[Federal Register Volume 83, Number 4 (Friday, January 5, 2018)]
[Proposed Rules]
[Pages 614-636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-28103]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 83, No. 4 / Friday, January 5, 2018 / 
Proposed Rules

[[Page 614]]



DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2510

RIN 1210-AB85


Definition of ``Employer'' Under Section 3(5) of ERISA--
Association Health Plans

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Proposed rule.

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SUMMARY: This document contains a proposed regulation under Title I of 
the Employee Retirement Income Security Act (ERISA) that would broaden 
the criteria under ERISA section 3(5) for determining when employers 
may join together in an employer group or association that is treated 
as the ``employer'' sponsor of a single multiple-employer ``employee 
welfare benefit plan'' and ``group health plan'' as those terms are 
defined in Title I of ERISA. By treating the association itself as the 
employer sponsor of a single plan, the regulation would facilitate the 
adoption and administration of such arrangements. The regulation would 
modify the definition of ``employer,'' in part, by creating a more 
flexible ``commonality of interest'' test for the employer members than 
the Department of Labor (DOL or Department) had adopted in sub-
regulatory interpretive rulings under ERISA section 3(5). At the same 
time, the regulation would continue to distinguish employment-based 
plans, the focal point of Title I of ERISA, from mere commercial 
insurance programs and administrative service arrangements marketed to 
employers. For purposes of Title I of ERISA, the proposal would also 
permit working owners of an incorporated or unincorporated trade or 
business, including partners in a partnership, to elect to act as 
employers for purposes of participating in an employer group or 
association sponsoring a health plan and also to be treated as 
employees with respect to a trade, business or partnership for purposes 
of being covered by the employer group's or association's health plan. 
The goal of the rulemaking is to expand access to affordable health 
coverage, especially among small employers and self-employed 
individuals, by removing undue restrictions on the establishment and 
maintenance of association health plans under ERISA. The proposed 
regulation would affect such association health plans, health coverage 
under these health plans, groups and associations of employers 
sponsoring such plans, participants and beneficiaries with health 
coverage under these plans, health insurance issuers, and purchasers of 
health insurance not purchased through association health plans.

DATES: Comments are due on or before March 6, 2018.

ADDRESSES: You may submit written comments, identified by RIN 1210-
AB85, by one of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Office of Regulations and Interpretations, Employee 
Benefits Security Administration, Room N-5655, U.S. Department of 
Labor, 200 Constitution Avenue NW, Washington, DC 20210, Attention: 
Definition of Employer--Small Business Health Plans RIN 1210-AB85.
    Instructions: All submissions received must include the agency name 
and Regulatory Identifier Number (RIN) for this rulemaking. Persons 
submitting comments electronically are encouraged to submit only by one 
electronic method and not to submit paper copies. Comments will be 
available to the public, without charge, online at http://www.regulations.gov and http://www.dol.gov/agencies/ebsa and at the 
Public Disclosure Room, Employee Benefits Security Administration, 
Suite N-1513, 200 Constitution Avenue NW, Washington, DC 20210.
    Warning: Do not include any personally identifiable or confidential 
business information that you do not want publicly disclosed. Comments 
are public records and are posted on the internet as received, and can 
be retrieved by most internet search engines.

FOR FURTHER INFORMATION CONTACT: Elizabeth Schumacher, Office of Health 
Plan Standards and Compliance Assistance, Employee Benefits Security 
Administration, (202) 693-8335 or Janet K. Song, Office of Regulations 
and Interpretations, Employee Benefits Security Administration, (202) 
693-8500. These are not toll free numbers.

SUPPLEMENTARY INFORMATION: 

A. Overview

    Since the Affordable Care Act \1\ (or ACA) was enacted, many 
consumers have continued to face rising costs of coverage and a lack of 
quality affordable healthcare options. On October 12, 2017, President 
Trump issued Executive Order 13813, ``Promoting Healthcare Choice and 
Competition Across the United States,'' stating that ``[i]t shall be 
the policy of the executive branch, to the extent consistent with law, 
to facilitate the purchase of insurance across State lines and the 
development and operation of a healthcare system that provides high-
quality care at affordable prices for the American people.'' The 
Executive Order states that the Administration will prioritize three 
areas for improvement in the near term: association health plans 
(AHPs), short-term, limited-duration insurance, and health 
reimbursement arrangements (HRAs). With regard to AHPs, the Executive 
Order directs the Secretary of Labor, within 60 days of the date of the 
Executive Order, to consider proposing regulations or revising 
guidance, consistent with law, to expand access to health coverage by 
allowing more employers to form AHPs. The Executive Order further notes 
that ``[l]arge employers often are able to obtain better terms on 
health insurance for their employees than small employers

[[Page 615]]

because of their larger pools of insurable individuals across which 
they can spread risk and administrative costs. Expanding access to AHPs 
can help small businesses overcome this competitive disadvantage by 
allowing them to group together to self-insure or purchase large group 
health insurance. Expanding access to AHPs will also allow more small 
businesses to avoid many of the PPACA's costly requirements. Expanding 
access to AHPs would provide more affordable health insurance options 
to many Americans, including hourly wage earners, farmers, and the 
employees of small businesses and entrepreneurs that fuel economic 
growth.''
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    \1\ The Patient Protection and Affordable Care Act (Pub. L. 111-
148), enacted on March 23, 2010, and the Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152), enacted on March 30, 
2010, collectively are known as the Affordable Care Act or ACA. The 
Affordable Care Act reorganizes, amends, and adds to the provisions 
in part A of title XXVII of the Public Health Service Act (PHS Act) 
relating to group health plans and health insurance issuers in the 
group and individual markets. In addition, the Affordable Care Act 
adds section 715(a)(1) to ERISA and section 9815(a)(1) to the 
Internal Revenue Code (Code) to incorporate the provisions of part A 
of title XXVII of the PHS Act (PHS Act sections 2701 through 2728) 
into ERISA and the Code, and make them applicable to group health 
plans, and health insurance issuers providing health insurance 
coverage in connection with group health plans.
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    The Executive Order directs the Secretary, to the extent permitted 
by law and as supported by sound policy, to consider expanding the 
conditions that satisfy the commonality-of-interest requirements under 
existing DOL advisory opinions interpreting the definition of an 
``employer'' under section 3(5) of ERISA. The Executive Order also 
directs the Department to consider ways to promote AHP formation on the 
basis of common geography or industry.
    AHPs are an innovative option for expanding access to employer-
sponsored coverage (especially for small businesses). AHPs permit 
employers to band together to purchase health coverage. Supporters 
contend that AHPs can help reduce the cost of health coverage by giving 
groups of employers increased bargaining power vis-[agrave]-vis 
hospitals, doctors, and pharmacy benefit providers, and creating new 
economies of scale, administrative efficiencies, and a more efficient 
allocation of plan responsibilities (as the AHP effectively transfers 
the obligation to provide and administer benefit programs from 
participating employers, who may have little expertise in these 
matters, to the AHP sponsor).
    Under current federal law and regulations, health insurance 
coverage offered or provided through an employer trade association, 
chamber of commerce, or similar organization, to individuals and small 
employers is generally regulated under the same federal standards that 
apply to insurance coverage sold by health insurance issuers directly 
to these individuals and small employers, unless the coverage sponsored 
by the association constitutes a single ERISA-covered plan. As a 
practical matter, however, under existing sub-regulatory guidance, the 
Department treats few associations as sponsoring single ERISA-covered 
plans. Instead the associations' arrangements for health coverage are 
generally treated as a collection of plans, separately sponsored by 
each of the individual employers.
    Whether, and the extent to which, various regulatory requirements 
apply to association health coverage, like other coverage, depends on 
whether the coverage is treated as individual or group coverage and, in 
turn, whether the group coverage is small or large group coverage. 
Generally, unless the arrangement sponsored by the association 
constitutes a single ERISA-covered plan, the current regulatory 
framework disregards the association in determining whether the 
coverage obtained by any particular participating individual or 
employer is treated as individual, small group, or large group market 
coverage. Instead, the test for determining the type of coverage 
focuses on whether the coverage is offered to individuals or employers. 
And, if the coverage is offered to employers, whether the group 
coverage is large group or small group coverage depends on the number 
of people employed by the particular employer obtaining the coverage. 
Thus, unless the association plan is treated as a single ERISA-covered 
plan, the size of each individual employer participating in the 
association determines whether that employer's coverage is subject to 
the small group or large group market rules (or the individual market 
rules, if the participant is an individual and not an employer that can 
establish and maintain a group health plan), and it is possible that 
different association members will have coverage that is subject to the 
individual market, small group market, and/or large group market rules, 
as determined by each member's circumstances.
    There are circumstances, however, even under the Department's 
existing sub-regulatory guidance, when employer association health 
coverage is treated as being provided through a plan, fund, or program 
that is a single ERISA-covered employee welfare benefit plan. In 
general, this occurs when the employer association, rather than the 
individual employer member, is considered the sponsoring ``employer'' 
that establishes and maintains the plan. In such cases, the health 
coverage program is, accordingly, treated as a single multiple employer 
plan for purposes of Title I of ERISA.\2\ Since these AHPs tend to 
cover many employees, the coverage, in such cases, tends to be 
regulated as large group coverage for ACA purposes.
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    \2\ The Department's prior guidance under ERISA section 3(5) 
addressed health benefits and other benefits under section 3(1) of 
ERISA. However, these proposed rules are limited to health benefits. 
Accordingly, for simplicity, these proposed regulations often refer 
only to health benefits, including when discussing the application 
of prior Departmental guidance.
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    The current criteria that an employer association must satisfy to 
sponsor a single multiple employer plan, however, are narrow. Thus, the 
Department often has found that the association is not the sponsor of a 
multiple employer plan; instead, each employer that gets its health 
coverage through the association is considered to have established a 
separate, single-employer health benefit plan covering its own 
employees. In such cases, the association, much like an insurance 
company, is simply the mechanism by which each individual employer 
obtains benefits and administrative services for its own separate plan. 
Therefore, to the extent the separate employers are small employers, 
each of their plans are subject to regulation as small group coverage 
for ACA purposes. Similarly, in the case of sole proprietors and other 
business owners that do not employ other individuals, the coverage they 
obtain for themselves through an association is treated as individual 
coverage. As a result of this regulatory structure today, AHPs 
currently face a complex and costly compliance environment that may 
simultaneously subject the AHP to large group, small group, and 
individual market regulation, which undermines one of the core purposes 
and advantages of forming or joining an AHP. Accordingly, the 
Department is proposing to amend the definition of employer in section 
3(5) of ERISA to change this state of affairs.

B. Purpose of Regulatory Action

    Executive Order 13813 directs the Secretary to consider issuing 
regulations that will expand access to more affordable health coverage 
by permitting more employers to form AHPs, and the Secretary has been 
specifically directed to consider expanding the conditions that a group 
of employers must satisfy to act as an ``employer'' under ERISA for 
purposes of sponsoring a group health plan by reconsidering the 
``commonality-of-interest'' requirements under current Departmental 
guidance. This proposed regulation would define the term ``group or 
association of employers'' under ERISA section 3(5) more broadly, in a 
way that would allow more freedom for businesses to join together in 
organizations that could offer group health coverage regulated under 
the ACA as large group coverage.

[[Page 616]]

A principal objective of the proposed rule is to expand employer and 
employee access to more affordable, high-quality coverage. The 
Department proposes changes in its approach to the ERISA section 3(5) 
definition of employer under ERISA. The ACA has caused individual and 
small group insurance premiums to increase significantly. In part as a 
result of this increase, health insurance available in the large group 
market is now typically less expensive, all else equal, than coverage 
in the small group or individual market. In addition, treating health 
coverage sponsored by an employer association as a single group health 
plan may promote economies of scale, administrative efficiencies, and 
transfer plan maintenance responsibilities from participating employers 
to the association. The proposed definition includes conditions, 
including nondiscrimination provisions, designed to continue to draw a 
line between the sorts of employer-sponsored arrangements that are 
regulated by ERISA on the one hand, and commercial insurance-type 
arrangements that lack the requisite connection to the employment 
relationship on the other, as well as to prevent potential adverse 
impacts on the individual and small group markets.
    It is important to note that the proposed regulation would not 
preclude associations that do not meet the conditions of the proposal 
from offering health coverage in accordance with existing ACA 
requirements and applicable State insurance regulation. See, e.g., CMS 
Insurance Standards Bulletin, Application of Individual and Group 
Market Requirements Under Title XXVII of the Public Health Service Act 
when Insurance Coverage is Sold to, or through, Associations (September 
1, 2011) and Department of Labor Publication, Multiple Employer Welfare 
Arrangements Under ERISA, A Guide to Federal and State Regulation 
(available at www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/mewa-under-erisa-a-guide-to-federal-and-state-regulation.pdf). In particular, health insurance 
coverage sold to, or through, associations that do not sponsor their 
own separate ERISA-covered employee benefit plans would not need to 
alter their operations if the proposed rule becomes final. Rather than 
constricting the offering of such non-plan multiple employer welfare 
arrangements (MEWAs), the proposed rule would simply make more widely 
available another vehicle --the AHP-- for the employer associations to 
provide group health coverage to their employer-members, thus making 
available advantages distinct from non-plan MEWAs, including, often, 
access to the large group market.

C. Background

1. Section 3(5) of ERISA and the Current Standards for an Association 
To Be Treated as the ``Employer'' Sponsor of an Employee Welfare 
Benefit Plan That Is a Group Health Plan.

    The term ``employee welfare benefit plan'' is defined in section 
3(1) of ERISA to include, among other arrangements, ``any plan, fund, 
or program . . . established or maintained by an employer or by an 
employee organization, or by both, to the extent that such plan, fund, 
or program was established or is maintained for the purpose of 
providing for its participants or their beneficiaries, through the 
purchase of insurance or otherwise . . . medical, surgical, or hospital 
care or benefits, or benefits in the event of sickness, accident, 
disability, death or unemployment . . . .'' Thus, in order to be an 
employee welfare benefit plan, a plan must, among other criteria, be 
established or maintained by an employer, an employee organization, or 
both. The term ``employer'' is defined in section 3(5) of ERISA as ``. 
. . any person acting directly as an employer, or indirectly in the 
interest of an employer, in relation to an employee benefit plan; and 
includes a group or association of employers acting for an employer in 
such capacity.'' Thus, ERISA defines the term ``employer'' to include 
the ``direct'' (or common law) employer of the covered employees or 
``any other person acting indirectly in the interest of'' the common 
law employer.\3\ Although there are various ways in which groups of 
employers can participate in a single plan, for example because they 
share substantial common ownership (e.g., a controlled group of 
corporations), the Department has taken the view, on the basis of the 
definitional provisions of ERISA, as well as the overall structure of 
Title I of ERISA, that, in the absence of the involvement of an 
employee organization, a single ``multiple employer'' plan may also 
exist where a cognizable group or association of employers, acting in 
the interest of its employer members, establishes a benefit program for 
the employees of member employers and exercises control over the 
amendment process, plan termination, and other similar functions on 
behalf of these members with respect to the plan and any trust 
established under the program. DOL guidance generally refers to these 
entities as ``bona fide'' employer groups or associations. See, e.g., 
Advisory Opinions 2008-07A, 2003-17A and 2001-04A. See also Advisory 
Opinion 96-25A (if an employer adopts for its employees a program of 
benefits sponsored by an employer group or association that does not 
itself constitute an ``employer,'' such an adopting employer may have 
established a separate, single-employer benefit plan covered by Title I 
of ERISA).
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    \3\ For more information on common law employment relationships, 
see Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992).
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    In distinguishing employer groups or associations that can act as 
an ERISA section 3(5) employer in sponsoring a multiple employer plan 
from those that cannot, the touchstone has long been whether the group 
or association has a sufficiently close economic or representational 
nexus to the employers and employees that participate in the plan. This 
``commonality of interest'' requirement distinguishes bona fide groups 
or associations of employers who provide coverage to their employees 
and the families of their employees from arrangements that more closely 
resemble State-regulated private insurance offered to the market at 
large. See, e.g., Advisory Opinion 94-07A; Advisory Opinion 2001-04A. 
Courts have also held that there must be some cohesive relationship 
between the provider of benefits and the recipient of benefits under 
the plan so that the entity that maintains the plan and the individuals 
who benefit from the plan are tied by a common economic or 
representational interest. Wisconsin Educ. Assn. Ins. Trust v. Iowa 
State Bd. of Public Instruction, 804 F.2d 1059, 1064 (8th Cir. 1986). 
See also MD Physicians & Associates, Inc. v. State Bd. of Ins., 957 
F.2d 178 (5th Cir. 1992), cert. denied, 506 U.S. 861 (1992); National 
Business Assn. Trust v. Morgan, 770 F. Supp. 1169 (W.D. Ky. 1991).
    DOL advisory opinions and court decisions have applied a facts-and-
circumstances approach to determining whether there is a sufficient 
common economic or representational interest or genuine organizational 
relationship for there to be a bona fide employer group or association 
capable of sponsoring an ERISA plan on behalf of its employer members. 
This analysis has focused on three broad sets of issues, in particular: 
(1) Whether the group or association is a bona fide organization with 
business/organizational purposes and functions unrelated to the 
provision of benefits; (2) whether the employers share some

[[Page 617]]

commonality and genuine organizational relationship unrelated to the 
provision of benefits; and (3) whether the employers that participate 
in a benefit program, either directly or indirectly, exercise control 
over the program, both in form and substance. The first two issues have 
tended to merge, depending on the facts of a particular case. When an 
entity meets each of these requirements, the Department has concluded 
that it is appropriate to treat the entity as an ``employer'' within 
the meaning of section 3(5) of ERISA, rather than merely as a 
commercial insurance-type arrangement that lacks the requisite 
connection to the employment relationship.
    This approach has ensured that the Department's regulation of 
employee benefit plans is focused on employment-based arrangements, as 
contemplated by ERISA's text, but neither the Department's previous 
advisory opinions, nor relevant court cases, have ever held that the 
Department is foreclosed from adopting a more flexible test in a 
regulation, or from departing from the three particular factors set 
forth above in determining whether a group or association can be 
treated as acting as an ``employer'' or ``indirectly in the interest of 
an employer,'' for purposes of the statutory definition. These 
definitional terms are ambiguous as applied to a group or association 
in the context of ERISA section 3(5), and the statute does not 
specifically refer to or impose the particular historical elements of 
the ``commonality'' test on the determination of whether a group or 
association acts as the ``employer'' sponsor of an ERISA-covered plan 
within the scope of ERISA section 3(5). Accordingly, that determination 
may be more broadly guided by ERISA's purposes and appropriate policy 
considerations, including the need to expand access to healthcare and 
to respond to statutory changes and changing market dynamics.

