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HB Counsel Client Alert – Final Rule on Association Health Plans Changes the Market! Or Is It?


Final Rule on Association Health Plans Changes the Market! Or Is It?

On June 19, 2018, the Department of Labor (DOL) issued the Final Rule on association health plans (AHPs)—following a prior Executive Order and proposed regulations.  This alert will provide a general overview of the Final Rule, along with our analysis of some key provisions.

Key concept.  Although the Final Rule appears to lessen requirements for association groups, to establish and operate an AHP in a compliant manner, the AHP must comply with an amalgamation of laws including ERISA, the Code, ACA, and state laws. The Final Rule specifically states that it will apply solely for purposes of ERISA and the PHSA provisions that apply to the individual, small group, or large group market, and does not impact any other applicable laws.

Purpose of the Final Rule.  The DOL states that the Final Rule is designed to:

  • Expand the opportunities for employers to band together;
  • Increase competition and flexibility;
  • Allow AHPs to offer “less comprehensive benefits;”
  • Assemble large, stable risk pools; and
  • Reduce the number of uninsured.


Continue current bonafide association plans.  Prior to the Final Rule, the DOL and HHS both had multi-factor tests (including commonality of interest and requirements for the sponsoring association) for a multiple employer welfare arrangement to meet the definition of a bonafide association plan (which we will continue to refer to as bonafide association plans to contrast to the new AHPs).

A bonafide association plan would be deemed to be a single large group plan instead of an amalgamation of separate employer plans.  Large group status would allow the bonafide association plan to avoid numerous ACA requirements that apply in the small group market.

The Final Rule answers the question of whether bonafide association plans would continue to exist.  The Final Rule allows existing bonafide association plans to remain compliant, if implemented in accordance with pre-Rule guidance.  However, such plans may elect to comply with the terms of the Final Rule going forward.

Create new AHPs.  The Final Rule sets forth rules for the new AHPs.  Newly established plans may choose to comply with either existing bona fide association plan guidance, or the Final Rule.

•  Expanded access.  The Final Rule expands the outreach of AHPs beyond bonafide association plans by expanding two key requirements in the existing DOL and HHS tests:


  • Commonality of interest.  Employers may band together in an AHP if they are either in the same trade, industry, line of business, or profession; or have a principal place of business within a region that does not exceed the boundaries of a state or metropolitan area, even if the metropolitan area overlaps a state line (such as our home of Kansas City).
  • Sponsoring association. The sponsoring association for the AHP need not be a pre-existing organization, and must have at least one substantial business purpose unrelated to the purpose of providing insurance. However, the principal purpose of forming the sponsoring association may be to provide insurance.

The Final Rule provides a safe harbor for the definition of substantial business purpose.  The safe harbor covers a group or association that would be a viable entity even in the absence of sponsoring an employee benefit plan.  The Final Rule explains that the substantial business purpose need not be for-profit, and may be offering services such as conferences, class, and educational materials to its members.

Who does this help?  These two rules will open AHPs to multiple industry groups such as Chambers of Commerce, single industry associations that cover multiple states or even the entire nation, and new groups without an existing association formed specifically to provide coverage.

•  Organizational structure.  The AHP must be a separate legal entity.  The AHP must have an organizational structure, bylaws or other governing documents, and must be functionally controlled by its employer members.

A facts and circumstances test is adopted in the Final Rule for determining if the AHP is controlled by employer members participating in the group health plan.

While not exclusive, the DOL will consider the control test met where the following factors are met:

  • Employer members regularly nominate and elect directors, officers, trustees, or other similar persons that constitute the governing body or authority of the employer group or association and plan;
  • Employer members have authority to remove any such director, officer, trustees, or other similar person with or without cause; and
  • Employer members have the authority and opportunity to approve or veto decisions or activities which relate to the formation, design, amendment, and termination of the plan.
Fiduciary rule intact.  The new organizational structure rule does not vary much from current requirements.  Plans must continue to meet ERISA’s stringent organizational, operational and fiduciary rules.

•  “Working owners.”  In a significant expansion, the Final Rule provides that an AHP may offer coverage to both employees of employer members and “working owners.” The AHP may be comprised of any combination of employees and working owners.

