District of Columbia and partially won on summary judgment. (New York v. United States Dep't of Labor, 2019 U.S. Dist. LEXIS 52725). In some cases, states base their opposition to expanding AHPs on the position that AHPs violate the public policy objectives of the ACA by not requiring the same basic benefit offerings otherwise required by the ACA in the small group market. In other instances, state regulators cite AHPs’ checkered history of fraud and asset mismanagement as warranting stricter regulation.⁷ Regrettably, this hostility has in some cases carried over to existing AHPs that had been in operation for many years prior to the enactment of the final rule.

As a practitioner, it will be important for you to be able to counsel clients about the DOL’s stated objectives for the final rule and the realities around whether your clients’ goals can be achieved under either the new or historical AHP rules. Clients seeking advice about forming an AHP or reexamining an existing AHP structure should know that new and existing AHPs can operate under either the new rule or the historical rules.⁸

Basic AHP Structure

An AHP is a health insurance arrangement provided by an association of employers for its employer members. Under the most common structure, the arrangement is fully insured, and the health insurance carrier issues a single group insurance policy to an independent trust established by the association. The individual employer members purchase insurance through the trust and receive a certificate of coverage. Under ERISA, an AHP is considered to be a single employer welfare benefit plan (as that term is defined in ERISA Section 3(1)) that covers multiple employers.⁹ As a result, the association files a single Form 5500 for the plan. An AHP is also treated as a multiple employer welfare arrangement (MEWA) and must file a Form M-1 with the DOL.¹⁰ The Historical Rule and the Final Rule The final rule substantially relaxes the requirements for qualifying as a bona fide association. However, AHPs that are sponsored by associations that qualify under these relaxed rules must comply with significant new nondiscrimination requirements (as discussed below). When advising clients, you will need to assess whether your client’s proposed use of the AHP structure will qualify under the historical rule or the new rule and, if they are seeking to establish an AHP using an association that qualifies under the new relaxed rules, whether, as a practical matter, the client can form a viable and commercially competitive AHP.

What Qualifies as a Bona Fide Association under the Historical AHP Rule?

Under the historical rule, to constitute a bona fide association of employers, the employer members must:

• Have a commonality of interest unrelated to providing benefits
• Exercise control over the benefit plan, both in form and in substance
• Consist of employers with at least one common law employee

Working owners without common law employees (for example, sole proprietors and self-employed individuals) may not be treated as member employers of an association under the historical rule.¹¹ A business consisting solely of an individual and his or her spouse is a business without an employee.¹² In addition, the association itself is required to be a preexisting organization and must exist for a purpose other than providing health coverage to its members.¹³

Commonality of Interest

Determining commonality of interest among employer members is a facts and circumstances test and is based on whether the members of the association have a genuine organizational relationship unrelated to providing health benefits to the employer members. Courts have held that there must be some cohesive relationship between the provider of benefits (the association) and the recipient of benefits under the plan. The DOL has long considered whether the association that maintains the plan and employer members and their employees who benefit under the plan have a sufficiently common economic or representational interest for the association to qualify as an employer under ERISA Section 3(5).¹⁴

Factors the DOL considers when evaluating whether employer members have a genuine organizational relationship include the following:

• How employer 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
• What, if any, were the preexisting relationships of its employer 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 program¹⁵

Examples of the kinds of activities the DOL has found to evidence a genuine organizational relationship include when employer members collaborate on resources for educational opportunities, develop joint marketing strategies, and have shared advocacy programs related to the particular industry, to name a few.¹⁶

The group of employers must direct the operation and activities of the plan through the ability to nominate, elect, and remove a majority of the trustees and/or the ability to amend or terminate the benefit plan. Sole proprietors or other self-employed individuals who are not considered to be employees are not eligible to participate in AHPs under the historical rule.