2. Federal and State Regulation of Multiple Employer Welfare 
Arrangements

    For many years, promoters of health coverage arrangements and 
others have established and operated MEWAs, also described as 
``multiple employer trusts'' or ``METs,'' as vehicles for marketing 
health and welfare benefits to employers for their employees.\4\ Some 
MEWAs have provided quality health coverage to their members' employees 
with less administrative overhead. But others have failed to pay 
promised health benefits to sick and injured workers while diverting, 
to the pockets of fraudsters, employer and employee contributions from 
their intended purpose of funding benefits.
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    \4\ The term MEWA or ``multiple employer welfare arrangement'' 
is defined in ERISA section 3(40). The term includes an employee 
welfare benefit plan, or any other arrangement (other than an 
employee welfare benefit plan) which is established or maintained 
for the purpose of offering or providing any ERISA welfare benefit 
to the employees of two or more employers (including one or more 
self-employed individuals), or to their beneficiaries. Section 3(40) 
expressly excludes from the MEWA definition any such plan or 
arrangement that is established or maintained under or pursuant to 
one or more agreements which the Secretary finds to be collective 
bargaining agreements, by a rural electric cooperative, or by a 
rural telephone cooperative association. The definition of MEWA thus 
includes both ERISA-covered employee welfare benefit plans and other 
arrangements which offer or provide medical, surgical, hospital care 
or benefits, or benefits in the event of sickness, accident, 
disability, or any other benefit described in ERISA Section 3(1). 
AHPs as described in this proposal are one type of MEWA.
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    Congress has enacted reforms to curb MEWA abuse. Prior to 1983, a 
number of States attempted to subject MEWAs to State insurance law 
requirements but were frustrated in their regulatory and enforcement 
efforts by MEWA-promoter claims of ERISA-plan status and federal 
preemption. Recognizing that it was both appropriate and necessary for 
States to be able to establish, apply, and enforce State insurance laws 
with respect to MEWAs, Congress amended ERISA in 1983 to provide an 
exception to ERISA's broad preemption provisions for the regulation of 
MEWAs under State insurance laws. In general, under the 1983 
amendments, if a MEWA that is also an employee welfare benefit plan (an 
uncommon situation under prior guidance, as explained elsewhere) is not 
fully insured, then under section 514(b)(6)(A)(ii) of ERISA, any State 
law that regulates insurance may apply to the MEWA to the extent that 
such State law is not inconsistent with ERISA. For example, a State law 
could regulate solvency, benefit levels, or rating. Similarly, States 
could require registration and claims data reporting of MEWA operators. 
If, on the other hand, a MEWA is also an employee welfare benefit plan 
and is fully insured, ERISA section 514(b)(6)(A)(i) of ERISA provides 
that State laws that regulate the maintenance of specified contribution 
and reserve levels (and that enforce those standards) may apply to the 
MEWA, but other State non-insurance laws are preempted. ERISA section 
514(b)(6)(D) provides, in turn, that a MEWA will be considered fully 
insured for purposes of section 514(b)(6) only if all of the benefits 
offered or provided under the MEWA are guaranteed under a contract or 
policy of insurance issued by an insurance company that is ``qualified 
to conduct business in a State.'' With respect to other non-insurance 
State laws, AHPs under the proposal would be subject to the same 
general ERISA preemption standards that apply to other ERISA-covered 
employee benefit plans.
    The Affordable Care Act established a multipronged approach to MEWA 
abuses. Improvements in reporting requirements, together with stronger 
enforcement tools, are designed to reduce MEWA fraud and abuse. These 
include expanded reporting and required registration for MEWAs with the 
Department prior to operating in a State. The additional information 
facilitates joint State and Federal efforts to prevent harm and take 
enforcement action. The Affordable Care Act also strengthened 
enforcement by giving the Secretary of Labor authority to issue a cease 
and desist order when a MEWA engages in fraudulent or other abusive 
conduct and issue a summary seizure order when a MEWA is in a 
financially hazardous condition.\5\
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    \5\ Section 6605 of the Affordable Care Act added section 521 to 
ERISA to give the Secretary of Labor additional enforcement 
authority to protect plan participants, beneficiaries, employees or 
employee organizations, or other members of the public against 
fraudulent, abusive, or financially hazardous MEWAs. ERISA section 
521(a) authorizes the Secretary of Labor to issue an ex parte cease 
and desist order if it appears to the Secretary that the alleged 
conduct of a MEWA under section 3(40) of ERISA is fraudulent, or 
creates an immediate danger to the public safety or welfare, or is 
causing or can be reasonably expected to cause significant, 
imminent, and irreparable public injury. Section 521(e) of ERISA 
authorizes the Secretary to issue a summary seizure order if it 
appears that a MEWA is in a financially hazardous condition.
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3. Impact of ERISA Definition of Employer on Health Insurance Markets

    Federal and State healthcare laws, including the Affordable Care 
Act, include a variety of requirements that sometimes differ based on 
whether health coverage is insured or self-insured, and if the coverage 
is insured, whether it is offered in the individual, small group, or 
large group health insurance market. Whether coverage is offered in the 
individual or group health insurance market is determined by reference 
to ERISA. Specifically, ``individual market coverage'' is health 
insurance coverage that is offered other than in connection with a 
group health plan. PHS Act section 2791(e)(1)(A). See also 26 CFR 
54.9801-2; 29 CFR 2590.701-2; 45 CFR 144.103. A ``group health plan'' 
is generally defined as an employee welfare benefit plan under ERISA 
section 3(1), to the extent the plan provides medical care. ERISA

[[Page 618]]

section 733(a); PHS Act section 2791. See also 26 CFR 54.9831-1(a); 29 
CFR 2590.732(a); 45 CFR 146.145(a). ``Group health insurance coverage'' 
means, in connection with a group health plan, health insurance 
coverage offered in connection with such plan. ERISA section 733(b)(4); 
PHS Act section 2791(b)(4). See also 26 CFR 54.9801-2; 29 CFR 2590.701-
2; 45 CFR 144.103.
    The group health insurance market is divided into the small group 
market and the large group market, depending on the number of employees 
employed by the employer. PHS Act section 2791(e)(2)-(7). See also 45 
CFR 144.103. Generally, group health insurance offered by an employer 
with at least one and not more than 50 employees is in the small group 
market, while group health insurance offered by an employer with at 
least 51 employees is in the large group market. Id.\6\
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    \6\ Under the ACA, the upper bound for the definition of a small 
employer for purposes of title XXVII of the PHS Act was to change 
from 50 (as originally enacted) to 100 employees as of 2016. 
However, the Protecting Affordable Coverage for Employees Act (PACE 
Act, Pub. L. 114-60) amended the definition so that the upper bound 
would remain at 50. The PACE Act also permits States to elect an 
upper bound of 100 employees. CMS guidance indicates that States may 
elect to extend this upper bound to 100 employees by any means that 
is legally binding under State law, provided the definition applies 
to all insurers. States that elect to extend the upper bound were 
requested to notify CMS. See https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQ-on-the-Impact-of-the-PACE-Act-on-State-Small-Group-Expansion.pdf. CMS has informed DOL that, to date, 
no States have elected to change the upper bound to 100.
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    With respect to insured coverage, whether coverage is offered in 
the individual, small group, or large group market affects compliance 
obligations under the Affordable Care Act and other State and Federal 
insurance laws. For example, only individual and small group market 
health insurance coverage is subject to the requirement to cover 
essential health benefits as defined under section 1302 of the 
Affordable Care Act.\7\ Moreover, the risk adjustment program, which 
transfers funds from plans with lower-risk enrollees to plans with 
higher-risk enrollees, applies only to health insurance issuers 
offering coverage in the individual and small group markets, not the 
large group market.\8\ The single risk pool requirement, which requires 
each health insurance issuer to consider the claims experience of all 
individuals enrolled in plans offered by the issuer in the individual 
market to be in a single risk pool, and all its individuals in the 
small group market to be members of a single risk pool, also applies 
only in the individual and small group markets, not the large group 
market.\9\ In addition, the health insurance premium rules that 
prohibit issuers from varying premiums except with respect to location, 
age (within certain limits), family size, and tobacco-use (within 
certain limits) apply only in the individual and small group 
markets.\10\ Finally, the Medical Loss Ratio (MLR) provisions, which 
limit the portion of premium dollars health insurance issuers may spend 
on administration, marketing, and profits establish different 
thresholds for the small group market and the large group market.\11\ 
Self-insured group health plans are exempt from each of these 
obligations regardless of the size of the employer that establishes or 
maintains the plan. These differences in obligations result in a 
complex and costly compliance environment for coverages provided 
through associations, particularly if the coverages are simultaneously 
subject to individual, small group, and large group market regulation.
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    \7\ See PHS Act section 2707, as added by the Affordable Care 
Act.
    \8\ See section 1343 of the Affordable Care Act.
    \9\ See section 1312(c) of the Affordable Care Act. States may 
require issuers to merge their individual and small group risk 
pools.
    \10\ See PHS Act section 2701, as added by the Affordable Care 
Act.
    \11\ The MLR provision of the Affordable Care Act requires most 
health insurance issuers that cover individuals or small employers 
to spend at least 80% of their premium dollars on healthcare claims 
and quality improvement, leaving the remaining 20% for overhead 
expenses, such as administrative costs, marketing, and profit. The 
MLR threshold is higher for large group plans, which must spend at 
least 85% of premium dollars on healthcare claims and quality 
improvement. 45 CFR part 158.
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    Guidance issued by the HHS Centers for Medicare & Medicaid Services 
(CMS) in 2011 (CMS 2011 guidance) clarifies that the test for 
determining whether association coverage is individual, small group, or 
large group market coverage for purposes of Title XXVII of the PHS Act 
is the same test as that applied to health insurance offered directly 
to individuals or employers.\12\ Association coverage does not exist as 
a distinct meaningful category of health insurance coverage under Title 
XXVII of the PHS Act.\13\ Instead, when applying the individual and 
group market requirements of the PHS Act to insurance coverage offered 
or provided through associations, CMS will ignore the association and 
look directly to each association member to determine the status of 
each member's coverage. As a result, association coverage may be 
treated as comprised of individual market coverage, small group market 
coverage, large group market coverage, and mixed associations of more 
than one coverage type.
---------------------------------------------------------------------------

    \12\ See CMS Insurance Standards Bulletin Series--(September 1, 
2011) available at: https://www.cms.gov/CCIIO/Resources/Files/Downloads/association_coverage_9_1_2011.pdf. See also CMS Insurance 
Standards Bulletin Transmittal No. 02-02 (August 2002) available at: 
https://www.cms.gov/CCIIO/Resources/Files/Downloads/dwnlds/hipaa_02_02_508.pdf.
    \13\ Title XXVII of the PHS Act does recognize coverage offered 
through ``bona fide associations,'' but only for purposes of 
providing limited exceptions from its guaranteed issue (in limited 
cases) and guaranteed renewability requirements. PHS Act secs. 
2741(e)(1); 2742(b)(5) and (e); 2703(b)(6), as added by the ACA; and 
2791(d)(3). Bona fide groups or associations of employers under the 
definition proposed in this rulemaking would not necessarily qualify 
as ``bona fide associations'' under the PHS Act definition for 
purposes of these PHS Act provisions.
---------------------------------------------------------------------------

    The CMS 2011 guidance further states that, ``in most situations 
involving employment-based association coverage, the group health plan 
exists at the individual employer level and not at the association-of-
employers level. In these situations, the size of each individual 
employer participating in the association determines whether that 
employer's coverage is subject to the small group market or the large 
group market rules. In the rare instances where the association of 
employers is, in fact, sponsoring the group health plan and the 
association itself is deemed the `employer,' the association coverage 
is considered a single group health plan. In that case, the number of 
employees employed by all of the employers participating in the 
association determines whether the coverage is subject to the small 
group market or the large group market rules.''
    Since the enactment of the Affordable Care Act, DOL and HHS have 
heard a number of concerns from stakeholders--especially working owners 
of businesses that do not employ other individuals, and independent 
contractors--regarding challenges that small businesses face in 
securing affordable health coverage options.
    Some stakeholders have suggested to the Department that allowing 
businesses, especially small businesses, more flexibility to form AHPs 
would facilitate more choice and potentially make health coverage more 
affordable. These stakeholders opined that the AHP structure would give 
them increased negotiating power to bargain for lower premiums for 
their employees, as well as the ability to purchase coverage that would 
be less expensive because it would not be subject to some of the 
regulatory requirements applicable to the small group market but not 
the large group market. Proponents also contend that AHPs can help 
reduce the cost of health coverage because of increased bargaining 
power, economies of scale,

[[Page 619]]

administrative efficiencies, and transfer of plan maintenance 
responsibilities from participating employers to the AHP sponsor. AHPs 
may also help contain costs by creating a stable risk pool that may 
enable AHPs to self-insure rather than purchase insurance from 
commercial insurers.
    Legislative proposals designed to foster the formation of AHPs have 
repeatedly been introduced in Congress.\14\ These legislative efforts 
generally would make it easier for employers to form AHPs and set a 
uniform federal framework for regulation. In the absence of 
legislation, however, Executive Order 13813 directs the Department to 
consider proposing regulations or revising guidance, consistent with 
law, to expand access to health coverage by allowing more employers to 
form AHPs by expanding the conditions that satisfy the commonality-of-
interest requirements under existing Department advisory opinions 
interpreting the definition of an ``employer'' under section 3(5) of 
ERISA in the context of AHPs in a manner that would focus on the 
association rather than the individual members of the association when 
evaluating association coverage.
---------------------------------------------------------------------------

    \14\ See, e.g., Small Business Health Fairness Act of 2017, H.R. 
1101, 115th Cong. sec. 1 (2017); see also, the Better Care 
Reconciliation Act of 2017, discussion draft of an amendment in the 
form of a substitute to the American Healthcare Act, H.R. 1628, 
115th Cong. sec. 1 (2017) (available at www.budget.senate.gov/imo/media/doc/ERN17500.pdf.).
---------------------------------------------------------------------------

    Upon due consideration as directed by the Executive Order, the 
Department is proposing for public comment a revision to its long-
standing interpretation of what constitutes an ``employer'' capable of 
sponsoring an ``employee benefit plan'' under ERISA in the context of 
group health coverage. Under the proposal, AHPs that meet the 
regulation's conditions would have a ready means of offering their 
employer-members, and their employer members' employees, a single group 
health plan subject to the same State and Federal regulatory structure 
as other ERISA-covered employee welfare benefit plans. This proposed 
rule has been developed in consultation with HHS, CMS, the Department 
of the Treasury, and the Internal Revenue Service, with which the 
Department is working to implement the Affordable Care Act, Executive 
Order 13813, and Executive Order 13765.\15\ However, these proposed 
rules would apply solely for purposes of Title I of ERISA and for 
determining whether health insurance coverage is regulated by PHS Act 
provisions that apply in the individual, small group, or large group 
market, and not, for example, for purposes of taxation under the Code.
---------------------------------------------------------------------------

    \15\ The Departments of Labor, HHS, and the Treasury operate 
under a Memorandum of Understanding that implements section 104 of 
the Health Insurance Portability and Accountability Act of 1996 
(HIPAA) and subsequent amendments, including certain sections of the 
Affordable Care Act, and provides for coordination and consultation. 
See 64 FR 70164 (December 15, 1999).
---------------------------------------------------------------------------

4. Overview of Proposed Regulation

    The Department believes providing additional opportunities for 
employer groups or associations to offer health coverage to their 
members' employees under a single plan may, under the conditions 
proposed here, offer many small businesses more affordable alternatives 
than are currently available to them in the individual or small group 
markets. Consequently, the proposed rule may prompt some working owners 
who were previously uninsured and some small businesses that did not 
previously offer insurance to their employees, to enroll in AHPs, and 
similarly prompt some small businesses with insured health plans to 
switch from their existing individual or small group policies to AHPs. 
In addition, the option for small employers to join AHPs could offer 
better financial protection to employers (and their employees) than if 
they self-insured and purchased stop-loss insurance \16\ that may not 
adequately protect them from financial risk. Under the proposed rule, 
AHPs that buy insurance \17\ would not be subject to the insurance 
``look-through'' doctrine as set forth in the CMS 2011 guidance; 
instead, because an AHP under the proposed rule would constitute a 
single plan, whether the plan would be buying insurance as a large or 
small group plan would be determined by reference to the number of 
employees in the entire AHP.
---------------------------------------------------------------------------

    \16\ Stop-loss insurance (sometimes also known as excess 
insurance) is generally an insurance product that provides 
protection for self-insured employers or plans by serving as a 
reimbursement mechanism for catastrophic claims exceeding pre-
determined levels. See https://www.siia.org/i4a/pages/index.cfm?pageID=4549.
    \17\ The CMS 2011 guidance ``Application of Individual and Group 
Market Requirements under Title XXVII of the Public Health Service 
Act when Insurance Coverage Is Sold to, or Through, Associations'' 
apples only to insured arrangements, and not to self-insured 
arrangements.
---------------------------------------------------------------------------

    The proposed regulation would redefine the criteria in the 
Department's existing sub-regulatory guidance for a bona fide group or 
association of employers capable of establishing a multiple employer 
group health plan that is an employee welfare benefit plan and a group 
health plan as those terms are defined in ERISA. The Department notes 
that this preamble and the proposed rule do not address the application 
of the ERISA section 3(5) statutory phrase, ``acting. . .indirectly in 
the interest'' or ``group or association of employers,'', in any 
context other than as applied to an employer group or association 
sponsoring an AHP.
a. Employers Could Band Together for the Single Purpose of Obtaining 
Health Coverage
    The proposed regulation would remove existing restrictions in the 
Department's sub-regulatory guidance on ERISA section 3(5) to allow 
employers to more easily join together in organizations that offer 
group health coverage to member employers and their employees under one 
group health plan. Specifically, the regulation would allow employers 
to band together for the express purpose of offering health coverage if 
they either are: (1) in the same trade, industry, line of business, or 
profession; or (2) have a principal place of business within a region 
that does not exceed the boundaries of the same State or the same 
metropolitan area (even if the metropolitan area includes more than one 
State). As discussed elsewhere in this document, the restrictions in 
the Department's existing advisory opinions were intended to help 
distinguish healthcare arrangements sponsored by an entity acting as an 
``employer'' within the meaning of section 3(5) of ERISA from 
commercial-insurance-type arrangements that lack the requisite 
connection to the employment relationship. The Department has concluded 
that other conditions in this proposal can adequately serve that 
purpose while removing the condition that the employer association must 
have a purpose other than offering health coverage as a potential undue 
restriction on the establishment and maintenance of AHPs under ERISA. 
The proposal also would allow associations to rely on other 
characteristics upon which they previously relied to satisfy the 
commonality provision of paragraph (c) of the proposed rules, because 
the Department's existing sub-regulatory guidance applies the 
commonality requirement as a facts and circumstances test, and the 
Department intends that any employer group or association that meets 
the commonality requirement in the Department's existing sub-regulatory 
requirement should also be treated as meeting the commonality 
requirement in the proposed regulation. The Department seeks comment on 
whether the final rule, if adopted, should also recognize other bases 
for finding a commonality of interest.