This new category of “working owner” may include a sole proprietor or other self-employed individual, so long as such worker averages at least 20 hours of personal service per week or 80 hours per month, or has earned income from the business that at least equals the cost of coverage under the plan.

A working owner may demonstrate evidence of sufficient hours worked by work history or a reasonable projection of expected self-employment hours worked in a trade or business.  Hours worked across individual jobs or contracts may be aggregated.

•  Nondiscrimination rules.  AHPs must continue to comply with the health plan nondiscrimination rules governing eligibility for benefits and premiums for coverage under HIPAA and the ACA.  The Final Rule does not allow AHPs to rate employer members separately based on health factors, stating that such limits undermine the aim of having the AHP act in the interest of employers.

Key concept.  The Final Rule specifically answers a long debated question, by stating that bona fide association plans established in accordance with the criteria from pre-rule guidance will not be subject to the new AHP rating restriction—allowing bona fide association plans to separately rate employer groups.  Many groups that can meet the test for a bona fide association plan will choose to continue such status over an AHP due to the new rating restrictions.

•  State regulation.  States may continue to regulate health insurance carriers and the policies they offer to AHPs.  The DOL stated that it does not have the authority to exempt self insured AHPs from state regulation.  Therefore, the dual regulation continues, and states may regulate self insured AHPs with respect to matters such as reserves, contributions and other funding issues.

What will states do?  States have varying requirements for operating self insured MEWAs, which now will include both bona fide association plans and AHPs.  These state requirements include applications for a certificate of authority, financial standards, and annual reporting.  These state requirements will survive the new regulations—and some states wary of self insured MEWAs may decide to expand enforcement to offset the relaxation of federal requirements.

•  Tax implications.  The Final Rule does not relax any issues under the Code.  For example, many association plans are formed as VEBAs.  The Code requirements of single line of business and geographic locale remain unaffected by the regulations.


•  Section 4980H penalty implications.  AHPs established under the Final Rule are not required to offer Essential Health Benefits (EHBs), as is required for individual and small group non-grandfathered plans.  As noted in the preamble to the Final Rule, large employers subject to the employer shared responsibility provisions of Code §4980H face the possibility of having to make an employer shared responsibility payment if the AHP does not provide minimum value.

•  Effective dates.  The Final Rule established a trifurcated implementation timeline as follows:

  • September 1, 2018  for new fully insured arrangements;
  • January 1, 2019 for existing self-insured plan MEWAs that meet the employer definition by satisfying the DOL’s existing guidance and want to comply with the final rule; and
  • April 1, 2019 for new self insured AHPs.

Legal challenge.  The Final Rule has already been challenged.  On July 26, 2018, the states of New York, Massachusetts, California, Delaware, Kentucky, Maryland, New Jersey, Oregon, Pennsylvania, Virginia, Washington and the District of Columbia filed an action challenging the Final Rule in the United States District Court for the District of Columbia.

The States assert that the Final Rule:

  •   Conflicts with the fundamental protections for individual and small groups under the ACA;
  •   Conflicts with the ACA, ERISA, and established case law regarding working owners; unlawfully expands ERISA to allow all employers in a State or “metropolitan area” to group together into a profit-making commercial insurance enterprise;
  •   Is arbitrary and capricious in overturning 40 years of well settled law; and
  •   Exceeds DOL’s authority, because DOL’s action is not designed to implement ERISA but instead to circumvent the ACA.

The States have requested that the Court vacate and set aside the Final Rule and enjoin the DOL and all its officers, employees, and agents, and anyone acting in concert with them, from implementing, applying, or taking any action whatsoever under the Final Rule.

What might this mean for AHPs formed under the Final Rule?  If the Court grants the requested relief in this action the Final Rule could be declared unlawful, and unless the Court grants some protection, any group formed thereunder might be in violation of the ACA and ERISA.


Caution to those new to the game!  Haynes Benefits has a long history of working with successful AHPs.  The proposed regulations now open up AHPs to more organizations, but we urge all groups considering formation of an AHP to invoke the careful and cautious planning of historically successful AHPs.

Dated:  August 28, 2018