Are AHPs and ARPs for Small Employers Dead in the Water?

A D.C. federal district court struck down DOL rules allowing expanded Association Health Plans (AHPs), effectively putting that new insurance market on hold. See here and here for our prior articles on the AHP rules. It may also impact the proposed regulation allowing employers to band together more easily in Association Retirement Plans (ARPs) or Multiple Employer Plans (MEPS). See here for those proposed rules. DOL will appeal the ruling and in the meantime is attempting to maintain the status quo for AHPs that already formed. At the same time, bipartisan legislation to validate MEPs that did not pass in 2018 is moving forward again.

The AHP rules were expressly designed to allow small employers and some “working owners” to band together in plans that would be treated as “large employer” plans and thus be free of some rules under the ACA. Several states attacked the AHP rules as an “end run” around the ACA’s small business and individual market rules. In New York v. U.S. Dep’t of Labor, the D.C. district court held that the AHP rules are an unreasonable interpretation of “employer” under ERISA. The AHP rules had accepted the premise from previous guidance that for an “association” to be treated as a single employer, it must have adequate “commonality of interest” among its members. The court found that the new rules so diluted the commonality requirement that employers located within a geographic area with nothing else in common, and even in conflict, could form an AHP. Of course diverse and even conflicting employers will often join together in an association like a Chamber of Commerce because they still have some interests in common (like local taxation), but the court found such minimal common interests inadequate to form a single employer within ERISA’s structure. The court was also particularly harsh in striking down the part of the rule allowing working owners to form an association sponsoring an AHP as “contrary to the text of ERISA.” The court said the rule used “prestidigitation” to transform two individuals with no employees into two employees and three employers. But it in the end it sent the rule back to DOL to determine whether any part of the rule was “severable” and could survive. (For example, the portion closest to existing guidance that allows industry-based associations.)

Some 30 new associations had already formed based on the new rules; for example local chambers of commerce in Nevada had joined with Anthem to offer small employer coverage. The DOL quickly put out brief guidance stating that such plans still had to pay claims while the DOL decided how to respond to the court’s ruling. Last week it filed a one-sentence notice of appeal, and on April 29 it issued a policy statement that while the case was on appeal it would not take action against AHPs formed in good faith based on the rule, as long as they continue to pay benefit claims. See the DOL statement here. Several states had effectively stopped AHPs under the new rules by regulation, and few are likely to proceed with more AHPs under the new rules unless the ruling is overturned. However AHPs can and still are forming under the narrower prior DOL guidance, which both the AHP rule and the court decision left intact.

The ruling could also undermine the proposed DOL regulations allowing ARPs and MEPs. The DOL borrowed heavily from the AHP rules when drafting the ARP rules, using the same version of “commonality” and allowing working owners to join under the same rationale as the court found an unreasonable interpretation of ERISA. The ARP rule also contained guidance on retirement plans sponsored by Professional Employer Organizations (PEOs) that would not be affected by the court ruling, but that part of the ARP rule broke little new ground. Thus it is likely that the ARP rule will also be on hold until DOL decides how to address the AHP rule.

For MEPs at least, legislative relief may be on the horizon. Expanding the availability of retirement MEPs for small employers has long enjoyed bipartisan support because it could encourage small employers who don’t offer any retirement plan to do so. The “Setting Every Community Up for Retirement Enhancement (SECURE) Act” allows for “open MEPs” even broader than under the proposed ARP rule. It has been passed by a House Committee and there is similar Senate legislation. The court decision could actually give a boost to finally passing this legislation, which died at the end of the last Congress. Republican Senators have just introduced a bill to allow AHPs by statute under criteria similar to the AHP rule, but it is unlikely to have such bipartisan support.

At this point small employers in some states (especially Washington) can still find opportunities to join AHPs that have been approved under the old DOL guidance. Employers in other states, and working owners everywhere, will have to await a judicial or legislative resolution of what “employer” really means under ERISA.

Disclaimer

This advisory is a publication of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.