[[Page 620]]

    The latter part of the second prong of this proposal's definition 
relating to States and metropolitan areas will allow an AHP to satisfy 
the commonality requirement if its members have a principal place of 
business within a region that does not exceed the boundaries of the 
same State or metropolitan area (even if the metropolitan area includes 
more than one State).
    Examples of such metropolitan areas include the Greater New York 
City Area/Tri-State Region covering portions of New York, New Jersey 
and Connecticut; the Washington Metropolitan Area of the District of 
Columbia and portions of Maryland and Virginia; and the Kansas City 
Metropolitan Area covering portions of Missouri and Kansas. AHPs could 
also satisfy the commonality requirement by limiting themselves to a 
smaller geographic region, such as a city or county. The Department 
invites comments specifically on whether more clarification would be 
helpful regarding the definition of a metropolitan area. For example, 
the Department is interested in whether a federal designation by the 
U.S. Census or the Office of Management and Budget (OMB), which 
delineates metropolitan and micropolitan statistical areas according to 
published standards (see www.census.gov/programs-surveys/metro-micro.html), or another definition, should be used and, if so, how, for 
purposes of establishing eligibility for continued or new employer 
membership (e.g., at the beginning of each plan year). The Department 
is also interested, for example, in comments on whether there is any 
reason for concern that associations could manipulate geographic 
classifications to avoid offering coverage to employers expected to 
incur more costly health claims. The Department also seeks comments on 
whether there are other examples that would be helpful to clarify the 
provision and also on whether there should be a special process 
established to obtain a determination from the Department that all an 
association's members have a principal place of business in a 
metropolitan area.
    By expressly allowing the group or association to exist for the 
purpose, in whole or in part, of offering or providing health coverage 
to its members, the regulation would depart from previous sub-
regulatory guidance providing that the group or association must exist 
for a bona fide purpose other than offering health coverage to be an 
employer for purposes of section 3(5) of ERISA. The proposal also would 
not include any requirement that the group or association be a pre-
existing organization. Rather, employers could band together in new 
organizations whose sole purpose is to provide group health coverage to 
member employers and their employees. And by allowing formation of such 
an organization based on either common industry or geography, the 
Department expects that the regulation could greatly increase 
association coverage options available to American workers.
    One of the primary aims of this proposal is to give small employers 
(as well as sole proprietors and other working-owners) the opportunity 
to join together to provide more affordable healthcare to their 
employees; however, the proposed regulation would not restrict the size 
of the employers that are able to participate in a bona fide group or 
association of employers. The Department expects minimal interest among 
large employers in establishing or joining an AHP as envisioned in this 
proposal because large employers already enjoy many of the large group 
market advantages that this proposal would afford small employers. 
However, the Department anticipates that there may be some large 
employers that may see cost savings and/or administrative efficiencies 
in using an AHP as the vehicle for providing health coverage to their 
employees.

b. The Group or Association Must Have an Organizational Structure and 
Be Functionally Controlled by Its Employer Members

    Paragraph (b) of the proposed regulation defines certain criteria 
for a bona fide group or association of employers to be capable of 
establishing a group health plan under ERISA. The proposal would 
require that the group or association have a formal organizational 
structure with a governing body and have by-laws or other similar 
indications of formality appropriate for the legal form in which the 
group or association operates, and that the group or association's 
member employers control its functions and activities, including the 
establishment and maintenance of the group health plan, either directly 
or through the regular election of directors, officers, or other 
similar representatives. These requirements largely duplicate 
conditions in the Department's existing sub-regulatory guidance under 
ERISA section 3(5), and ensure that the organizations are genuine 
organizations with the organizational structure necessary to act ``in 
the interest'' of participating employers with respect to employee 
benefit plans as the statute requires. The proposed regulation would 
also retain the requirement in the Department's existing sub-regulatory 
guidance under section 3(5) of ERISA that an AHP's employer-members 
control the AHP. This requirement is necessary to satisfy the statutory 
requirement in ERISA section 3(5) that the group or association must 
act ``in the interest of'' the direct employers in relation to the 
employee benefit plan, and to prevent formation of commercial 
enterprises that claim to be AHPs but, in reality, merely operate 
similar to traditional insurers selling insurance in the group market. 
In the latter circumstance, the association lacks the requisite 
connection to the employment relationship, inasmuch as it neither acts 
directly as an employer, nor ``in the interest'' of employers, within 
the meaning of section 3(5) of ERISA. The Department intends that any 
employer group or association that meets the control requirement in the 
Department's existing sub-regulatory requirement should also be treated 
as meeting the control requirement in the proposed regulation.

c. Group or Association Plan Coverage Must Be Limited to Employees of 
Employer Members and Treatment of Working Owners

    In addition, paragraph (b)(6) of the proposed regulations would 
require that only employees and former employees of employer members 
(and family/beneficiaries of those employees and former employees) may 
participate in a group health plan sponsored by the association and 
that the group or association does not make health coverage offered 
through the association available to anybody other than to employees 
and former employees of employer members and their families or other 
beneficiaries. Together, these criteria are intended to ensure that, 
for purposes of Title I of ERISA, the groups or associations sponsoring 
the covered AHPs are bona fide employment-based associations, as 
clarified by this proposal, and not more general membership 
organizations essentially operating as unlicensed health insurance 
providers selling commercial group health coverage to individuals and 
employers without the type of connection to the employment relationship 
envisioned by ERISA's section 3(1) definition of employee welfare 
benefit plan. See, e.g., Wisconsin Educ. Assn. Ins. Trust v. Iowa State 
Bd. of Public Instruction, 804 F.2d 1059, 1064 (8th Cir. 1986) (``The 
only relationship between the sponsoring labor union and these non-
member recipients stems from the benefit plan

[[Page 621]]

itself. Such a relationship is similar to the relationship between a 
private insurance company, which is subject to myriad State insurance 
regulations, and the beneficiaries of a group insurance plan.''). 
Accord Mandala v. California Law Enforcement Ass'n, 561 F. Supp.2d 
1130, 1135 (C.D. Cal. 2008)).
    The text of ERISA relevant here specifies that only employees and 
former employees of the member employers, and their families or other 
beneficiaries, may receive coverage through an AHP as an ERISA-covered 
benefit plan. ERISA is an acronym for the ``Employee Retirement Income 
Security Act of 1974.'' Consistent with the Act's title and 
understandings about the workplace, the touchstone of ERISA is the 
provision of benefits through the employment relationship. That 
understanding appears in the definition of ``employee welfare benefit 
plan,'' which defines which benefit arrangements are subject to ERISA. 
An ``employee welfare benefit plan'' is defined as ``any plan, fund, or 
program . . . established or maintained by an employer or by an 
employee organization, or by both, to the extent that such plan, fund, 
or program was established or is maintained for the purpose of 
providing for its participants or their beneficiaries [benefits such as 
health insurance].'' ERISA section 3(1). The term ``participant'' is in 
turn defined as ``any employee or former employee of an employer . . . 
who is or may become eligible to receive a benefit . . . from an 
employee benefit plan which covers employees of such employer.'' Id. 
section 3(7) (emphasis added). In other words, a participant is an 
employee of an employer who may receive benefits from that employer's 
own benefits plan. Individuals who are not ``participants'' within the 
meaning of ERISA section 3(7), e.g., individuals who are not employees 
or former employees of employers sponsoring a particular plan, are 
ineligible to be covered (or have their families or other beneficiaries 
covered) by an ERISA plan. See, e.g., Wisconsin Educ. Assn. Ins. Trust, 
804 F.2d at 1064.
    Significantly, in paragraph (e) of the regulation, the proposal 
would expressly provide that working owners, such as sole proprietors 
and other self-employed individuals, may elect to act as employers for 
purposes of participating in an employer group or association and also 
be treated as employees of their businesses for purposes of being 
covered by the group or association's health plan. This approach is 
consistent with advisory opinions in which the Department has concluded 
that working owners may be ``participants'' in ERISA plans. For 
example, Advisory Opinion 99-04A reviews various provisions of ERISA 
and the Code that specifically address working owner issues in ERISA 
plans, and concludes that, taken as a whole, they ``reveal a clear 
Congressional design to include 'working owners' within the definition 
of 'participant' for purposes of Title I of ERISA.'' \18\
---------------------------------------------------------------------------

    \18\ The Advisory Opinion cites Code section 401(c), which for 
purposes of certain provisions relating to qualified retirement 
plans, and also for certain other Code provisions related to 
employee benefits that cross-reference section 401(c), generally 
treats a sole proprietor as both an employer and an employee and 
treats partners (including owners of entities taxed as partnerships, 
such as limited liability companies) as employees of the 
partnership.
---------------------------------------------------------------------------

    This proposed rule would also serve to confirm that the 
Department's regulation at 29 CFR 2510.3-3 does not limit the ability 
of working owners to participate in AHPs alongside other employer 
members. Section 2510.3-3(b) excludes ``plans without employees'' from 
the definition of employee benefit plans covered by Title I of ERISA, 
thereby ensuring that a health insurance arrangement that covers, for 
example, only the working owner and his or her spouse, is not generally 
subject to ERISA's reporting and disclosure, fiduciary, and enforcement 
provisions. Thus, Section (c) of 29 CFR 2510.3-3 is titled 
``Employees'' and states: ``For purposes of this section [i.e., for 
purposes of the regulation defining a covered plan]: (1) An individual 
and his or her spouse shall not be deemed to be employees with respect 
to a trade or business, whether incorporated or unincorporated, which 
is wholly owned by the individual or by the individual and his or her 
spouse, and (2) A partner in a partnership and his or her spouse shall 
not be deemed to be employees with respect to the partnership.'' 
Accordingly, if the sole participants in a benefit arrangement are the 
individual owner of a business and his or her spouse or partners in the 
same partnership and their spouses, the regulation treats the 
arrangement as a plan without employees and excludes it from the 
definition of ERISA-covered plans.
    However, that same regulation expressly limits this language to 29 
CFR 2510.3-3, and sole owners or partners are not excluded from being 
participants in a plan that also covers one or more common law 
employees in addition to the sole owner or partners of the same 
partnership and their spouses. Rather, plans covering working owners 
and their non-owner employees clearly fall within ERISA's scope. Thus, 
the U.S. Supreme Court in Yates v. Hendon, 541 U.S. 1 (2004), concluded 
in a case involving section 2510.3-3, that ``[u]nder ERISA, a working 
owner may have dual status, i.e., he can be an employee entitled to 
participate in a plan and, at the same time, the employer (or owner or 
member of the employer) who established the plan.'' The definition of 
``plans without employees'' in 29 CFR 2510.3-3(b) simply defines a 
limited circumstance in which the only parties participating in the 
benefit arrangement are an individual owner/partner and spouse, and 
declines to deem the individuals, in that limited circumstance, as 
employees of the trade or business for purposes of the regulation. In 
that narrow circumstance, the regulation concludes that ERISA's 
reporting and disclosure, fiduciary, and enforcement provisions are 
unnecessary.
    The regulatory definition does not apply, however, outside that 
limited context and, accordingly, does not prevent sole proprietors or 
other working owners from being participants in broader plan 
arrangements, such as the AHPs that are the subject of this proposal. 
As proposed here, AHPs are a far cry from such individual arrangements 
``administered'' by a single individual on behalf of himself or herself 
and a spouse. Instead, the association and the AHP are responsible for 
the provision of employment-based benefits payable to numerous workers 
employed by multiple employers. Many or most of the affected employers 
and employees will not be directly involved in the administration of 
benefits, and all of the employers and employees should benefit from 
prudence and loyalty requirements for those running the AHP, as well as 
such other protections as reporting and disclosure obligations and 
claims procedure requirements, and enforcement, in the same manner and 
to the same extent as participants in other ERISA plan arrangements.
    Accordingly, this proposal would extend by regulation the 
availability of the dual status of working owners to AHPs as a type of 
multiple employer plan, and make it clear that 29 CFR 2510.3-3 does not 
broadly preclude working owners of trades or businesses and other self-
employed individuals without common law employees from joining a group 
health plan sponsored by an employer group or association. The 
Department set forth above its view regarding the permissible 
interpretation of the 29 CFR 2510.3-3 regulation as it relates to 
working owners participating in AHPs. Notwithstanding those views, to 
the extent the regulation could result in working owners not being able 
to participate as employees even in some

[[Page 622]]

circumstances, the Department believes the policies and objectives 
underlying this proposal support an amendment of the 29 CFR 2510.3-3 
regulation so that it clearly does not interfere with working owners 
participating in AHPs as envisioned in this proposal. Accordingly, and 
to eliminate any potential ambiguity regarding the interaction of this 
proposal with the regulation at 29 CFR 2510-3-3, this proposal also 
includes a technical amendment of paragraph (c) of 2510.3-3 to include 
an express cross-reference to the working owner provision in this 
proposal.
    Specifically, the proposed regulation includes a provision that 
expressly states that a working owner of a trade or business without 
common law employees, regardless of the legal form in which the 
business is operated (e.g., sole proprietors or other working owners of 
businesses, whether incorporated or unincorporated), may elect to act 
as an employer for purposes of participating in an employer group or 
association and be treated as an employee of the trade or business for 
purposes of being covered by the employer group's or association's 
health plan, if the individual is earning income from the trade or 
business for providing personal services to the trade or business; and 
either provides on average at least 30 hours of personal services to 
the trade or business per week or 120 hours of such service per month, 
or has earned income derived from such trade or business that at least 
equals the cost of coverage under the group or association's health 
plan. In addition, the individual must not be eligible for other 
subsidized group health plan coverage under a group health plan 
sponsored by any other employer of the individual or by a spouse's 
employer.\19\ The proposal also includes an express provision that 
would allow the group or association sponsoring the AHP to rely, absent 
knowledge to the contrary, on written representations from the 
individual seeking to participate as a working owner as a basis for 
concluding that these conditions are satisfied. Comments are invited on 
this provision, including whether an individual must not be eligible 
for other subsidized group health plan coverage under another employer 
or a spouse's employer.
---------------------------------------------------------------------------

    \19\ The earned income standard and other group health plan 
eligibility provision are informed by Federal tax standards, 
including section 162(l) of the Code that describe conditions for 
self-employed individuals to deduct the cost of health insurance. 
However, federal tax treatment, including tax administration of Code 
section 162(l) and any potential IRS reporting requirements, of 
working owners is not affected by the proposed regulation's 
characterization of a working owner as an employer for purposes of 
participating in a sponsoring employer group or association and an 
employee for purposes of being covered by the group health plan.
---------------------------------------------------------------------------