Further, under the historical rule, benefit programs maintained by employers with no common industry affiliation or that are effectively controlled by a self-perpetuating board with no voice provided to the participating employers do not constitute a bona fide association of employers under the historical rule.¹⁷ Practically speaking, very few association plans were treated as a single ERISA-covered plan under that framework, but instead were treated as a collection of plans each sponsored by individual employers.

What Qualifies as a Bona Fide Association under the Final Rule?

The final rule retains some of the current AHP requirements and modifies or eliminates other existing requirements, as follows:

1. The rule expands the commonality of interest requirement. The commonality of interest requirement is significantly expanded to include employers simply related by geography or industry. An association can show a commonality of interest among its members on the basis of geography or industry if the members are either: (i) In the same trade, industry, or profession throughout the United States (ii) In the same principal place of business within the same state or a common metropolitan area, even if the metro area extends across state lines¹⁸
2. Sole proprietors can participate in an AHP. Sole proprietors are permitted to participate in the AHP to provide coverage for themselves as well as their spouses and children, even if they have no employees.¹⁹
3. Preexisting organization requirement is eliminated. The requirement that the association be a preexisting organization is eliminated.
4. Primary purpose can be providing health coverage. The requirement that the association exist for a primary purpose other than providing health coverage to its members is eliminated. The final rule does require the sponsoring association to have at least one sustainable purpose in addition to providing health insurance to members, even if the primary purpose of the group or association is to offer such coverage to its members.²⁰
5. Formal organization structure still required. The final rule retains the requirement that the employer members control the AHP and requires that the AHP have a formal organizational structure with a governing body and bylaws (or similar indication of formality).
6. Employees of AHP are eligible for AHP-sponsored health coverage. The final rule now explicitly states that an association is treated as being in the same trade or business as the employer members of the group or association and, as a result, employees of the association itself may participate in an AHP covering the association’s employer members.²¹
7. New nondiscrimination requirements apply. The final rule adds a new set of nondiscrimination requirements applicable to AHPs.²² See Nondiscrimination Requirements below.

Note, the portions of the Final Rule that expand the commonality of interest requirement to allow entities to be only related by geography and expands the concept of employer and employee to include sole proprietors have been successfully challenged in federal district court and as of this writing, have been vacated by the U.S. District Court for the District of Columbia in New York v. United States Dep't of Labor, 2019 U.S. Dist. LEXIS 52725.

AHP Nondiscrimination Requirements

When counseling clients who are exploring using the final rule to form a new AHP, you’ll need to describe the nondiscrimination rules that apply to AHPs sponsored by associations that qualify under the final rule. The final rule significantly restricts how such an AHP may set rates for employer members. The practical impact of the new nondiscrimination rules is that such AHPs may have difficulty creating a commercially viable health plan.

Employer Experience-Rating Prohibited

The final rule prohibits AHPs seeking to qualify under the new requirements from varying premiums across groups of employers based on health factors. This limitation means that the AHP cannot use experience rating for the employer members except in narrowly defined circumstances. In contrast, under the historical rules, AHPs have been permitted to vary premiums on an employer-by-employer basis, including based on health factors.²³

Interestingly, loosening the requirements on how to qualify as a bona fide association was intended to ultimately increase the number of small employers that can purchase insurance on terms otherwise only available to large employers. But the final rule’s new restriction on experience rating significantly threatens the competitiveness of AHPs—and perhaps their efficacy. Some clients may be seeking to form an association under the new rules without fully understanding how the restrictions on setting rates could undermine the AHP’s competitiveness, so this is an important factor to discuss with clients considering the AHP organization.

