DOL Provides Transitional Relief to Association Health Plans

On April 29, 2019, the United States Department of Labor (the “DOL”) released a policy statement providing transitional relief from the potential adverse consequences arising from a District Court’s vacating portions of the DOL’s regulations on the alternative test of the definition of “employer” for Association Health Plan (“AHP”) purposes.

By way of background, on June 21, 2018, the DOL published regulations which established an alternative test that described in prior DOL guidance as to who can sponsor an ERISA-covered AHP as an “employer” (the “Final Rule”).  In relevant part, the Final Rule:  (1) expanded the prior “purpose test” to require the association to have at least one substantial purpose (other than the provision of health coverage); (2) expanded the prior “community of interest test” to permit this test to be satisfied by the AHP’s members sharing a common geographical location; and (3) permitted working owners without employees to participate in AHPs.

The stated purpose of the Final Rule is to expand access to affordable health care to employees of small employers.  Critics of the Final Rule assert that it permits small employers to circumvent a number of health insurance requirements imposed by the Patient Protection and Affordable Care Act (“ACA”).

Eleven states and the District of Columbia sued the DOL asserting that the Final Rule was inconsistent with the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and thus the Final Rule was invalid.  On March 28, 2019, in State of New York v. United States Department of Labor, 2019 WL 1410370, the District Court for the District of Columbia vacated certain provisions of the Final Rule.  The DOL disagrees with the District Court’s ruling and a notice of appeal was filed on April 26, 2019.

As a result of the District Court’s decision, a number of participants and employers participating in AHPs have questioned whether the AHP must cease to provide health coverage.  Presumably, they are concerned that, with the Final Rule being vacated, the AHP may be subject to a different regulatory regime (such as multiple employer welfare arrangement (“MEWA”) treatment or may be recharacterized as a noncompliant small group health plan) which may make continuing operations impractical or illegal.

In the policy statement, the DOL provides the following transitional relief:  (1) “employers participating in insured AHPs can generally maintain that coverage through the end of the plan year or, if later, the contract term” (hereinafter the “Transition Period”); (2) the DOL will “work with affected parties, [the Department of Health and Human Services (“HHS”)], and the States to mitigate any disruptions or hardships that result from confusion regarding the status of the [Final Rule] and legal compliance requirements; and (3) the DOL “will not pursue enforcement actions against parties for potential violations stemming from actions taken before the District Court’s decision in good faith reliance on the [Final Rule’s] validity, as long as the parties meet their responsibilities to association members and their participants and beneficiaries to pay health benefit claims as promised.”

Significantly, the policy statement also summarizes certain transitional relief with respect to areas overseen by HHS.  In the policy statement, the DOL notes that HHS has advised the DOL that HHS will not pursue enforcement during the Transition Period against nonfederal governmental plans or health insurers for potential violations of the Public Health Service Act (“PHS Act”) caused by actions taken before the District Court’s decision in good faith reliance of the Final Rule.  In addition, HHS has advised the DOL that, if the States adopt a similar approach with respect to insurance coverage issued within the State, the HHS will not consider the State to be not substantially enforcing the applicable requirements of the PHS Act.

As a practical matter, many AHPs utilize a calendar year plan year and an annual calendar year insurance contract.  With respect to these AHPs, the Transition Period under the policy statement will end on December 31, 2019.  As such, the practical effect of the DOL and HHS transitional relief is to permit AHP’s, their members and the participants and beneficiaries to maintain the status quo that existed prior to the District Court’s decision through the end of the AHP’s plan year or contract term, if later.

While there is a hope that the Court of Appeals will complete the appeal and rule on the validity of the Final Rule prior to the end of the Transition Period, there is a good chance that this  case will go to the Supreme Court and the legal proceedings will not be completed by the end of the Transition Period.  This puts existing AHPs and their members in a difficult position.

Presumably, the AHPs will likely need to determine whether to continue to offer health insurance coverage by the end of the third quarter of 2019 and the AHP members and their participants and beneficiaries will also need to begin to look for replacement coverage (if the AHP ceases coverage) in the third quarter of 2019.  If the legal proceedings are not completed by the end of the third quarter of 2019, the DOL should consider extending the policy statement’s transitional relief for an additional calendar year (through December 31, 2020).

In summary, The DOL and the HHS have provided transitional relief to most of the adverse consequences to AHP’s resulting from the District Court’s invalidation of portions of the Final Rule.  Significantly, the DOL continues to provide additional guidance on its website.  See “Federal District Court Ruling in State of New York v. United States Department of Labor Concerning Department of Labor’s Final Rule on Association Health Plans”, Questions and Answers- Part Two (May 13, 2019).  Hopefully, the DOL will continue to provide additional guidance and/or transitional relief until the status of the Final Rule is ultimately resolved by the courts.

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