    The Department included the proposed working owner criteria to 
ensure that a legitimate trade or business exists. ERISA governs 
benefits provided in the context of an employment relationship. The 
Department is concerned, therefore, that without such criteria, the 
regulation could effectively eliminate the statutory distinction 
between offering and maintaining employment-based ERISA-covered plans, 
on the one hand, and the mere marketing of insurance to individuals 
outside the employment context, on the other. Thus, for example, an 
association would fall outside the purview of this rule if it offered 
coverage to persons who are not genuinely engaged in a trade or 
business (e.g., a vendor marketing AHP coverage could not make 
eligibility turn on such de minimis ``commercial activities'' as giving 
a ``customer'' a single on-demand ride for a fee, or knitting a single 
scarf to be offered for sale on the internet, with no requirement that 
the individual ever engage in the supposed ``trade or business'' ever 
again). The rule is intended to cover genuine employment-based 
relationships, not to provide cover for the marketing of individual 
insurance masquerading as employment-based coverage.
    The Department recognizes that it could be possible to draw the 
line between employment-based arrangements, as covered by ERISA, and 
non-ERISA arrangements in other ways. For example, the Department also 
recognizes that some legitimate start-up trades or businesses may take 
time to become profitable, and ongoing genuine trades or businesses may 
experience bad years financially. Alternative approaches could focus on 
other measures of the trade or business as a source of earnings or 
other measures of time spent on the work activity. Accordingly, the 
Department solicits comments on whether the proposed standard is 
workable and, if so, whether any additional clarifications would be 
helpful to address issues relating to how working owners could 
reasonably predict whether they will meet the earned income and hours 
worked requirements, and whether AHPs should be required to obtain any 
evidence in support of such a prediction beyond a representation from 
the working owner. Thus, the Department generally invites comment on 
whether different criteria would be more appropriate to ensure that so-
called ``working owners'' who join an AHP are genuinely engaged in a 
trade or business and are performing services for the trade or business 
in a manner that is in the nature of an employment relationship.
    Under the proposal, an AHP thus could be comprised of participants 
who are common law employees, common law employees and working owners, 
or comprised of only working owners. In all cases, the working owner 
would be treated as an employee and the business as the individual's 
employer for purposes of being an employer member of the association 
and an employee participant in the AHP. In the Department's view, 
allowing sole proprietors and other working owners without common law 
employees to participate in AHPs covered by ERISA on an equal basis 
with other employers and employees furthers ERISA's purposes of 
promoting employee benefit plans and protecting the interests of plan 
participants and their beneficiaries. This approach acknowledges that 
an AHP may include as employer-members working owners with common law 
employees and also addresses the operational impracticability of having 
an AHP switch in and out of its status as a single multiple employer 
plan during periods in which the AHP sometimes has and sometimes does 
not have employees other than sole proprietors.
    Finally, as noted above, AHPs that already meet the Department's 
current commonality of interest and employer-member control standards 
will continue to be treated as meeting those requirements under the 
proposal for sponsoring a single multiple employer plan under ERISA. 
However, if the proposal is adopted as a final rule, upon effectiveness 
of the final rule, such an existing AHP would need to meet all the 
conditions in the final rule to continue to act as an ERISA section 
3(5) employer going forward.
    To the extent a final rule consistent with this proposal would be 
inconsistent with any prior sub-regulatory guidance, the final rule 
would supersede that guidance. For example, the regulation would 
supersede the statement in Advisory Opinion 2003-13A that ERISA section 
3(5) does not cover groups with memberships that include persons who 
are not employers of common-law employees. In the case of statutory and 
regulatory provisions like those involved here, the Department has the 
authority to supersede its previous interpretations, as articulated in 
non-binding advisory opinions, to address marketplace developments and 
new policy and regulatory issues, see generally Perez v. Mortgage 
Bankers

[[Page 623]]

Assn, 135 S. Ct. 1199 (2015), and the authority to supersede a prior 
interpretation by a federal court, see National Cable & 
Telecommunications Ass'n v. Brand X internet Services (Brand X), 545 
U.S. 967, 125 S. Ct. 2688 (2005) (``A court's prior judicial 
construction of a statute trumps an agency construction otherwise 
entitled to Chevron deference only if the prior court decision holds 
that its construction follows from the unambiguous terms of the statute 
and thus leaves no room for agency discretion.''). The ERISA statutory 
definition of the term ``employer,'' which includes direct employers 
and any other person acting indirectly in the interest of the employer 
in relation to an employee benefit plan, including a group or 
association of employers, is not an unambiguous term that leaves no 
room for agency discretion. Moreover, by proceeding through notice and 
comment rulemaking, the Department has exercised its authority in a way 
that ensures all interested stakeholders will have an opportunity to 
present their views on the implications and significance of the 
proposal in light of past guidance, judicial decisions, and sound 
public policy.
d. Health Nondiscrimination Protections
    Two distinct potential issues prompt the nondiscrimination 
protections in the proposed rule. First, some stakeholders and experts 
have expressed concerns that legislative proposals that would have 
permitted employer groups or associations to sponsor group health plans 
for the purpose of promoting and expanding association health coverage 
could have resulted in risk selection. For example, in a letter to the 
Chairwoman and Ranking Member of the House Committee on Education & the 
Workforce, the American Academy of Actuaries argued that AHPs could 
create adverse selection if legislation \20\ being considered by the 
committee allowed them to operate under different rules than other 
group health plans. They wrote: ``If one set of plans operates under 
rules that are more advantageous to healthy individuals, then those 
individuals will migrate to those plans; less healthy individuals will 
migrate to the plans more advantageous to them.'' \21\ Similarly, the 
National Association of Insurance Commissioners (NAIC) also wrote a 
letter to the Chairwoman and Ranking Member stating that the 
legislation would encourage AHPs to select healthy groups by designing 
benefit packages and setting rates to the detriment of unhealthy 
groups.\22\
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    \20\ Small Business Health Fairness Act of 2017, H.R. 1101, 
115th Cong. (2017).
    \21\ Letter from the American Academy of Actuaries to Virginia 
Foxx, Chairwoman, Committee on Education and the Workforce, U.S. 
House of Representatives, and Robert C. Scott, Ranking Member, 
Committee on Education and the Workforce, U.S. House of 
Representatives (March 8, 2017) (available at https://www.actuary.org/files/publications/AHPs_HR1101_030817.pdf).
    \22\ Letter from the NAIC to Virginia Foxx, Chairwoman, 
Committee on Education and the Workforce, U.S. House of 
Representatives, and Robert C. Scott, Ranking Member, Committee on 
Education and the Workforce, U.S. House of Representatives (Feb. 28, 
2017) (available at http://www.naic.org/documents/health_archive_naic_opposes_small_business_fairness_act.pdf).
---------------------------------------------------------------------------

    Alternatively, some have argued that more actuarially appropriate 
pricing where premiums match risk tends to lead people to buy the 
efficient amount of coverage, rather than underinsuring or 
overinsuring, and that such pricing also reduces the likelihood that 
insurance markets deteriorate into adverse selection spirals. In the 
case of associations, some stakeholders have argued that the presence 
of nondiscrimination rules may create instability in the AHP market, as 
employers with disproportionately unhealthy employees seek to join AHPs 
to lower their rates while AHPs with disproportionately healthy 
employees constantly modify their rules of admission to avoid this 
outcome. And stakeholders have argued that allowing employers to join 
together voluntarily on their own terms to offer health coverage to 
their members would reflect those employers' interests and maximize the 
potential for the market, while the converse would deter AHP formation 
and lead to fewer insured people.
    Second, the nondiscrimination provisions distinguish genuine 
employment-based plans from commercial enterprises that claim to be 
AHPs but that are more akin to traditional insurers selling insurance 
in the employer marketplace. ERISA sections 3(1) and (5) require a bona 
fide employment nexus and a level of cohesion and commonality among 
entities acting on behalf of common law employers, the common law 
employers, and the covered employees, as distinguished from commercial 
insurance arrangements that sell insurance coverage to unrelated common 
law employers. The nondiscrimination provisions maintain that nexus and 
cohesion--embodied in the longstanding ERISA section 3(5) ``commonality 
of interests'' requirement--in the new circumstance permitted under the 
proposal under which an employer group or association sponsoring an 
ERISA employee benefit plan may exist solely for the purpose of 
providing group health coverage. In the Department's view, AHPs that 
discriminate among employer-members in ways that would violate the 
nondiscrimination provisions in the proposal may not reflect the common 
employer interests that characterize an employee benefit plan as 
compared to the sort of commercial insurance enterprise that ERISA 
intended to leave to state, rather than federal, regulation. The 
nondiscrimination provisions are also based on the Department's broad 
rulemaking authority under ERISA section 505 (authorizing ``such 
regulations as [the Secretary] finds necessary or appropriate to carry 
out the provisions of this title'') and ERISA section 734. ERISA 
section 734 authorizes the Secretary to promulgate such regulations as 
may be necessary or appropriate to carry out the provisions of Part 7 
of ERISA, including ERISA section 715(a)(1), which incorporates the 
provisions of part A of title XXVII of the PHS Act (generally, sections 
2701 through 2728 of the PHS Act) into ERISA and makes those provisions 
applicable to plans and issuers.
    The nondiscrimination provisions in paragraph (d) of the proposed 
regulation build on the existing health nondiscrimination provisions 
applicable to group health plans under HIPAA, as amended by the 
Affordable Care Act (HIPAA/ACA health nondiscrimination rules), with an 
additional clarification addressing how to apply those rules to 
association coverage.
    Specifically, paragraph (d)(1) of the proposed regulation would 
ensure the group or association does not restrict membership in the 
association itself based on any health factor, as defined in the HIPAA/
ACA health nondiscrimination rules. The HIPAA/ACA health 
nondiscrimination rules define a health factor as: health status, 
medical condition (including both physical and mental illnesses), 
claims experience, receipt of healthcare, medical history, genetic 
information, evidence of insurability, and disability. Code section 
9802(a)(1), ERISA section 702(a)(1), and PHS Act section 2705(a)(1). 
See also 26 CFR 54.9802-1(a), 29 CFR 2590.702(a), and 45 CFR 
146.121(a).
    Paragraphs (d)(2) and (d)(3) of the proposed rules provide that the 
group health plan sponsored by the group or association must comply 
with the HIPAA/ACA health nondiscrimination rules, which govern 
eligibility for

[[Page 624]]

benefits \23\ and premiums for group health plan coverage. In 
determining what is a group of similarly situated individuals for 
purposes of applying those rules, this proposed regulation provides in 
paragraph (d)(4) how to apply these HIPAA/ACA health nondiscrimination 
rules in the context of a group or association of employers sponsoring 
a single group health plan.
---------------------------------------------------------------------------

    \23\ A rule for eligibility for benefits is defined by reference 
to the HIPAA/ACA health nondiscrimination rules and includes rules 
relating to enrollment, the effective date of coverage, waiting (or 
affiliation) periods, late or special enrollment, eligibility for 
benefit packages, benefits (including covered benefits, benefit 
restrictions, and cost-sharing), continued eligibility, and 
terminating coverage. 26 CFR 54.9802-1(b)(1)(ii); 29 CFR 
2590.702(b)(1)(ii); 45 CFR 146.121(b)(1)(ii).
---------------------------------------------------------------------------

    Specifically, the HIPAA/ACA health nondiscrimination rules 
generally prohibit health discrimination within groups of similarly 
situated individuals, but they do not prohibit discrimination across 
different groups of similarly situated individuals. In determining what 
counts as a group of similarly situated individuals, for these 
purposes, paragraph (d) of the HIPAA/ACA health nondiscrimination rules 
generally provides that plans may, subject to an anti-abuse provision 
for discrimination directed at individuals, treat participants as 
distinct groups if the groups are defined by reference to a bona fide 
employment-based classification consistent with the employer's usual 
business practice. As stated in the HIPAA/ACA health nondiscrimination 
rules, whether an employment-based classification is bona fide is 
determined based on all the relevant facts and circumstances, including 
whether the employer uses the classification for purposes independent 
of qualification for health coverage (for example, determining 
eligibility for other employee benefits or determining other terms of 
employment). Examples in the HIPAA/ACA health nondiscrimination rules 
of classifications that may be bona fide, based on all the relevant 
facts and circumstances, include full-time versus part-time status, 
different geographic location, membership in a collective bargaining 
unit, date of hire, length of service, current employee versus former 
employee status, and different occupations. Under an anti-abuse 
provision contained in paragraph (d)(3) of the HIPAA/ACA health 
nondiscrimination rules, however, a distinction between groups of 
individuals is not permitted if the creation or modification of an 
employment or coverage classification is directed at individual 
participants or beneficiaries based on any health factor of the 
participants or beneficiaries.
    In addition, under the HIPAA/ACA health nondiscrimination rules, a 
plan may, generally, subject to certain anti-abuse provisions for 
discrimination directed at individuals, treat beneficiaries as distinct 
groups based on the bona fide employment-based classification of the 
participant through whom the beneficiary is receiving coverage, the 
relationship to the participant, marital status, age or student status 
(subject to PHS Act section 2714, as incorporated in ERISA section 715, 
as well as ERISA section 714) and other factors if the factor is not a 
health factor. Finally, the HIPAA/ACA health nondiscrimination rules 
generally allow group health plans to treat participants and 
beneficiaries as distinct groups.
    The proposed regulations propose that, in applying the HIPAA/ACA 
health nondiscrimination rules for defining similarly-situated 
individuals, the group or association may not treat member employers as 
distinct groups of similarly-situated individuals. As noted above, the 
HIPAA/ACA health nondiscrimination rules apply within groups of 
similarly-situated individuals. If an association could treat different 
employer-members as different bona fide employment classifications, the 
nondiscrimination protections in paragraphs (d)(1) through (d)(3) could 
be ineffective, as AHPs could offer membership to all employers meeting 
the association's membership criteria, but then charge specific 
employer members higher premiums, based on the health status of those 
employers' employees and dependents. Accordingly, under the proposed 
regulation a group or association which seeks treatment as an 
``employer'' under ERISA section 3(5) for purposes of sponsoring a 
single group health plan under ERISA section 3(1) cannot simultaneously 
undermine that status by treating different employers as different 
groups based on a health factor of an individual or individuals within 
an employer member. DOL seeks comment on whether this structure, which 
could potentially represent an expansion of current regulations, would 
create involuntary cross-subsidization across firms that would 
discourage formation and use of AHPs.
    Moreover, the Department views such employer-by-employer risk-
rating as undermining the statutory aim of limiting plan sponsors to 
``employers'' and to entities acting ``in the interest'' of employers, 
and instead extending ERISA coverage to entities that seek to 
underwrite risk and are nearly--or entirely--indistinguishable from 
such commercial-insurance-type entities. The extension of ERISA 
coverage to such commercial entities would not be consistent with 
Congress' deliberate decision to limit ERISA's coverage to employment-
based relationships. Coupled with the control requirement, also 
requiring AHPs to accept all employers who fit their geographic, 
industry, or any other non-health-based selection criteria that each 
AHP chooses, the nondiscrimination provisions ensure a level of 
cohesion and commonality among entities acting on behalf of common law 
employers, the common law employers themselves, and the covered 
employees, as distinguished from commercial insurance arrangements that 
sell insurance coverage to unrelated common law employers.
    Paragraph (d)(5) contains examples that illustrate the rules of 
paragraphs (d)(1) through (d)(4).
    The Department specifically solicits comments on the above 
described nondiscrimination requirements, including how they balance 
risk selection issues with the stability of the AHP market and the 
ability of employers to innovate and enter voluntary coverage 
arrangements. The Department also solicits comments on the effect of 
additional or different nondiscrimination protections, such as further 
limitations on price flexibility. Specifically, the Department invites 
comments on whether paragraph (d)(4) is an appropriate or sufficient 
response to the need to distinguish AHPs from commercial insurance (and 
on any alternative provisions that might achieve the same goal, as well 
as on whether paragraph (d)(4) could destabilize the AHP market or 
hamper employers' ability to create flexible and affordable coverage 
options for their employees.

5. Request for Public Comments

    The Department invites comments on the specific issues identified 
in the discussion above, as well as on all aspects of the proposed rule 
as a potential alternative approach to the Department's existing sub-
regulatory guidance criteria. Comments are invited on the interaction 
with and consequences under other State and Federal laws, including the 
interaction with the Code section 501(c)(9) provisions for voluntary 
employees' beneficiary associations (VEBAs), should an AHP want to use 
a VEBA. The Department also invites comments on whether any notice 
requirements are needed to ensure that employer members of 
associations, and

[[Page 625]]

participants and beneficiaries of group health plans, are adequately 
informed of their rights or responsibilities with respect to AHP 
coverage. Comments are also solicited on the impact of these proposals 
on the risk pools of the individual and small group health insurance 
markets, and for data, studies or other information that would help 
estimate the benefits, costs, and transfers of the rule.

6. Request for Information

    In addition to the proposal set forth in this document, pursuant to 
Executive Order 13813, the Department is considering other actions it 
could take to promote healthcare consumer choice and competition across 
the United States. The proposed rules would not alter existing ERISA 
statutory provisions governing MEWAs. The proposed rules also would not 
modify the States' authority to regulate health insurance issuers or 
the insurance policies they sell to AHPs. As described above, some 
MEWAs have historically been unable to pay claims due to fraud, 
insufficient funding, or inadequate reserves.\24\ ERISA section 
514(b)(6) gives the Department \25\ and State insurance regulators 
joint authority over MEWAs (including AHPs described in this proposed 
rule), to ensure appropriate consumer protections for employers and 
employees relying on an AHP for healthcare coverage.
---------------------------------------------------------------------------

    \24\ See U.S. Gov't Accountability Office, GAO-92-40, States 
Need Labor's Help Regulating Multiple Employer Welfare Arrangements, 
(1992) (available at http://www.gao.gov/products/HRD-92-40); See 
also U.S. Gov't Accountability Office, GAO-04-312, Employers and 
Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling 
Coverage (2004) (available at http://www.gao.gov/products/GAO-04-312).
    \25\ Because small employer group health plans typically are 
fully-insured or pay benefits out of the employer's general assets, 
they are generally exempt under current DOL regulations from most, 
if not all, of ERISA's annual reporting requirements. See 29 CFR 
2520.104-20. However, as a MEWA, an AHP MEWA would not be eligible 
for this filing exemption, even if it covered fewer than 100 
participants. Further, ERISA-covered group health plans that have 
100 participants or more generally are required to file a Form 5500, 
whether insured or self-insured. Thus, AHPs established as a result 
of the proposal would be required to file Forms 5500. See ERISA 
section 101(b). In addition, because, as noted above, these AHPs are 
also MEWAs, they would be required to file a Form M-1. See ERISA 
section 101(g) and 29 CFR 2520.101-2. Both Form 5500 and Form M-1 
information is accessible by DOL, as well as the States, to fulfill 
traditional oversight functions to help ensure that plans meet their 
obligations to pay benefits as promised under the plan and the law.
---------------------------------------------------------------------------

    Some stakeholders have identified the Department's authority under 
ERISA section 514(b)(6)(B) to exempt self-insured MEWA plans from State 
insurance regulation as a way of promoting consumer choice across State 
lines. Specifically, ERISA section 514(b)(6)(B) provides that the 
Department may prescribe regulations under which non-fully insured 
MEWAs that are employee benefit plans may be granted exemptions, 
individually or class by class, from certain State insurance 
regulation. Section 514(b)(6)(B) does not, however, give the Department 
unlimited exemption authority. The text limiting the Department's 
authority is in ERISA section 514(b)(6)(A). That section provides that 
the Department cannot exempt an employee benefit plan that is a non-
fully insured MEWA from state insurance laws that can apply to a fully 
insured MEWA plan under ERISA section 514(b)(6)(A), i.e., state 
insurance laws that establish reserves and contribution requirements 
that must be met in order for the non-fully insured MEWA plan to be 
considered able to pay benefits in full when due, and provisions to 
enforce such standards.
    Thus, self-insured MEWAs, even if covered by an exemption, would 
remain subject to State insurance laws that provide standards requiring 
the maintenance of specified levels of reserves and contributions as 
means of ensuring the payment of promised benefits. While beyond the 
scope of this proposed rulemaking, the Department is interested in 
receiving additional input from the public about the relative merits of 
possible exemption approaches under ERISA section 514(b)(6)(B). The 
Department is interested both in the potential for such exemptions to 
promote healthcare consumer choice and competition across the United 
States, as well as in the risk such exemptions might present to 
appropriate regulation and oversight of AHPs, including State insurance 
regulation oversight functions.
    The Department is also interested in comments on how best to ensure 
compliance with the ERISA and ACA standards that would govern AHPs and 
on any need for additional guidance on the application of these 
standards or other needed consumer protections. In this connection, the 
Department emphasizes that AHPs would be subject to existing generally 
applicable federal regulatory standards governing ERISA plans and 
additional requirements governing MEWAs specifically, and sponsors of 
AHPs would need to exercise care to ensure compliance with those 
standards.
    The Department requests comments on how it can best use the 
provisions of ERISA Title I to require and promote actuarial soundness, 
proper maintenance of reserves, adequate underwriting and other 
standards relating to AHP solvency. The Department also invites 
comments on whether additional provisions should be added to the final 
rule to assist existing employer associations--including MEWAs that do 
not now constitute AHPs--in making adjustments to their business 
structures, governing documents, or group health coverage to become 
AHPs under the final rule.
    The Department likewise encourages commenters to identify any 
aspect of the foregoing rules and obligations that would benefit from 
additional guidance as applied to AHPs, as well as any perceived 
deficiencies in existing guidance or regulatory safeguards.

