A recent ruling by the United States District Court for the District of Columbia calls into question the recently expanded regulations allowing small employers to band together to establish Association Health Plans. This development should be monitored closely by employers and employer organizations currently sponsoring, or considering sponsoring, these plans.
A group of unrelated employers wishing to establish an Association Health Plan (AHP) must satisfy a bona fide association test, as defined by regulations issued by the U.S. Department of Labor (DOL) interpreting the definition of employer under ERISA. Through advisory opinions issued to groups of employers wishing to establish an AHP, the DOL explained that satisfying the bona fide association test requires, among other things, that a commonality of interest be established among the employers. On June 21, 2018, the DOL published final regulations relaxing the long-standing factors required to establish a commonality of interest under the bona fide association test (the Final Rule). Additionally, the Final Rule expanded the scope of prior AHP guidance to allow working owners (i.e., self-employed individuals) to participate in an AHP. In doing so, the DOL made it easier for groups of small employers and sole proprietors to band together to form an AHP in order to avoid some of the more onerous requirements that apply to the small and individual group markets, including community rating.
Previously, under the more stringent AHP guidance, groups of employers generally needed to be in the same line of business and geographic area in order to satisfy the commonality of interest component of the bona fide association test. Before the Final Rule, “geography, alone, was not sufficient to establish commonality.” However, under the Final Rule, the commonality of interest component may be satisfied if the group employers are in the same line of business or the same geographic area. The Final Rule can be found here.
In July 2018, a coalition of 12 attorneys general, led by New York and Massachusetts, filed a lawsuit challenging the Final Rule. The attorneys general argued that the expansion of the commonality of interest component of the bona fide association test, and the inclusion of working owners under the Final Rule was inconsistent with the purpose of ERISA and the Congressional intent of the Affordable Care Act (“ACA”).
On March 29, 2019, Judge John D. Bates of the United States District Court for the District of Columbia (the “Court”) invalidated two major portions of the Final Rule – the modified commonality of interest component of the bona fide association test, and the working owner provision. The Court was concerned that expanding the scope of the bona fide association test to allow small employers to band together without a true “commonality of interest” so that they may offer large group health insurance was an unlawful expansion of the existing AHP regulations. Additionally, the court found it “absurd” that working owners with no common law employees could take advantage of the group health insurance market. The court was concerned that this expansion by the DOL was “clearly an end-run around the [Affordable Care Act].” The Court ruled that these provisions of the Final Rule misinterpreted the definition of Employer under ERISA to unlawfully expand the term’s meaning by ignoring “Congress’s clear intent” for the ACA to distinguish between large group, small group, and individual markets.
The Court set aside these sections of the Final Rule, remanded the Final Rule, and directed the DOL to revise the Final Rule in accordance with the Court’s ruling. Moving forward, the DOL has the option to rescind the Final Rule altogether, revise the Final Rule in accordance with the Court’s decision, or appeal the decision to the Court of Appeals for the D.C. Circuit. Judge Bates’ ruling can be found here.
Next Steps for Employers
Although a change to the Final Rule will not occur overnight, and though it is extremely likely that the DOL will appeal the decision, we believe that this is something that employers that have implemented an AHP or are considering implementing an AHP should monitor closely. AHPs created since the Final Rule should also consult with their service providers and benefits counsel to determine whether they should make any changes pending final resolution of this issue.