Commercial Disadvantage

Restricting the use of experience rating when underwriting AHP employer members places an AHP at a significant competitive disadvantage. Commercial insurance carriers are not so limited except to the extent of state and federal community rating requirements that apply to small groups. The practical effect of prohibiting experience rating is that AHPs qualifying under the new rules will be forced to quote basically the same rates for all employer members. This contrasts with commercial carriers being allowed to quote unhealthy large employer groups at higher rates than healthier groups. This is likely to result in adverse selection in the AHP market. Large employer groups with higher-than-average claims will have a financial incentive to join AHPs formed under the new rules, but healthier-thanaverage groups will inevitably choose to purchase health insurance from commercial carriers. This dynamic could result in AHPs enrolling, on average, more costly groups than carriers in the non-AHP market. If this occurs, the applicable AHP will likely have to increase premiums, diminishing the AHP’s ability to attract even moderately healthy groups. This likely scenario may result in further market segmentation and destabilization of the AHP marketplace. Thus, the practical result of this (misguided) nondiscrimination requirement significantly undermines the stated policy objectives of the final rule.

Choosing between the Old and the New AHP Rule to Avoid Nondiscrimination Requirements

Recognizing the problem above, the final rule provides that, where the association qualifies under the historical rule, AHPs may continue to apply experience rating based on health factors to the underlying employer members. Associations formed under the final (new) rule would be required to comply with the final rule’s nondiscrimination requirements.²⁴ New or existing plans that meet the historical AHP qualification requirements need not comply with the final rule’s nondiscrimination rule regarding experience rating. Effectively, the requirements in the final rule constitute an alternative method of satisfying the requirements to establishing an AHP. Existing and new AHPs need not satisfy the final rule’s nondiscrimination requirements as long as they meet the AHP requirements as in effect before the final rule.

If you are advising an existing AHP that wishes to expand within a geographic area, regardless of industry, or to cover a self-employed employer, you’ll need to advise the AHP that it will be subject to the new nondiscrimination requirements for setting rates. Any association that wishes to form a new AHP will almost certainly attempt to qualify under the historical rule to avoid complying with the unworkable nondiscrimination provisions. If you are advising an organization that may only qualify as a bona fide association under the final rule and will therefore not have the ability to rate employer members based on health experience, counsel that organization that it will likely face significant challenges in the marketplace as a result of competition and adverse selection by unhealthy employer members.

Forming an AHP

A client seeking to form a startup AHP needs to know that formation requires considerable time, effort, and resources, as well as a strong insurance company partner. Once formed, building a successful AHP requires patience, persistence, and a continued commitment of significant resources to overcome the practical and commercial difficulties that face startup AHPs.

A variety of AHP structures are possible, but the structure described here has worked particularly well in practice.

In whatever structure the client considers, the formation of an AHP will always start with an analysis of the sponsoring association, which will typically serve the role of “plan sponsor” within the meaning of ERISA Section 3(16)(B).²⁵

The Trust and Trustees

The common first step is for the association to form a trust. The association will serve as the trust grantor, with individuals who are employed by members of the association serving as trustees. Ideally, three or more recognized servant leaders of their trade, business, or profession will be recruited for the trustee role. These trustees ultimately will be elected by the member firms of the AHP once the AHP is up and running.

The success of the AHP will largely hinge on the dedication, effort, and persistence of the trustees, who, because of ERISA’s strictures, must serve without compensation.²⁶ The individual trustees should therefore be selected from among those who take pride and satisfaction from building something truly special without monetary remuneration for the benefit of employer members and their employees.

Necessary Service Providers

The next step—and perhaps the most challenging for clients— is to contract with skilled and experienced service providers. Their services will be crucial to the smooth day-to-day operation of the AHP. The AHP will need to contract for the following services:

• Billing and collection of premiums
• Marketing and sales
• Preparing legally required participant communications and governmental filings
• Creating and staffing call centers
• Providing internet resources
• Claims processing
• Conducting underwriting
• Establishing robust provider networks and pharmacy benefit management

The Insurance Carrier

The ideal partner is a strong insurance carrier. Forming a successful AHP is probably not feasible without one.