Regulatory Impact Analysis

1.1. Executive Orders

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects; distributive impacts; and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility.
    Under Executive Order 12866 (58 FR 51735), ``significant'' 
regulatory actions are subject to review by the Office of Management 
and Budget (OMB). Section 3(f) of the Executive Order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more in any one year, or adversely and materially affecting a sector of 
the economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or tribal governments or communities 
(also referred to as ``economically significant''); (2) creating a 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. It has 
been determined that this rule is economically significant within the 
meaning of section 3(f)(1) of the Executive Order. Therefore, OMB has 
reviewed these proposed rules pursuant to the Executive Order.

[[Page 626]]

    In accordance with the direction of Executive Order 13813, DOL is 
proposing a rule to broaden the circumstances under which an AHP will 
be treated as a single multiple employer-plan under ERISA. The proposal 
is intended to extend advantages typically enjoyed by large employer-
sponsored health benefit plans to more working owners and small 
employers (collectively hereafter, small businesses) that under the 
proposal would be eligible to participate in AHPs. AHPs generally can 
offer these small businesses more health benefit options, and options 
that are more affordable, than typically are available in today's 
individual and small group health insurance markets. This document 
assesses the proposal's potential impacts.

1.2. Introduction and Need for Regulation

    U.S. families obtain health benefits from a number of different 
private and public sources. Essentially all individuals age 65 or older 
are covered by Medicare. Most individuals under age 65 are covered by 
employer-sponsored insurance. Nearly all large employers offer health 
insurance to their employees, but only about one-half of employers with 
fewer than 50 employees do. Altogether, 61 percent of individuals under 
age 65 have employer-sponsored coverage. Thirty-eight percent of 
individuals under age 65 obtain coverage from private employers with 50 
or more employees, 9 percent from smaller private employers, and 14 
percent from public-sector employers.\26\
---------------------------------------------------------------------------

    \26\ DOL calculations based on the Abstract of Auxiliary Data 
for the March 2016 Annual Social and Economic Supplement to the 
Current Population Survey, U.S. Department of Labor.
---------------------------------------------------------------------------

    Large employers have a long history of providing their employees 
with affordable health insurance options. This regulation is needed to 
lower some barriers that can prevent many small businesses from 
accessing such options.
    Today, businesses generally access insurance in one of three market 
segments, depending on their size. These segments are the individual 
market, which includes working owners among other individuals and their 
families, if they do not employ employees and therefore cannot 
establish a group health plan; the small group market, which generally 
includes small businesses with at least one and not more than 50 
employees; and the large group market, which includes larger employers 
and some groups of employers. (Many large employers self-insure rather 
than purchase group insurance in the large group market segment.) 
Historically, relative to large employers, small businesses accessing 
health insurance in the individual and small group markets have faced 
at least two disadvantages. First, owing to their small size, working 
owners and other small businesses generally lack large employers' 
potential for administrative efficiencies and negotiating power. 
Second, unlike large employers, individual small businesses do not 
constitute naturally cohesive large risk pools. Any single small 
business's claims can spike abruptly due to one serious illness. 
Historically, individual and small group issuers often responded to 
such spikes by sharply increasing premiums, and/or by refusing to issue 
or renew policies or to cover pre-existing conditions. More recently, 
State and Federal legal changes including the ACA generally have 
outlawed these practices. Current rules generally regulate the 
individual and small group markets in which small businesses obtain 
insurance more stringently than the large group markets and self-
insured employer plans. Unfortunately such rules can themselves limit 
choice, increase premiums, or even destabilize small group and 
individual markets. They, in effect, force issuers to raise premiums 
broadly, particularly for healthier small groups and individuals, which 
can prompt such groups and individuals to seek more affordable coverage 
elsewhere if available, or drop insurance altogether. In contrast, 
large employers' natural ability to provide comprehensive coverage at 
relatively stable cost is mirrored by the regulatory framework that 
applies to large group markets and self-insured ERISA plans.
    Given the natural advantages enjoyed by large employer groups, it 
may be advantageous to allow more small businesses to combine into 
large groups for purposes of obtaining or providing health insurance. 
While some AHPs exist today, their reach currently is limited by the 
Department's existing interpretation of the conditions under which an 
AHP is an employer-sponsored plan under ERISA. Under that 
interpretation, eligible association members must share a common 
interest (generally, operate in the same industry), must join together 
for purposes other than providing health insurance, must exercise 
control over the AHP, and must have one or more employees in addition 
to the business owner. Accordingly, this proposed rule aims to 
encourage the establishment and growth of AHPs comprising otherwise 
unrelated small businesses, including working owners, and to clarify 
that nationwide industry organizations such as trade associations can 
sponsor nationwide AHPs.
    This proposal would broaden the conditions under which associations 
can sponsor AHPs, thereby increasing the number of small businesses 
potentially eligible to participate in AHPs and providing new, 
affordable health insurance options for many Americans. It generally 
would do this in four important ways. First, it would relax the 
existing requirement that associations sponsoring AHPs must exist for a 
reason other than offering health insurance. Second, it would relax the 
requirement that association members share a common interest, as long 
as they operate in a common geographic area. Third, it would make clear 
that associations whose members operate in the same industry can 
sponsor AHPs, regardless of geographic distribution. Fourth, it would 
clarify that working owners and their dependents are eligible to 
participate in AHPs. Consequently, for example, the proposal would 
newly allow a local chamber of commerce that meets the other conditions 
in the proposal to offer AHP coverage to its small-business members, 
including working owners.
    As large groups, AHPs might offer small businesses some of the 
scale and efficiency advantages typically enjoyed by large employer 
plans. They additionally could offer small businesses relief from ACA 
and State rules that restrict issuers' product offerings and pricing in 
individual and small group markets.

1.3. AHPs' Potential Impacts

    By facilitating the establishment and operation of more AHPs, this 
proposed rule aims to make more, and more affordable, health insurance 
options available to more employees of small businesses and the 
families of such employees. Insuring more American workers, and 
offering premiums and benefits that faithfully match employees' 
preferences, are the most important benefits of this rule. The proposed 
rule contains provisions designed to prevent potentially adverse 
impacts on individual or small group risk pools that might otherwise 
carry social costs. AHPs will also affect tax subsidies and revenue and 
the Medicaid program.While the impacts of this proposed rule, and of 
AHPs themselves, are intended to be positive on net, the incidence, 
nature and magnitude of both positive and negative effects are 
uncertain. Predictions of these impacts are confounded by numerous 
factors including:

[[Page 627]]

     The dynamic and in some cases unstable conditions 
currently prevailing in local individual and small group insurance 
markets under existing ACA and State rules;
     A lack of data on the risk profiles of existing and 
potential associations and the individual and small group markets with 
which they intersect;
     A lack of data on the relative availabilities and sizes of 
subsidies and tax preferences for prospective AHP enrollees in 
Exchanges or Small Business Health Options Program (SHOP) Exchanges 
versus in AHPs;
     Legislative proposals to amend or repeal and replace the 
ACA;
     States' broad discretion to regulate AHPs, and variations 
in State practices; and
     Interactions with related initiatives per Executive Order 
13813, including HRAs and short-term limited duration insurance 
policies.
    In light of these uncertainties, what follows is a mostly 
qualitative assessment of this proposal's potential impacts, rather 
than a quantitative prediction. The Department is seeking comments and 
data that will allow the impacts of the rule to be quantified, and that 
will enable it to more fully assess the proposed rule's effects.

1.4. Potential Advantages of Scale

    Owing to their potentially large scale, under the right conditions, 
AHPs result in lower insurance premiums compared to existing small 
group and individual insurance market arrangements. Consequently, AHPs 
may offer small businesses comparable coverage at lower prices, thereby 
delivering economic benefits to many working owners and employees of 
small businesses.
    Large employers often enjoy some advantages of scale in the 
provision of health benefits for their employees, and AHPs may realize 
some of these same advantages. Scale may yield savings via one or more 
of three mechanisms: administrative efficiencies from economies of 
scale, self-insurance, and market power.
    Administrative savings generally can be understood to constitute a 
social benefit, as resources are freed for other uses without reducing 
consumption. With respect to administrative efficiency from economies 
of scale, large employers generally avoid the potentially high cost 
associated with health insurance issuers' efforts to market to, enroll, 
and underwrite and set premiums for large numbers of individual 
families or small employer groups.\27\ AHPs may, under favorable 
circumstances, achieve some savings in the same way. On the other hand, 
rather than avoiding these costs, some AHPs sometimes may merely 
internalize them, in the form of employers' cost to form associations 
and AHPs' own efforts to recruit and enroll association members, and to 
sign members up for insurance. AHPs sponsored by pre-existing 
associations that exist for reasons other than offering health 
insurance might have more potential to deliver administrative savings 
than those set up to offer health insurance. Organizations that already 
exist for reasons other than offering health insurance (such as 
chambers of commerce or trade associations) may already have extensive 
memberships and thus may have fewer setup, recruitment, and enrollment 
costs than organizations newly formed to offer insurance. Under this 
proposal, such existing associations that have been prohibited from 
offering AHPs to some or all of their existing members by the 
Department's current interpretations could newly extend AHP eligibility 
to existing members. Some other AHPs, however, might thrive by 
delivering savings to members by other means, such as by offering less 
comprehensive benefits, even if their administrative costs are higher.
---------------------------------------------------------------------------

    \27\ ACA and State rules that limit underwriting and set floors 
for insurers' loss ratios may make some of these savings available 
even within the existing individual and small group markets.
---------------------------------------------------------------------------

    Some other efficiency gains might arise from AHPs' scale in 
purchasing not insurance but healthcare services. Healthcare payers and 
providers sometimes realize administrative efficiencies in their 
interactions if a large proportion of each provider's patients are 
covered by a common payer. For example, streamlining of billing and 
payment processes and procedures for preauthorization for covered 
services may facilitate volume discounts. A self-insured AHP with a 
sufficiently large presence in a local market might capture some such 
efficiency. On the other hand, in some cases AHPs' entry into markets 
alongside other payers might erode such efficiency by reducing such 
issuer's scale in purchasing healthcare services. That is, an increase 
in the number of payers may sometimes increase the administrative 
burden associated with the payer-provider interface for some or all 
payers and providers. Consequently, the net impact of this proposal on 
efficiency in this interface (and on associated social welfare) could 
be positive or negative.
    As large groups, AHPs also may achieve some savings by offering 
self-insured coverage. Because large group plans in and of themselves 
constitute large and potentially stable risk pools, it often is 
feasible for them to self-insure rather than to purchase fully-insured 
large group insurance policies from licensed health insurance issuers. 
Large risk pools' claims experience generally varies only modestly from 
year to year, so well-run large group plans can set premiums and 
operate with little risk of financial shortfalls. By self-insuring, 
some large AHPs may avoid some of the overhead cost otherwise 
associated with fully-insured large group health insurance policies. 
However State revenue may also decline in States that tax insurance 
premiums.
    Also, as large groups, in addition to potential administrative and 
overhead savings, AHPs sometimes may be able to achieve savings through 
market power, negotiating discounts that come at suppliers' expense. In 
otherwise competitive markets, the exercise of market power sometimes 
can result in economic inefficiency. The opposite might be true, 
however, where an AHP's market power acts to counterbalance market 
power otherwise exercised by issuers or providers. If large group 
premiums are not already at competitive levels, sufficiently large AHPs 
may be able to negotiate with issuers for premium discounts. More 
frequently, issuers and other large payers, potentially including 
large, self-insured AHPs, may be able to negotiate discounts and other 
savings measures with hospitals, providers, and third party 
administrators (TPAs). Because markets for healthcare services are 
inherently local, payers' market power generally requires not merely 
scale, but a large geographic market share. Consequently, self-insured 
AHPs with geographically concentrated membership are more likely to 
realize such savings than are AHPs whose membership is spread thinly 
across States.
    On the other hand, AHPs might sometimes dilute other payers' market 
power to command provider discounts,\28\ thereby increasing costs for 
such payers' enrollees. AHP's net effect on payers' market power with 
respect to providers and consequent effect on enrollee costs 
consequently could be positive or negative.
---------------------------------------------------------------------------

    \28\ For a discussion of insurers' market power see Sheffler, 
Richard M. and Daniel R.Arnold. ``Insurer Market Power Lowers Prices 
in Numerous Concentrated Provider Markets.'' Health Affairs 36, no. 
9 (2017).
---------------------------------------------------------------------------

    It should be noted that diluting others' market power can increase 
social

[[Page 628]]

welfare if it produces more healthy competition. If local individual 
and small group market premiums are not already at competitive levels, 
increasing competitive pressure from AHPs might force some individual 
and small group issuers to lower their own premiums. There is some 
evidence that competition among issuers has this effect,\29\ although 
the likelihood of this effect occurring in this case is unclear, as 
market rules and claims experience may already have eliminated excess 
profit.
---------------------------------------------------------------------------

    \29\ Frank, Richard G. and Thomas G. McGuire. ``Regulated 
Medicare Advantage and Marketplace Individual Health Insurance 
Markets Rely on Insurer Competition.'' Health Affairs 36 no. 9 
(2017).
---------------------------------------------------------------------------

    Given all of these variables, the net transfer and social welfare 
effects related to AHPs' exercise of, or impact on others' exercise of, 
market power are ambiguous.
    In summary, AHPs' potential to reap advantages from scale may vary. 
Under favorable conditions they may realize some administrative 
savings, and/or negotiate discounts from insurers, providers, or TPAs. 
Market forces may favor AHPs that reap such advantages, but may also 
sustain AHPs that deliver savings to members by other means.

1.5. Increased Choice

    Because they would not be subject to individual and small group 
market rules, AHPs in the large group market (which the Department 
expects would include all or almost all AHPs) would enjoy greater 
flexibility with respect to the products and prices they could offer to 
small businesses. AHPs consequently could offer many small businesses 
more affordable insurance options than would be available to them in 
individual and small group markets. Under the ACA and State rules, non-
grandfathered individual and small group insurance policies generally 
must cover certain benefits. These rules limit the policies that 
issuers can offer to small businesses. Under this proposal, as noted 
earlier in this section, AHPs would generally be treated as large 
employers and accordingly granted access to the large group market (or, 
alternatively, could self-insure). The large group market is not 
subject to the same restrictions that apply in the individual and small 
group markets.\30\ AHPs consequently could offer many small businesses 
more options than could individual and small group insurance issuers. 
For instance, AHPs could offer less comprehensive--and hence more 
affordable--coverage that some employees may prefer.
---------------------------------------------------------------------------

    \30\ Some States do set some minimum standards for benefits 
covered by large group policies, however. Such mandates would apply 
to fully insured AHPs. Because AHPs are MEWAs under ERISA, States 
also may have flexibility under ERISA's MEWA provisions to extend 
benefit standards to self-insured AHPs. ERISA generally precludes 
States from applying such standards to self-insured ERISA plans that 
are not MEWAs. For lists of ``essential health benefits'' that must 
be covered by non-grandfathered coverage in States' individual and 
small group markets under the ACA, and for lists of benefit 
standards that States apply to large group plans, see https://www.cms.gov/cciio/resources/data-resources/ehb.html.
---------------------------------------------------------------------------

    Some stakeholders have expressed concern that AHPs, by offering 
less comprehensive benefits, could attract healthier individuals, 
leaving less healthy individuals in the individual and small group 
markets and thus driving up the premiums in those markets and 
potentially destabilizing them. This risk may be small, however, 
relative to the benefits realized by small businesses and their 
employees that gain access to more affordable insurance that more 
closely matches their preferences. AHPs' benefits to their members can 
be substantial, as discussed above. For example, a small businesses 
electing less comprehensive AHP coverage can deliver benefits that are 
more closely tailored to their employees' actual health needs at a 
price their employees prefer. In addition, to the extent that AHPs 
deliver administrative savings or market power they may offer less 
expensive but equally comprehensive benefit options as compared to 
plans available in the individual or small group markets. This feature 
of AHPs would appeal to their less healthy members, prompting less 
healthy individuals to leave the individual and small group markets and 
potentially balancing out any exodus of healthy individuals from these 
markets. Moreover, this proposal addresses the risk of adverse effects 
on the individual and small group markets by including 
nondiscrimination provisions under which AHPs could not condition 
eligibility for membership or benefits or vary members' premiums based 
on their health status. The Department invites comments as to the 
benefits of AHPs offering wider choice including less comprehensive 
policies as well as any risk of adverse effects on individual or small 
group markets.

