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Paul Zimmerman

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Closing the Health Insurance Gap for Small Business: The Potential and Pitfalls in the Proposed Rules for Association Health Plans

For years, the percentage of small businesses offering group health insurance coverage has been dropping. This hard fact of life accelerated with the advent of the Affordable Care Act (ACA), which put steep coverage mandates on insurance sold to small employers with 50 or less employees, causing corresponding increases in premiums. Many of these mandates did not apply to large employers. When small employers wanted to band together and form associations that would exceed the 50 employee threshold, they ran into federal rules that simply disregarded the existence of the association and treated its members based on their individual sizes.

In an effort to provide more affordable coverage, the Department of Labor (DOL) has just issued new proposed regulations that loosen the rules for forming association health plans (AHPs). 83 Fed. Reg. 614 (Jan. 5, 2018). Pursuant to the pending rules, a qualifying AHP will be treated as the employer issuing the plan, and assuming it serves over 50 employees, as a large employer for purposes of the ACA. This means that it will not have to comply with the federal mandate to provide essential health benefits, it will no longer be included in the small group risk pool (which a state can combine with its individual risk pool), and insurers will have greater flexibility in setting its rates. With a larger number of beneficiaries, an AHP should enjoy greater market power, also potentially lowering its costs. Moving to the large group market subjects a plan to an 85% Medical Loss Ratio instead of 80% for small groups; but this may be feasible given the greater economies of scale and risk-spreading for a larger plan.

Association plans have existed for many years. But under prior DOL regulations, the existence of an association was ignored unless it met very tight organizational criteria. If it failed these rules, its health plan was treated as having been issued by each participating employer, meaning that the employers were generally subject to small group or individual insurance rules. Under the newly proposed rules, the criteria to create a qualifying AHP have been greatly broadened. To form a ‘bona fide’ association, members merely need to be employers that are either: (i) in the same trade, industry, line or business or profession, or (ii) have their principal business in the same state or metropolitan area. (The metro area can cross state lines, such as with Kansas City.) And the rules for qualifying as an employer have also been loosened, so that sole proprietors, partners and other working owners can join.

The proposed rules include important requirements to set up an AHP: The association must have a formal organizational structure, with a governing body and bylaws. And its activities must be controlled by its members through means such as the regular election of directors. To limit “adverse selection” – rules for membership that screen out sicker employees – an AHP will not be not permitted to condition admission to membership on health status factors such as employees’ medical conditions, claims experience, receipt of medical care, medical history, genetic information, evidence of insurability or disability. On the other hand, the proposed rules will permit associations to classify members based on other factors such as full-time versus part-time status, geographic location, date of hire, length of service and occupation, among others.  

The DOL notes that AHPs will generally be considered as “multiple employer welfare arrangements” –MEWAs   MEWAs get less favorable treatment under federal law (i.e., ERISA) than plans for single employers or controlled groups. This is because historically some self-insured MEWAs took advantage of ERISA preemption of state law to avoid oversight of their finances, resulting in major losses for insureds. So in a reversal of the normal ERISA rules, self-insured MEWAs are actually subject to state insurance regulations. These regulations vary from light to very tight, depending on the state. California has even enacted a moratorium on licensure of self-insured MEWAs since 1995, and only four or five still exist there. On the other hand, fully-insured MEWAs are exempt from most state insurance laws, and do not have to be licensed or file financial reports in many states. Although the coverage they purchase is still subject to state laws.

AHPs will also be subject to ERISA rules for health plans. This means that they need to register and file annual reports with the DOL, provide disclosures such as summary plan descriptions (SPDs) to employees, and comply with plan continuation rules (COBRA) and rules on fiduciary duties. They will be subject to other important statutes that are included in ERISA as well, such as HIPAA, the mental health parity act (MHPAEA) and the ACA market reforms.

The proposed AHP rules are open for comments until March 6, and may well see changes. But if adopted in close to their current form, they present important strategic considerations for potential associations. The qualifications that an AHP sets for membership and the geographic area in which it chooses to operate will significantly impact its premiums. In many cases, coping with additional state regulation will make it disadvantageous or even impossible for an AHP to operate as a self-funded plan. In other states, self-funding may be viable.

The pending regulations are intended to make insurance more available to small employers. But small employers also need to move cautiously. Given the history of association plans, they need to make sure that the AHP is financially sound, follows the rules, and provides a better offering than other options such as directly purchasing insurance from a health plan.

To learn more about association plans, contact David Johnson at

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.