The practical reality is that insurance companies are not that interested in contracting with startup AHPs, so engaging an insurance company partner will be one of the AHP’s principle challenges. You can help your client prepare for negotiations with carriers by helping them understand the startup of an AHP from the carriers’ perspective. For example, from a carrier’s point of view, new AHPs raise the following concerns:

• High initial cost with little reward. First, an association that is starting a new AHP will typically require a lot of assistance and expertise from its prospective insurance company partner. This results in the carrier’s personnel guiding the process without immediate compensation; the carrier’s reward will only materialize if the AHP is successful and the employer members generate profitable revenue to the carrier. In most cases, it takes years for a startup AHP to build up to a sustainable level, without guarantee of success.
• Employers already using the carrier may simply switch to AHP-sponsored coverage. If in fact the AHP is successful, it will often cannibalize the existing business of the AHP’s insurance carrier partner; employers that already have a group health insurance policy with the carrier may choose to switch coverage to the AHP. Since the carriers typically earn higher profits on their small group business than their AHP business, this is an unwelcome development.
• State restrictions may disadvantage carriers. Finally, be aware that in reaction to the DOL’s final rule, some states are already seeking to further restrict AHPs under state law. In particular, a few of the blue states have become aggressively hostile towards AHPs and are looking for any excuse to fine a carrier that partners with one or have placed constraints on AHPs to limit their potential growth. For example, California recently enacted SB 1375 to prohibit sole proprietors, partners of a partnership, and their spouses and partners from participating in an AHP.²⁷ Connecticut issued Bulletin HC-123, stipulating that a small employer, as defined under Connecticut statutes, that participates in a fully insured AHP must be rated as a small employer.²⁸ Oregon issued Oregon Division of Finance RegulationBulletin, No. DFR 2018-06, which provides that any association seeking to establish an AHP in Oregon must satisfy Oregon’s requirements for an association.²⁹

Clients need to consider why a carrier would ever partner with an AHP. To a large extent, a carrier’s willingness to partner with an AHP may be a defensive measure. If the carrier believes that a startup AHP has a good chance of long-term success, then it might be willing to enter into an exclusive arrangement with the AHP to prevent a competitor from doing so. Carriers are likely to evaluate partnering with an AHP startup based, in part, on the following considerations:

• The AHP has demonstrated the will to succeed.
• A substantial small employer membership exists within the association.
• Evidence suggests that the association is committed to the success of the AHP, as demonstrated by the personnel assigned to getting the AHP up and running. Answers to the following questions will be important to persuading the carrier:
  • What are the qualifications of the individual tasked with leading the AHP?
  • Is the AHP leader a strong, entrepreneurial project manager?
  • Has the association provided the project manager with the financial resources to succeed?
  • What is the strength and quality of the association’s legal support?
• In the case of a self-insured AHP, the amount of capital the AHP is setting aside as startup capital is critical, as the carrier will be concerned about the AHP’s financial ability to continue as an ongoing plan in the event of adverse claims experience.
• Finally, the carrier will typically be much more interested in partnering with a startup AHP that plans to operate in an AHP-friendly state (such as Oklahoma or Texas) versus a state that is actively hostile to AHPs.

Carrier Engaged–Now What?

Assuming that the AHP is successful in engaging an insurance carrier, the carrier will issue a group insurance policy to the AHP. While self-insured AHPs are possible, they are not recommended because of state regulatory hurdles. If the AHP wishes to take on risk, it can do so through a minimum premium contract with a financially sound carrier, in which event the carrier will bear the ultimate risk for all claims costs that exceed premiums and reserves. Advise the AHP as it enters into (1) a services agreement with the carrier and, if the AHP is taking on risk through a minimum premium contract, (2) an experience-rating agreement.

In addition, you will need to prepare a participation agreement that will be used by each participating employer member to contract with the trust under which the employer member will agree to the terms and conditions of trust membership. Once an employer member executes the participation agreement, the carrier will issue a certificate of coverage to the employer member.