1.6. Risk Pooling

    The proposal seeks to enable AHPs to assemble large, stable risk 
pools. The ACA and State rules tightly regulate how individual and 
small group issuers pool risk, for example by limiting the degree to 
which premiums can be adjusted based on age. These rules can threaten 
market stability. The ACA and State rules attempt to address this 
threat with additional, potentially inefficient rules, including the 
requirement that all individuals acquire coverage and mandatory 
transfers of ``risk adjustment payments'' from some issuers to others. 
AHPs would not be subject to these ACA and State rules, but will be 
subject to the nondiscrimination rules that bar all group health plans 
from conditioning eligibility, benefits, or premiums on health status. 
Properly designed, these rules should help AHPs to assemble large, 
stable risk pools, while at the same time limiting the risk that AHPs 
might tend to enroll healthier small businesses and thereby adversely 
affect individual and small group markets.
    Some stakeholders have raised concerns that AHPs will be more 
likely to form in industries with younger, healthier employees, as 
employers and their employees receive greater access to more affordable 
coverage than is available in the individual and small group markets. 
The Department believes such concerns at this juncture are speculative. 
While AHPs may have larger incentives to form in industries with 
younger, healthier workers, they will also have incentives to form in 
industries with older or less healthy workers when, for example, they 
deliver sufficient administrative savings to offset any additional cost 
of insuring an older or less healthy population. The Department 
requests comments that would help further address this issue.
    Likewise, some stakeholders have raised concerns that, because AHPs 
will enjoy greater pricing flexibility to set premiums, some might 
offer lower prices to healthier groups and higher prices to less 
healthy groups than individual and small group issuers are allowed to 
offer to those same groups. Of course, the nondiscrimination provisions 
in this proposal would prohibit any such discrimination based on health 
factors, but some non-health factors (such as age) correlate to a large 
degree with healthcare expenditures, and AHPs under this proposal could 
vary premiums to reflect actuarial risk based on such non-health 
factors. Some stakeholders argue that pursuit of lower prices based on 
non-health factors would lead, for example, younger association members 
to join AHPs but might lead older members to remain in individual and 
small group markets.
    This argument, however, depends on the assumption that pricing 
flexibility is the principal or only advantage available to AHPs. In 
fact, as outlined above, AHPs have the potential to create significant 
efficiencies that could lower premiums across the board. An AHP that 
realizes sufficient efficiencies may offer attractive prices even to 
less

[[Page 629]]

healthy groups. In that scenario, less healthy people would also have 
an incentive to leave the individual and small group markets, 
potentially balancing out any exodus of healthy people from these 
markets. The Department requests comments that would help further 
address this issue.
    As noted earlier, the Department intends that this proposal would 
help AHPs to assemble large, stable risk pools, while at the same time 
limiting any risk of adverse effects on individual and small group 
markets. In calibrating the proposal to advance those goals, the 
Department considered a range of evidence on the dynamics of health 
insurance markets under various conditions and rules. The Department 
believes available evidence is consistent with the balanced approach 
adopted in the proposal, and that the proposal would advance the 
intended goals, and invites comments responsive to this evidence and 
viewpoint.
    Some of the evidence the Department reviewed appears to suggest 
this proposal would have little impact on the composition of individual 
and small group market risk pools. Other potential avenues for 
segmentation that exist today do not appear to have produced major 
effects. For example, a small employer currently can segregate itself 
into a separate risk pool by self-insuring and relying on stop-loss 
insurance to backstop particularly large losses. Yet the proportion of 
small-firm establishments reporting that they use self-insurance has 
increased only modestly, from 12.7 percent in 2010 to 17.4 percent in 
2016 and the percent of policy holders in self-insured plans at small-
firm establishments has increased from 12.5 percent to 15.7 percent 
over the same time period.\31\ In addition, price inelasticity and 
inertia in individuals' and small businesses' health insurance 
purchases \32\ may help to limit and/or slow any potential impacts. If, 
as this evidence suggests, small businesses might not vigorously shop 
for better prices and products, there may be little potential for risk 
selection, but also limited demand for AHPs.
---------------------------------------------------------------------------

    \31\ Agency for Healthcare Research and Quality (AHRQ), 2016 
Medical Expenditure Survey-Insurance Component (MEPS-IC).
    \32\ See M. Kate Bundorf, Joanthan Levin, and Neal Mahoney, 
``Pricing and Welfare in Health Plan Choice,'' American Economic 
Review 2012, 107(7), 3214-3248, pointing to price inelasticity; and 
Benjamin R. Handel, ``Adverse Selection and Inertia in Health 
Insurance Markets: When Nudging Hurts,'' American Economic Review 
2013, 103(7), 2643-2682, finding that inertia restrains adverse 
selection and associated welfare losses.
---------------------------------------------------------------------------

    Various studies of past State and Federal individual and small 
group market reforms, cited below in connection with AHPs' potential 
impact on the uninsured population, mostly find that reforms tightening 
market rules result in only limited adverse selection. This might 
suggest that this proposal, by in effect loosening such rules, may 
produce only limited risk selection effects.
    Some other evidence illustrates how under some conditions changes 
in product and price offerings can affect the composition of risk 
pools. One employer found that older and less healthy employees 
sometimes declined to join younger and healthier counterparts in 
switching to new, less comprehensive options, despite incentives 
provided to encourage such switches, perhaps due to concerns about 
reduced coverage.\33\ A review of experience with consumer-directed 
health plans suggests some potential for similar effects.\34\ Some 
prior experiences with different AHP and group purchasing arrangements 
reportedly did not achieve sufficient efficiencies to fully prevent or 
offset all potential risk segmentation effects.\35\ The Congressional 
Budget Office once predicted modest risk segmentation from an AHP-like 
proposal, with small premium increases for small employers retaining 
traditional insurance, and increased coverage among healthier small 
groups partly offset by a small loss of coverage among less healthy 
ones.\36\
---------------------------------------------------------------------------

    \33\ Fronstin, Paul, and M. Christopher Roebuck. ``Health Plan 
Switching: A Case Study-Implications for Private- and Public-Health-
Insurance Exchanges and Increased Health Plan Choice.'' EBRI Issue 
Brief 432, March 23, 2017. https://www.ebri.org/pdf/briefspdf/EBRI_IB_432_PlnSwtch.23Mar17.pdf.
    \34\ Bundorf, M. Kate, ``Consumer-Directed Health Plans: A 
Review of the Evidence.'' The Journal of Risk and Insurance. January 
2016.
    \35\ Historically, some efforts to assemble large purchasing 
coalitions to negotiate such discounts have met with limited 
success. In one major example, the California Health Insurance 
Purchasing Cooperative, or HIPC, established by the State and later 
operated by a business coalition, was eventually disbanded after 
failing to deliver its intended savings. See, for example, National 
Conference of State Legislatures, ``Health Insurance Purchasing 
Cooperatives: State and Federal Roles.'' September 1, 2016. Last 
accessed September 25, 2017. http://www.ncsl.org/research/health/purchasing-coops-and-alliances-for-health.aspx#Other_Approaches. See 
also Bender, Karen, and Beth Fritchen. ``Government-Sponsored Health 
Insurance Purchasing Arrangements: Do they Reduce Costs or Expand 
Coverage for Individuals and Small Employers?'' 2008. Report finds 
that purchasing arrangements increase premiums by as much as six 
percent. http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/files/archive/2011/health_ins_purchasing_arrangements(1).pdf.
    \36\ CBO Paper, ``Increasing Small-Firm Health Insurance 
Coverage Through Association Health Plans and HealthMarts,'' January 
2000. https://www.cbo.gov/publication/12066; CBO cost estimate, H.R. 
525 Small Business Health Fairness Act of 2005. April 8, 2005. 
https://www.cbo.gov/sites/default/files/109th-congress-2005-2006/costestimate/hr52500.pdf.
---------------------------------------------------------------------------

    The foregoing evidence may be consistent with some key 
stakeholders' concerns that AHPs, if regulated too loosely relative to 
issuers, might adversely impact some risk pools.\37\ On the other hand, 
severely restricting AHPs would hinder them from providing additional, 
affordable coverage options. The Department believes that this 
proposal, under which AHPs could not condition eligibility, benefits, 
or premiums on health status, strikes the right balance to enable AHPs 
to assemble large stable risk pools and offer new affordable options to 
small businesses without posing substantial risk of adverse effects on 
other risk pools. AHPs' potential to deliver administrative savings 
further mitigates any such risk
---------------------------------------------------------------------------

    \37\ See for example: (1) NAIC letter to Reps. Foxx and Scott, 
February 28, 2017, http://www.naic.org/documents/health_archive_naic_opposes_small_business_fairness_act.pdf; (2) 
American Academy of Actuaries. ``Issue Brief: Association Health 
Plans,'' February 2017; .and (3) America's Health Insurance Plans 
(AHIP), ``Association-Sponsored Health Plans and Reform of the 
Individual Healthcare Market'' February 10, 2017.
---------------------------------------------------------------------------

1.7. Individual and Small Group Markets

    The Department separately considered AHPs' potential impacts on 
both individual and small group markets. In both cases, AHPs could 
offer many small businesses more, and more affordable, coverage options 
than otherwise available.
    With respect to individual markets, many of those insured there now 
might become eligible for AHPs. AHPs could enroll both working owners 
and employees of small business that do not currently offer insurance 
but might elect to join AHPs. The latter group may be growing as small 
firms' propensity to offer health insurance for employees has declined 
substantially from 47 percent of establishments in 2000 to 29 percent 
in 2016.\38\ Of the 25 million U.S. individuals under age 65 who were

[[Page 630]]

insured in individual markets in 2015, approximately 3 million were 
working owners or dependents thereof, and an additional 6 million were 
employees of small businesses that did not offer insurance or 
dependents thereof. With respect to small group markets, essentially 
all insured businesses might become eligible for AHPs. In 2015, firms 
with fewer than 50 employees insured 24 million workers and 
dependents.\39\
---------------------------------------------------------------------------

    \38\ Agency for Healthcare Research and Quality, Center for 
Financing, Access and Cost Trends. Medical Expenditure Panel Survey-
Insurance Component, 2012-2016. Medical Expenditure Panel Survey 
Private Sector Insurance Component, Table II.A.2. In 2016, among 
employees of firms with fewer than 50 employees, just one in four 
were enrolled in insurance on the job. Nearly one-half worked at 
firms that did not offer insurance. Agency for Healthcare Research 
and Quality (AHRQ), 2016 Medical Expenditure Panel Survey Insurance 
Component (MEPS-IC) Tables. Nonetheless, just 18 percent of small 
firm employees were uninsured. Many obtained insurance from a 
spouse's or parent's employer. DOL calculations based on the 
Abstract of Auxiliary Data for the March 2016 Annual Social and 
Economic Supplement to the Current Population Survey, U.S. 
Department of Labor.
    \39\ DOL calculations based on the Abstract of Auxiliary Data 
for the March 2016 Annual Social and Economic Supplement to the 
Current Population Survey, U.S. Department of Labor.
---------------------------------------------------------------------------

    In an effort to facilitate the availability of individual 
insurance, the ACA established federal and State-based ``Exchanges,'' 
or centralized, regulated marketplaces. The ACA envisioned that a 
number of health insurance issuers would offer a set of comparable 
policies in each Exchange, making it possible for individuals to shop 
(and necessary for issuers to compete) for the best price and quality, 
while means-tested subsidies would ensure that coverage was affordable. 
This vision has not been realized fully in much of the country, 
however.
    In 2016, 11 million individuals were enrolled via Exchanges. A 
large majority qualified for means-tested assistance with premiums (9 
million) and/or cost sharing (6 million).\40\ However, for 2018, only 
one issuer offered coverage in the Exchange in each of approximately 
one-half of US counties. Just two issuers participated in Exchanges in 
many additional counties.\41\ Moreover, many Exchange enrollees have 
faced large premium increases.\42\ The Administration already has taken 
some steps to stabilize the Exchanges, but their success is uncertain 
given that the ACA creates significant incentives for some people to 
wait to purchase insurance until an enrollment period that occurs after 
they have experienced a medical need. By expanding AHPs, this proposed 
rule aims to provide many more individuals access to the potentially 
more stable and affordable large group market. However, to the extent 
that AHPs prove particularly attractive to younger or lower cost 
individuals, they may contribute to some Exchanges' instability.
---------------------------------------------------------------------------

    \40\ Office of the Assistant Secretary for Planning and 
Evaluation (ASPE), U.S. Department of Health and Human Services, 
Compilation of State Date on the Affordable Care Act, December 2016.
    \41\ See U.S. Department of Health and Human Services, ``County 
by County Analysis of Plan Year 2018 Insurer Participation in Health 
Insurance Exchanges,'' available at https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Marketplaces/Downloads/2017-10-20-Issuer-County-Map.pdf.
    \42\ The places with the largest 2017 increases in the 
unsubsidized second-lowest silver plan included Phoenix, AZ (up 145% 
from $207 to $507 per month for a 40-year-old non-smoker). See 
Cynthia Cox, Michelle Long, Ashley Semanskee, Rabah Kamal, Gary 
Claxton, and Larry Levitt, ``2017 Premium Changes and Insurer 
Participation in the Affordable Care Act's Health Insurance 
Marketplaces,'' Kaiser Family Foundation, October 24, 2016 (updated 
November 1, 2016), available at https://www.kff.org/health-reform/issue-brief/2017-premium-changes-and-insurer-participation-in-the-affordable-care-acts-health-insurance-marketplaces/.
---------------------------------------------------------------------------

    Issuers may elect to offer individual market policies in Exchanges 
or outside them, or both. Non-grandfathered individual market policies 
must satisfy various ACA requirements including minimum benefit 
packages, minimum actuarial value(s), and minimum loss ratios. They 
must be offered to any individual who applies, and premiums must not 
vary depending on enrollees' health status, instead varying only based 
on location, age, tobacco use, and family size, and within certain 
limits. Issuers offering individual policies in a given location both 
through the local Exchange and outside it must treat the two as a 
single risk pool when setting premiums. The issuers offering individual 
policies, the policies offered, and the premiums charged can vary from 
place to place and locally between Exchanges and outside markets.
    To facilitate access to health insurance for small employers, the 
ACA established the Small Business Health Options Program, or ``SHOP''. 
Small employers may purchase insurance from an issuer, agent, or broker 
via the SHOP, or directly from issuers or through agents or brokers not 
via a SHOP, or they may self-insure. Employers purchasing group 
policies via a SHOP may qualify for tax credits to help cover premium 
costs. If available, small employers also may obtain coverage from an 
AHP, and thereby pool together with other employers and gain access to 
the large group market. Small employers whose employees are represented 
by a union may participate in a (usually large) multiemployer health 
benefit plan, established pursuant to collective bargaining agreements 
between the union and two or more employers.
    Issuers may offer small group policies to small employers via 
SHOPs, directly through issuers, agents or brokers, or both. Either 
way, as with non-grandfathered individual market policies, non-
grandfathered small group policies must satisfy various ACA 
requirements including minimum benefit packages, minimum actuarial 
value(s), and minimum loss ratios. They must be offered to any small 
employer who applies, and premiums may vary only based on location, 
age, and tobacco use, and within certain limits; they may not vary 
based on health. Issuers offering small group policies in a given 
location both through the local SHOP and directly must treat the two as 
a single risk pool when setting premiums. However, the issuers offering 
small group policies, the policies they offer, and the premiums charged 
can vary from place to place and locally between SHOPs and outside 
markets. In some locations the availability of policies may be limited, 
and/or the premiums charged may be rising rapidly, although in most 
locations small group markets continue to offer some choice of issuers 
and policies and moderate premium growth.\43\
---------------------------------------------------------------------------

    \43\ Between 1996 and 2016 small (fewer than 50 employees) and 
large private-sector employer premium increases followed similar 
trajectories. Both averaged 6 percent annually. Agency for 
Healthcare Research and Quality. Average total single premium (in 
dollars) per enrolled employee at private-sector establishments that 
offer health insurance by firm size and selected characteristics 
(Table I.C.1). Medical Expenditure Panel Survey Insurance Component 
Tables.
---------------------------------------------------------------------------

    Few small employers have elected to acquire health insurance via 
SHOPs. As of January 2017, just 27,205 small employers purchased small 
group policies via SHOPs, covering 233,000 employees and 
dependents.\44\ (Much larger numbers obtained coverage directly from 
small group issuers via agents and brokers outside of SHOPs: In 2016, 
1.6 million small-firm establishments offered health benefits for 
employees.) \45\ Sixteen States and the District of Columbia operated 
SHOPs, while federally-facilitated SHOPs operated in 33 States. 
(Beginning in 2017, a special waiver allowed Hawaii to operate its 
existing small group market within the relevant ACA framework without 
establishing a SHOP.) At this point, SHOPs cover far fewer employees 
than existing plan-MEWAs/AHPs, which reportedly cover 1.8 million 
participants.
---------------------------------------------------------------------------

    \44\ SHOP numbers reported by SB-SHOPs to CCIIO State 
Marketplace Insurance Programs Group and FF-SHOP Enrollment 
Database, May 15, 2017.
    \45\ Agency for Healthcare Research and Quality (AHRQ), 2016 
Medical Expenditure Panel Survey Insurance Component (MEPS-IC). 
Small firms include those with fewer than 50 employees.
---------------------------------------------------------------------------

    The Department considered the potential susceptibilities of 
individual and small group markets to adverse selection under this 
proposal. All else equal, individual markets may be more susceptible to 
risk selection than small group markets, as individuals' costs 
generally vary more widely than small groups'. The ACA's requirement 
that essentially all individuals acquire coverage and the provision of 
subsidies in Exchanges may reduce that

[[Page 631]]

susceptibility, however.\46\ The Department believes that under this 
proposal AHPs' adherence to applicable nondiscrimination rules and 
potential for administrative savings would mitigate any risk of adverse 
selection against individual and small group markets.
---------------------------------------------------------------------------

    \46\ H.R. 1 of the 115th Congress, enacted December 22, 2017 
will eliminate the shared responsibility payment for failure to 
maintain health insurance coverage effective beginning in 2019. 
AHPs, by offering eligible individuals more affordable options than 
are available in individual markets, might reduce somewhat any 
potential increase in the uninsured population that could result 
from elimination of the tax payment. At the same time, however, such 
elimination might prompt some individuals who would have joined AHPs 
to remain uninsured instead.
---------------------------------------------------------------------------

1.8. Medicaid

    Under the ACA, Medicaid eligibility was expanded in many States. 
Some Medicaid-eligible workers may become eligible to enroll in AHPs 
under this proposal. Among 42 million individuals under age 65 enrolled 
in Medicaid or CHIP in 2015, 2 million were working owners or 
dependents thereof, and 6 million were employees of small businesses 
that did not offer insurance or dependents thereof.\47\
---------------------------------------------------------------------------

    \47\ DOL calculations based on the Abstract of Auxiliary Data 
for the March 2016 Annual Social and Economic Supplement to the 
Current Population Survey, U.S. Department of Labor.
---------------------------------------------------------------------------

1.9. The Uninsured

    Twenty-eight million individuals in the U.S. lacked health 
insurance coverage in 2015.\48\ Because AHPs often can offer more 
affordable alternatives to individual and small group insurance 
policies, it is possible that this proposed rule will extend insurance 
coverage to some otherwise uninsured individual families and small 
groups. Of the 28 million uninsured, approximately 3 million are 
working owners or dependents thereof and an additional 8 million are 
employees of small businesses that do not offer insurance or dependents 
thereof.\49\ It is likely that some of these uninsured will become 
eligible for an AHP under this proposed rule.
---------------------------------------------------------------------------

    \48\ Id.
    \49\ Id.
---------------------------------------------------------------------------

    Past State and Federal reforms that tightened or loosened 
individual and small group market rules may, according to various 
studies, have changed the prices paid and policies selected by 
different businesses, somewhat improved access for targeted groups 
(potentially at others' expense), and/or prompted some individuals or 
small businesses to acquire or drop insurance, but had little net 
effect on coverage.\50\ AHPs' potential to expand coverage may be 
greater than this experience suggests, however. Market conditions and 
the size and composition of the uninsured population are different 
today, and as noted earlier, small firms' propensity to offer insurance 
to their employees has fallen, suggesting potential opportunities for 
AHPs to expand coverage.
---------------------------------------------------------------------------

    \50\ See for example: (1) Thomas Buchmueller and John DiNardo, 
``Did Community Rating Induce an Adverse Selection Death Spiral? 
Evidence from New York, Pennsylvania, and Connecticut, ``American 
Economic Review 2002, 92(1), 280-294, finding little net effect.'''' 
(2) Mark A. Hall, ``HIPPA's Small-Group Access Laws: Win, Loss, or 
Draw,'' Cato Journal 2002 22(1), 71-83, generally calling the 
results a ``draw.'' (3) Susan M. Gates, Kanika Kapur, and Pinar 
Karaca-Mandic, ``State Health Insurance Mandates, Consumer Directed 
Health Plans, and Health Savings Account: Are They a Panacea for 
Small Businesses,'' Chapter 3 in In the Name of Entrepreneurship: 
The Logic and Effects of Special Treatment for Small Businesses, 
Susan M. Gates and Kristin J Leuschner, eds., Rand Corporation, 
2007, finding little effect. (4) Sudha Xirasagar, Carleen H. 
Stoskopf, James R. Hussey, Michael E. Samuels, William R. Shrader, 
and Ruth P. Saunders, ``The Impact of State' Small Group Health 
Insurance Reforms on Uninsurance Rates,'' Journal of Health and 
Social Policy 2005, 20(3), finding little effect. (5) James R. 
Baumgardner and Stuart A Hagen, ``Predicting Response to Regulatory 
Change in the Small Group Health Insurance Market: The Case of 
Association Health Plans and Healthmarts,'' Inquiry 2001/2002, 
38(4), 351-364, predicting small effects.
---------------------------------------------------------------------------

1.10. Operational Risks

    ERISA generally classifies AHPs as MEWAs. Historically, a number of 
MEWAs have suffered from financial mismanagement or abuse, often 
leaving participants and providers with unpaid benefits and bills.\51\ 
Both DOL and State insurance regulators have devoted substantial 
resources to detecting and correcting these problems, and in some 
cases, prosecuting wrongdoers. Some of these entities attempt to evade 
oversight and enforcement actions by claiming to be something other 
than MEWAs, such as collectively-bargained multiemployer ERISA plans. 
To address this continuing risk, the ACA gave DOL expanded authority to 
monitor MEWAs and intervene when MEWAs are headed for trouble, and both 
DOL and State enforcement efforts are ongoing.
---------------------------------------------------------------------------

    \51\ For discussions of this history, see: (1) U.S. Gov't 
Accountability Office, GAO-92-40, ``State Need Labor's Help 
Regulating Multiple Employer Welfare Arrangements.'', March 1992, 
available at http://www.gao.gov/assets/220/215647.pdf; (2) U.S. 
Gov't Accountability Office, GAO-04-312, ``Employers and Individuals 
Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage.'' 
February 2004, available at http://www.gao.gov/new.items/d04312.pdf; 
and Mila Kofman and Jennifer Libster, ``Turbulent Past, Uncertain 
Future: Is It Time to Re-evaluate Regulation of Self-Insured 
Multiple Employer Arrangements?'', Journal of Insurance Regulation, 
2005, Vol. 23, Issue 3, p. 17-33.
---------------------------------------------------------------------------

    ERISA requires MEWAs to report certain information annually to the 
Department, using a form known as Form M1.\52\ The Department last 
examined the universe of these reports in September of 2014.\53\ That 
examination included reports for MEWAs (including AHPs) operating in 
each year from 2010 through 2013. According to this examination, in 
2013, 392 MEWAs covered approximately 1.6 million employees. The vast 
majority of these MEWAs reported themselves as ERISA plans that covered 
employees of two or more employers. Nearly all of these covered more 
than 50 employees and therefore constituted large-group employer plans 
for purposes of the ACA. A few reported as so-called ``non-plan'' 
MEWAs, that provided or purchased health or other welfare benefits for 
two or more ERISA plans sponsored by individual employers (most of 
which probably were small-group plans for ACA purposes). Some of these 
might qualify to begin operating as ``plan-MEWAs'' (or AHPs) under this 
proposed rule. This proposed rule is intended to facilitate the 
establishment of more new plan-MEWAs/AHPs, all of which would be 
required to report annually to the Department.
---------------------------------------------------------------------------

    \52\ ERISA requires any plan MEWA/AHP (a MEWA that is also an 
ERISA plan) to file an additional report annually with the 
Department. This is the same annual report filed by all ERISA plans 
that include 100 or more participants or hold plan assets, filed 
using Form 5500. However, while more than 90 percent of 2012 Form M1 
filers reported that they were plan MEWAs, only a bit more than one-
half of these entities also filed Form 5500 for that year. Among 
those that did, frequently some of the information reported across 
the two forms was inconsistent. These reporting inconsistencies 
raise questions about the reliability of MEWAs' compliance with 
ERISA's reporting requirements and the reliability of the 
information recounted here.
    \53\ ``Analysis of Form M-1 Data for Filing Years 2010-2013,'' 
September 23, 2014. https://www.dol.gov/sites/default/files/ebsa/researchers/analysis/health-and-welfare/summit2014.pdf. A small 
number of new multiemployer welfare plans that have been in 
operation for less than three years also are required to submit such 
reports. Such multiemployer plans, which exist pursuant to 
collective bargaining agreements between one or more employee 
organizations and two or more employers, are not subject to ERISA's 
MEWA provisions (other than the reporting requirement), and are not 
affected by this regulation. These multiemployer plans made up just 
2 percent of all reporting entities in 2013. Because of their 
inclusion among the reports, the statistics presented here somewhat 
overstate the size of the true MEWA universe.
---------------------------------------------------------------------------

    Most reporting MEWAs operate in more than one State, and a handful 
operate in more than 20 States. In 2013, 46 MEWAs reported expanding 
operations into one or more new States. States with the most plan-
MEWAs/AHPs in 2012 included California (147), Texas (106), and New York 
(100). Only one had fewer than 20 (South Dakota had 18). MEWAs were 
most likely to be

[[Page 632]]

self-insured in certain western States including Wyoming (37 percent), 
Oklahoma (31 percent), Montana (30 percent), and North Dakota (28 
percent).
    About one-fourth of reporting MEWAs are self-insured in all the 
States in which they operate, and another 9 percent are self-insured in 
some States. (The remaining majority does not self-insure and instead 
purchases insurance from issuers in all States in which they operate.) 
For MEWAs for which the type of benefits offered could be determined, 
nearly all offered health insurance, and many offered other, additional 
welfare benefits, such as dental or vision benefits, or life or 
disability insurance.
    MEWAs' annual reports filed with the Department must indicate 
whether they are in compliance with a number of ERISA's minimum health 
plan standards, and with ERISA's general requirement that plans hold 
assets in trust. Nearly none reported lack of compliance with the 
former, but 13 percent reported that they did not comply with the trust 
requirement.
    This proposed rule includes provisions intended to protect AHPs 
against mismanagement and abuse. It requires that the group or 
association has a formal organizational structure with a governing body 
and has by-laws or other similar indications of formality appropriate 
for the legal form in which the group or association is operated, and 
that the functions and activities of the group or association, 
including the establishment and maintenance of the group health plan, 
are controlled by its employer members. These requirements are intended 
to ensure that the organizations are bona fide organizations with the 
organizational structure necessary to act ``in the interests'' of 
participating employers with respect to employee benefit plans as ERISA 
requires. The proposed rule also requires that the AHP's member 
companies control the AHP. This requirement is necessary both to 
satisfy ERISA's requirement that the group or association must act for 
the direct employers in relation to the employee benefit plan, and to 
prevent formation of commercial enterprises that claim to be AHPs but 
that operate like traditional issuers selling insurance in the employer 
marketplace and may be vulnerable to abuse. In addition, the proposal 
would require that only employer members may participate in the AHP and 
health coverage is not made available other than to or in connection 
with a member of the association. Together, these criteria are intended 
to ensure that associations sponsoring AHPs are bona fide employment-
based associations and likely to be resistant to abuse. Nevertheless, 
the flexibility afforded AHPs under this proposal could introduce more 
opportunities for mismanagement or abuse, increasing potential 
oversight demands on the Department and State regulators.

1.11. Federal Budget Impacts

    The proposal is likely to have offsetting effects on the budget, 
with some increasing the deficit and others reducing the deficit. On 
balance, deficit-increasing effects are likely to dominate, making the 
proposal's net impact on the federal budget negative.
    Approximately 906,000 individuals who are insured on the Exchanges 
and eligible for subsidies, and approximately 2 million Medicaid 
enrollees, are working owners or dependents thereof. An additional 2 
million and 6 million, respectively, are employees of small businesses 
that do not offer insurance or dependents thereof.\54\ As of February 
2017, 10.3 million individuals were enrolled, and paid their premiums, 
on a Federal or State-based Exchange. Of these individuals, 8.7 million 
received tax credits, and 5.9 million were receiving cost-sharing 
reduction subsidies. The average advanced premium tax credit for these 
individuals was $371 per month.\55\ Forty-two million individuals under 
age 65 were covered by Medicaid.
---------------------------------------------------------------------------

    \54\ DOL calculations based on the Abstract of Auxiliary Data 
for the March 2016 Annual Social and Economic Supplement to the 
Current Population Survey, U.S. Department of Labor.
    \55\ CMS, ``2017 Effectuated Enrollment Snapshot,'' June 12, 
2017. https://downloads.cms.gov/files/effectuated-enrollment-snapshot-report-06-12-17.pdf
---------------------------------------------------------------------------

    In 2005, the Congressional Budget Office (CBO) estimated the 
potential budget impacts of a 2005 legislative proposal to expand AHPs. 
Under the 2005 legislation and contemporaneous law, many individuals 
joining AHPs previously would have been uninsured or purchased 
individual policies without benefit of any subsidies; by joining AHPs 
they stood to gain potentially large subsidies in the form of tax 
exclusions. CBO predicted that the legislation, by increasing spending 
on employer-provided insurance, would reduce federal tax revenue by 
$261 million over 10 years, including a $76 million reduction in Social 
Security payroll taxes. CBO also predicted that AHPs would displace 
some Medicaid coverage and thereby reduce federal spending by $80 
million over 10 years. Finally, according to CBO, the legislation would 
have required DOL to hire 150 additional employees and spend an 
additional $136 million over 10 years to properly oversee AHPs.\56\ 
Together these budget impacts would have increased the federal deficit 
by $317 million over 10 years.
---------------------------------------------------------------------------

    \56\ CBO cost estimate, H.R. 525 Small Business Health Fairness 
Act of 2005. April 8, 2005. https://www.cbo.gov/sites/default/files/109th-congress-2005-2006/costestimate/hr52500.pdf
---------------------------------------------------------------------------

    Today, consequent to the ACA, many individuals who in 2005 might 
have been uninsured instead are enrolled in Medicaid or are insured and 
receive subsidies on individual Exchanges, and therefore would trade 
existing subsidies for potential new tax subsidies when joining AHPs. 
Market forces generally favor individuals capturing the larger 
available subsidy, so it is likely that AHPs will mostly enroll higher 
income individuals, whose net subsidies will increase, adding to the 
federal deficit. Resources allocated to support the Departments' 
efforts to prevent and correct potential mismanagement and abuse could 
add more to it. If, however, AHPs do enroll some Medicaid enrollees or 
individuals receiving large subsidies on individual Exchanges, savings 
from these impacts might offset a portion of these deficit increases.

1.12. Regulatory Alternatives

    In developing this proposal DOL considered various alternative 
approaches.
     Retaining existing rules and interpretations. DOL elected 
to propose relaxing existing rules and interpretations because they 
have proven to impede the establishment and growth of potentially 
beneficial AHPs. Existing interpretations generally block working 
owners who lack employees from joining AHPs. Instead these individuals 
and their families are limited to options available in individual 
markets where premiums may be higher and choice narrower than that 
which AHPs can sometimes provide. The existing commonality requirement 
sometimes prevents associations from achieving sufficient scale in 
local markets to effectively establish and operate efficient AHPs. The 
existing uncertainty as to the sufficiency of a common industry to 
permit establishment of an AHP may prevent the formation of more 
nationwide AHPs. And, the existing requirement that associations exist 
for purposes other than providing health benefits prevents the 
establishment of beneficial AHPs in circumstances where no other 
compelling reason exists to establish and maintain an association. By 
addressing these requirements, this proposal aims to promote the 
establishment and growth of AHPs and

[[Page 633]]

optimize small businesses' access to them.
     Relaxing the control requirement. The proposal generally 
requires that association members control the AHP. Relaxing this 
requirement might encourage more and faster establishment and growth of 
AHPs, as entrepreneurs identify and seize opportunities to reap and 
share with enrollees the economic benefits AHPs can deliver. DOL 
believes, however, that relaxing this requirement would increase the 
risk that AHPs would be vulnerable to mismanagement or abuse. 
Additionally, the Department's authority to loosen this requirement is 
unclear in light of ERISA's text.
     Including only fully-insured AHPs. DOL considered 
prohibiting broadening the circumstances under which an AHP is treated 
as a single plan under ERISA only for fully insured AHPs. Historically, 
self-insured MEWAs have been particularly vulnerable to financial 
mismanagement and abuse. MEWA promoters sometimes have used self-
insurance both to evade State oversight and to maximize opportunities 
for abusive financial self-dealing, often with highly negative 
consequences for their enrollees. Nonetheless, DOL recognizes that 
well-managed self-insured AHPs may be able to realize efficiencies that 
insured AHPs cannot. In light of this potential, and considering the 
enforcement tools that the ACA added to DOL's arsenal, DOL elected to 
allow AHPs to continue to self-insure under this proposal. This 
provision will serve to further promote the establishment and growth of 
effective AHPs, but it will also compel DOL to commit additional 
resources to AHPs' oversight.
     Limiting or increasing AHPs' product and/or price 
flexibility. As noted earlier, this proposal allows small businesses to 
band together to obtain advantages that attend the provision of 
insurance by a large employer, including access to the large-group 
market. The large-group market is not subject to certain product and 
pricing restrictions that govern the individual and small group 
markets. As noted earlier, some stakeholders expressed their concern 
that allowing small businesses to escape these restrictions could lead 
to excessive risk segmentation and might destabilize some local 
individual and small group markets. The Department considered, but 
rejected, subjecting AHPs to constraints similar to those applicable to 
the individual and small group markets. The goal of the proposed rule 
is to allow AHPs to leverage advantages available to large employers to 
assemble large, stable risk pools, pursue administrative savings, and 
offer small businesses more, and more affordable, health insurance 
options. In light of that objective, imposing the product and pricing 
restrictions that distinguish the individual and small group markets 
from the large group market would have been too limiting. The 
flexibility also may increase AHPs' market reach, making more 
affordable options available to more small businesses than would be 
possible without it. This proposal would mitigate AHPs' potential to 
segment risk and destabilize individual and small group markets by 
applying nondiscrimination rules that bar them from conditioning 
eligibility, benefits, or premiums on the health status of small 
businesses' employees. Some stakeholders argue that nondiscrimination 
provisions themselves unduly restrict AHPs and could prevent AHP 
formation (and hence lower the number of insured people). DOL 
considered, but rejected, omitting the nondiscrimination provisions in 
part. These provisions, among other functions, serve to distinguish 
AHPs from commercial insurers as a legal matter.

1.13. Conclusion

    This proposed rule broadens the conditions under which AHPs will be 
treated as large group health benefit plans under ERISA, the ACA and 
State law. Under the proposal, AHPs generally can offer small 
businesses more, and more affordable, benefit options than are 
available to them in the individual and small group markets, in part 
through the creation of various efficiencies. AHPs' flexibility to 
tailor products and adjust prices to more closely reflect expected 
claims will also improve social welfare for AHP participants. Although 
they may limit AHPs' appeal and thus we are seeking comment on them, 
rules barring discrimination based on health status will moderate the 
incentives for relatively healthy people disproportionately to leave 
the individual and small group markets, which would further destabilize 
local individual and small group markets. Operational risks may demand 
increased federal and State oversight. The proposal may increase the 
federal deficit.