Preparing to Advise

Clients who are newly exploring the AHP model for providing health coverage to small employers will need to first decide whether they are best served by establishing an AHP through an existing association that meets the historical rule or whether their employer-group is more likely to use an association that qualifies under the final rule (to the extent it survives the legal challenge.) If your client’s proposed association does not qualify as a bona fide association under the historical rule, the client will have to consider the market realities of health insurance to determine if its proposed AHP can compete—and successfully provide—desirable coverage to small employers.

Brian W. Berglund, partner (retired) at Bryan Cave Leighton Paisner LLP, has counseled clients for more than 35 years in the employee benefits, executive compensation, captive insurance, and tax areas. Recent client engagements have included the representation of a board of trustees in connection with the establishment of a group life and health insurance program and captive insurance arrangement covering 1,400 employers who were members of the same trade association; the representation of a healthcare benefit manager in connection with the establishment of a stop loss health insurance product providing for a guarantee of pharmacy spend, including the formation of a captive insurance company and negotiation of a reinsurance treaty with a fronting carrier; and the representation of a global employer in connection with the establishment of a phantom equity arrangement (based on business unit performance) in multiple countries. Sarah L. Bhagwandin is counsel at Bryan Cave Leighton Paisner LLP. She practices employee benefits law, counseling clients on the design, implementation, and ongoing administration of tax-qualified retirement plans, welfare plans, fringe benefit plans, and executive compensation. She is also a member of the firm’s Association Health Plans team. Ms. Bhagwandin’s clients include public and private companies, governmental agencies, and religious and other nonprofit organizations. She is a frequent speaker on a broad range of topics, including healthcare reform, fiduciary duties and liability, and the HIPAA privacy and security rules. 

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Related Content

1. For a DOL communication on AHPs, see Dep’t of Labor, About Association Health Plans. 2. ERISA § 4 (29 U.S.C.S. § 1003). 3. ERISA § 3(5) (29 U.S.C.S. § 1002(5)). 4. Id. 5. 83 Fed. Reg. 28912 (June 21, 2018). 6. 82 Fed. Reg. 48385 (Oct. 17, 2017). 7. See 83 Fed. Reg. 28917. 8. 83 Fed. Reg. 28916. 9. ERISA § 3(1) (29 U.S.C.S. § 1002(1)). 10. See ERISA § 101(g) (29 U.S.C.S. § 1021(g)); 29 C.F.R. § 2520.101-2; and Dep’t of Labor Form M-1 and instructions. For an agency discussion about MEWAs, see Dep’t of Labor: Multiple Employer Welfare Arrangements under the Employee Retirement Income Security Act—A Guide to Federal and State Regulation. 11. 29 C.F.R. § 2510.3-3(b). 12. 29 C.F.R. § 2510.3-3(c). 13. ERISA Advisory Opinion 94-07A, 3/14/1994, 83 Fed. Reg. 28918. 14. Wis. Educ. Ass’n Ins. Tr. v. Iowa State Bd. of Pub. Instruction, 804 F.2d 1059, 1063–64 (8th Cir. 1986). 15. 83 Fed. Reg. 28916, footnote 13; ERISA Advisory Opinion 2003-13A,09/30/2003. 16. ERISA Advisory Opinion 2005-24A, 12/30/2005, 83 Fed. Reg. 28918. 17. ERISA Opinion Letter 1994-07A, 3/14/1994. 18. 83 Fed. Reg. 28962. 19. 83 Fed. Reg. 28964. 20. 83 Fed. Reg. 28962. 21. Id. 22. Id. 23. 83 Fed. Reg. 28927-28928. 24. 83 Fed. Reg. 28912, 28928, 28962-3. 25. 29 U.S.C.S. § 1002(16)(B). 26. ERISA § 408(c)(2) (29 U.S.C.S. § 1108(c)(2)). 27. 2018 Cal Stats. ch. 700. 28. State of Connecticut Insurance Dept., Bulletin HC 123 (Aug. 27, 2018) (definition of employer under Section 3(5) of ERISA). 29. Oregon Division of Financial Regulation Bulletin No. DFR 2017–2 (producer compensation for health benefit plans).