2. Paperwork Reduction Act

    The proposed rule is not subject to the requirements of the 
Paperwork Reduction Act of 1995 (PRA 95) (44 U.S.C. 3501 et seq.), 
because it does not contain a collection of information as defined in 
44 U.S.C. 3502(3).

3. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency determines that a proposal is not 
likely to have a significant economic impact on a substantial number of 
small entities, section 603 of the RFA requires the agency to present 
an initial regulatory flexibility analysis (IRFA) of the proposed rule. 
The Department has determined that this proposed rule, which would 
broaden the criteria for determining when employers may join together 
in a group or association to sponsor a group health plan under ERISA, 
is likely to have a significant impact on a substantial number of small 
entities. Therefore, the Department provides its IRFA of the proposed 
rule, below.
Need for and Objectives of the Rule
    This proposed rule is intended and expected to deliver benefits 
primarily to the employees of small businesses and their families, as 
well as the small businesses themselves. As detailed earlier, this 
proposed rule would encourage the establishment and growth of AHPs. 
AHPs may offer small businesses more, and more affordable, health 
benefit options than otherwise are available to them in the individual 
and small group markets, resulting in employer-sponsored coverage for 
more Americans, and more diverse and affordable insurance options.
Affected Small Entities
    Potential beneficiaries of savings and increased choice from AHP 
coverage under the proposed rule include:
     Some of the 25 million individuals under age 65 who 
currently are covered in individual markets, including approximately 3 
million who are sole proprietors or dependents thereof, and an 
additional 6 million who are employees of small businesses or 
dependents thereof.
     The 25 million individuals under age 65 who currently are 
covered in small group markets.
     Some of the 28 million individuals under age 65 who 
currently lack insurance, including 2 million who are sole proprietors 
or dependents thereof, and an additional 5 million who are employees of 
small businesses or dependents thereof.

[[Page 634]]

     Some of the 1.6 million private, small-firm establishments 
(those with fewer than 50 employees) that currently offer insurance and 
the 4 million that do not.
Impact of the Rule
    By expanding AHPs, this proposal would provide more, and more 
affordable, health insurance options for small businesses, thereby 
yielding economic benefits for participating small businesses. The 
proposal includes provisions to mitigate any risk of negative 
spillovers for other small businesses. The proposal may impact 
individual and small group issuers whose enrollees might switch to 
AHPs, some of which would likely be small entities.
Duplication, Overlap, and Conflict With Other Rules and Regulations
    The proposed actions would not conflict with any relevant federal 
rules. As discussed above, the proposed rule would merely broaden the 
conditions under which an association can act as an ``employer'' under 
ERISA for purposes of offering a group health plan and would not change 
AHPs' status as large group plans and MEWAs, under ERISA, the ACA, and 
State law.

4. Congressional Review Act

    The proposed rule is subject to the Congressional Review Act (CRA) 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and, if finalized, will be transmitted to 
Congress and the Comptroller General for review. The proposed rule is a 
``major rule'' as that term is defined in 5 U.S.C. 804(2), because it 
is likely to result in an annual effect on the economy of $100 million 
or more.

5. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4) requires each federal agency to prepare a written statement 
assessing the effects of any federal mandate in a proposed or final 
agency rule that may result in an expenditure of $100 million or more 
(adjusted annually for inflation with the base year 1995) in any one 
year by State, local, and tribal governments, in the aggregate, or by 
the private sector. For purposes of the Unfunded Mandates Reform Act, 
as well as Executive Order 12875, this proposal does not include any 
federal mandate that the Department expects would result in such 
expenditures by State, local, or tribal governments, or the private 
sector. This proposed rule would merely broaden the conditions under 
which AHPs will be treated as large group health benefit plans under 
ERISA, the ACA and State law. In so doing, it makes available to more 
small businesses some of the advantages currently enjoyed by large 
employer-sponsored plans.

6. Federalism Statement

    Executive Order 13132 outlines fundamental principles of 
federalism, and requires the adherence to specific criteria by federal 
agencies in the process of their formulation and implementation of 
policies that have ``substantial direct effects'' on the States, the 
relationship between the national government and States, or on the 
distribution of power and responsibilities among the various levels of 
government. Federal agencies promulgating regulations that have 
federalism implications must consult with State and local officials and 
describe the extent of their consultation and the nature of the 
concerns of State and local officials in the preamble to the final 
rule.
    In the Department's view, these proposed regulations would have 
federalism implications because they would have direct effects on the 
States, the relationship between the national government and the 
States, and on the distribution of power and responsibilities among 
various levels of government. The Department believes these effects are 
limited, insofar as the proposal would not change AHPs' status as large 
group plans and MEWAs, under ERISA, the ACA, and State law. As 
discussed above in this preamble, because ERISA classifies AHPs as 
MEWAs, they generally are subject to State insurance regulation. 
Specifically, if an AHP is not fully insured, then under section 
514(b)(6)(A)(ii) of ERISA any State insurance law that regulates 
insurance may apply to the AHP to the extent that such State law is not 
inconsistent with ERISA. If, on the other hand, an AHP is fully 
insured, section 514(b)(6)(A)(i) of ERISA provides that only those 
State insurance laws that regulate the maintenance of specified 
contribution and reserve levels may apply to the AHP. The Department 
notes that State rules vary widely in practice, and many States 
regulate AHPs less stringently than individual or small group 
insurance. The Department welcomes input from affected States, 
including the NAIC and State insurance officials, regarding this 
assessment.

7. Executive Order 13771 Reducing Regulation and Controlling Regulatory 
Costs

    Executive Order 13771, titled Reducing Regulation and Controlling 
Regulatory Costs, was issued on January 30, 2017. This proposed rule is 
expected to be an EO 13771 deregulatory action, because it would expand 
small businesses' access to more lightly regulated and more affordable 
health insurance options, by removing certain restrictions on the 
establishment and maintenance of AHPs under ERISA.

List of Subjects in 29 CFR Part 2510

    Employee benefit plans, Pensions.

    For the reasons stated in the preamble, the Department of Labor 
proposes to amend 29 CFR part 2510 as follows:

PART 2510--DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, G, 
AND L OF THIS CHAPTER

0
1. The authority citation for part 2510 is revised to read as follows:

    Authority:  29 U.S.C. 1002(2), 1002(5), 1002(21), 1002(37), 
1002(38), 1002(40), 1031, and 1135; Secretary of Labor's Order No. 
1-2011, 77 FR 1088 (Jan. 9, 2012); Sec. 2510.3-101 also issued under 
sec. 102 of Reorganization Plan No. 4 of 1978, 43 FR 47713 (Oct. 17, 
1978), E.O. 12108, 44 FR 1065 (Jan. 3, 1979) and 29 U.S.C. 1135 
note. Sec. 2510.3-38 is also issued under sec. 1, Pub. L. 105-72, 
111 Stat. 1457 (1997).

0
2. Section 2510.3-3 is amended by revising paragraph (c) introductory 
text to read as follows:


Sec.  2510.3-3  Employee benefit plan.

* * * * *
    (c) Employees. For purposes of this section and except as provided 
in Sec.  2510.3-5(e):
* * * * *
0
 3. Section 2510.3-5 is added to read as follows:


Sec.  2510.3-5   Employer.

    (a) In general. The purpose of this section is to clarify which 
persons may act as an ``employer'' within the meaning of section 3(5) 
of the Act in sponsoring a multiple employer group health plan. Section 
733(a)(1) defines the term ``group health plan,'' in relevant part, as 
an employee welfare benefit plan to the extent that the plan provides 
medical care to employees or their dependents through insurance, 
reimbursement, or otherwise. The Act defines an ``employee welfare 
benefit plan'' in section 3(1), in relevant part, as any plan, fund, or 
program established or maintained by an employer, employee 
organization, or by both an

[[Page 635]]

employer and an employee organization, for the purpose of providing 
certain listed welfare benefits to participants or their beneficiaries. 
For purposes of being able to establish and maintain a welfare benefit 
plan, an ``employer'' under section 3(5) of the Act includes any person 
acting directly as an employer, or any person acting indirectly in the 
interest of an employer in relation to an employee benefit plan. A 
group or association of employers is specifically identified in section 
3(5) of the Act as a person able to act directly or indirectly in the 
interest of an employer, including for purposes of establishing or 
maintaining an employee welfare benefit plan.
    (b) Bona fide group or association of employers. For purposes of 
Title I of the Act and this chapter, a bona fide group or association 
of employers capable of establishing a group health plan that is an 
employee welfare benefit plan shall include a group or association of 
employers that meets the following requirements:
    (1) The group or association exists for the purpose, in whole or in 
part, of sponsoring a group health plan that it offers to its employer 
members;
    (2) Each employer member of the group or association participating 
in the group health plan is a person acting directly as an employer of 
at least one employee who is a participant covered under the plan;
    (3) The group or association has a formal organizational structure 
with a governing body and has by-laws or other similar indications of 
formality;
    (4) The functions and activities of the group or association, 
including the establishment and maintenance of the group health plan, 
are controlled by its employer members, either directly or indirectly 
through the regular nomination and election of directors, officers, or 
other similar representatives that control the group or association and 
the establishment and maintenance of the plan;
    (5) The employer members have a commonality of interest as 
described in paragraph (c) of this section;
    (6) The group or association does not make health coverage through 
the association available other than to employees and former employees 
of employer members and family members or other beneficiaries of those 
employees and former employees;
    (7) The group or association and health coverage offered by the 
group or association complies with the nondiscrimination provisions of 
paragraph (d) of this section; and
    (8) The group or association is not a health insurance issuer 
described in section 733(b)(2) of ERISA, or owned or controlled by such 
a health insurance issuer.
    (c) Commonality of interest. Commonality of interest of employer 
members of a group or association will be determined based on relevant 
facts and circumstances and may be established by:
    (1) Employers being in the same trade, industry, line of business 
or profession; or
    (2) Employers having a principal place of business in a region that 
does not exceed the boundaries of the same State or the same 
metropolitan area (even if the metropolitan area includes more than one 
State).
    (d) Nondiscrimination. A bona fide group or association, and any 
health coverage offered by the bona fide group or association, must 
comply with the nondiscrimination provisions of this paragraph (d).
    (1) The group or association must not condition employer membership 
in the group or association based on any health factor of an employee 
or employees or a former employee or former employees of the employer 
member (or any employee's family members or other beneficiaries), as 
defined in Sec.  2590.702(a) of this chapter.
    (2) The group health plan sponsored by the group or association 
must comply with the rules of Sec.  2590.702(b) of this chapter with 
respect to nondiscrimination in rules for eligibility for benefits, 
subject to paragraph (d)(4) of this section.
    (3) The group health plan sponsored by the group or association 
must comply with the rules of Sec.  2590.702(c) of this chapter with 
respect to nondiscrimination in premiums or contributions required by 
any participant or beneficiary for coverage under the plan, subject to 
paragraph (d)(4) of this section.
    (4) In applying the nondiscrimination provisions of paragraphs 
(d)(2) and (3) of this section, the group or association may not treat 
different employer members of the group or association as distinct 
groups of similarly-situated individuals.
    (5) The rules of this paragraph (d) are illustrated by the 
following examples:

    Example 1.  (i) Facts. Association A offers group health 
coverage to all members. According to the bylaws of Association A, 
membership is subject to the following criteria: All members must be 
restaurants located in a specified area. Restaurant B, which is 
located within the specified area, has several employees with large 
health claims. Restaurant B applies for membership in Association A, 
and is denied membership based on the claims experience of its 
employees.
    (ii) Conclusion. In this Example 1, Association A's exclusion of 
Restaurant B from Association A discriminates on the basis of claims 
history, which is a health factor under Sec.  2590.702(a)(1) of this 
chapter. Accordingly, Association A violates the requirement in 
paragraph (d)(1) of this section, and, therefore would not meet the 
definition of a bona fide group or association of employers under 
paragraph (b) of this section.
    Example 2.  (i) Facts. Association C offers group health 
coverage to all members. According to the bylaws of Association C, 
membership is subject to the following criteria: All members must 
have a principal place of business in a specified metropolitan area. 
Individual D is a sole proprietor whose principal place of business 
is within the specified area. As part of the membership application 
process, Individual D provides certain health information to 
Association C. After learning that Individual D has diabetes, based 
on D's diabetes, Association C denies Individual D's membership 
application.
    (ii) Conclusion. In this Example 2, Association C's exclusion of 
Individual D because D has diabetes is a decision that discriminates 
on the basis of a medical condition, which is a health factor under 
Sec.  2590.702(a)(1) of this chapter. Accordingly, Association C 
violates the requirement in paragraph (d)(1) of this section and 
would not meet the definition of a bona fide group or association of 
employers under paragraph (b) of this section.
    Example 3.  (i) Facts. Association F offers group health 
coverage to all plumbers working for plumbing companies in a State. 
Plumbers employed by a plumbing company on a full-time basis (which 
is defined under the terms of the arrangement as regularly working 
at least 30 hours a week) are eligible for health coverage without a 
waiting period. Plumbers employed by a plumbing company on a part-
time basis (which is defined under the terms of the arrangement as 
regularly working at least 10 hours per week, but less than 30 hours 
per week) are eligible for health coverage after a 60-day waiting 
period.
    (ii) Conclusion. In this Example 3, making a distinction between 
part-time versus full-time employment status is a permitted 
distinction between similarly situated individuals under Sec.  
2590.702(d) of this chapter, provided the distinction is not 
directed at individuals under Sec.  2590.702(d)(3) of this chapter. 
Accordingly, the requirement that plumbers working part time must 
satisfy a waiting period for coverage is a rule for eligibility that 
does not violate Sec.  2590.702(b) or, as a consequence, paragraph 
(d)(2) of this section.
    Example 4.  (i) Facts. Association G sponsors a group health 
plan, available to all employers doing business in Town H. 
Association G charges Business I more for premiums than it charges 
other members because Business I employs several individuals with 
chronic illnesses.
    (ii) Conclusion. In this Example 4, Business I cannot be treated 
as a separate group of similarly situated individuals from other 
members under paragraph (d)(4) of this section. Therefore, charging 
Business I more for premiums based on one or more health

[[Page 636]]

factors of the employees of Business I violates Sec.  2590.702(c) of 
this chapter and, consequently, the requirement in paragraph (d)(3) 
of this section.
    Example 5.  (i) Facts. Association J sponsors a group health 
plan that is available to all members. According to the bylaws of 
Association J, membership is open to any entity whose principal 
place of business is in State K, which has only one major 
metropolitan area, the capital city of State K. Members whose 
principal place of business is in the capital city of State K are 
charged more for premiums than members whose principal place of 
business is outside of the capital city.
    (ii) Conclusion. In this Example 5, making a distinction between 
members whose principal place of business is in the capital city of 
State K, as compared to some other area in State K, is a permitted 
distinction between similarly situated individuals under Sec.  
2590.702(d) of this chapter, provided the distinction is not 
directed at individuals under Sec.  2590.702(d)(3) of this chapter. 
Accordingly, Association J's rule for charging different premiums 
based on principal place of business does not violate paragraph 
(d)(3) of this section.
    Example 6.  (i) Facts. Association L sponsors a group health 
plan, available to all members. According to the bylaws of 
Association L, membership is open to any entity whose principal 
place of business is in State M. Sole Proprietor N's principal place 
of business is in City O, within State M. It is the only member 
whose principal place of business is in City O, and it is otherwise 
similarly situated with respect to all other members of the 
association. After learning that Sole Proprietor N has been 
diagnosed with cancer, based on the cancer diagnosis, Association L 
changes its premium structure to charge higher premiums for members 
whose principal place of business is in City O.
    (ii) Conclusion. In this Example 6, cancer is a health factor 
under Sec.  2590.702(a) of this chapter. Making a distinction based 
on a health factor, between members that are otherwise similarly 
situated is in this case a distinction directed at an individual 
under Sec.  2590.702(d)(3) of this chapter and is not a permitted 
distinction. Accordingly, by charging higher premiums to members 
whose principal place of business is City O, Association L violates 
Sec.  2590.702(c) of this chapter and, consequently, paragraph 
(d)(4) of this section.

    (e) Dual treatment of working owners as employers and employees--
(1) A working owner of a trade or business may qualify as both an 
employer and as an employee of the trade or business for purposes of 
the requirements in paragraph (b) of this section, including paragraph 
(b)(2) that each employer member of the group or association 
participating in the group health plan must be a person acting directly 
as an employer of one or more employees who are participants covered 
under the plan, and paragraph (b)(6) that the group or association does 
not make health coverage offered to employer members through the 
association available other than to employees and former employees of 
employer members and the family members or other beneficiaries of those 
employees and former employees.
    (2) The term ``working owner'' as used in this paragraph (e) means 
any individual:
    (i) Who has an ownership right of any nature in a trade or 
business, whether incorporated or unincorporated, including partners 
and other self-employed individuals;
    (ii) Who is earning wages or self-employment income from the trade 
or business for providing personal services to the trade or business;
    (iii) Who is not eligible to participate in any subsidized group 
health plan maintained by any other employer of the individual or of 
the spouse of the individual; and
    (iv) Who either:
    (A) Works at least 30 hours per week or at least 120 hours per 
month providing personal services to the trade or business, or
    (B) Has earned income from such trade or business that at least 
equals the working owner's cost of coverage for participation by the 
working owner and any covered beneficiaries in the group health plan 
sponsored by the group or association in which the individual is 
participating.
    (3) Absent knowledge to the contrary, the group or association 
sponsoring the group health plan may reasonably rely on written 
representations from the individual seeking to participate as a working 
owner as a basis for concluding that the conditions in paragraph (e)(2) 
are satisfied.

Jeanne Klinefelter Wilson,
Deputy Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2017-28103 Filed 1-4-18; 8:45 am]
 BILLING CODE 4510-29-P