The U.S. Department of Labor (DOL) recently issued a final rule rescinding a 2018 rule entitled “Definition of Employer Under Section 3(5) of ERISA – Association Health Plans,” which is commonly known as the 2018 AHP Rule. DOL rescinded this rule because it determined that its provisions were inconsistent with the statutory requirements of ERISA concerning the definition of “employer” in establishing group health plans. The final rule removes the Code of Federal Regulations (CFR), Chapter 29, Section 2510.3-5, and amends Section 2510.3-3.

Employee Benefit Plans Under ERISA

A plan qualifies as an employee benefit plan under ERISA if an employer, an employee organization, or both establish it. Under Section 3(5) of ERISA, an “employer” is “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.” This definition traditionally did not include several unrelated employers with no genuine organizational relationship.

The 2018 AHP Rule

The 2018 AHP Rule established alternative criteria under ERISA Section 3(5) to determine when a group of employers constituted an “employer” to sponsor an ERISA-governed employee benefit plan. Many of these criteria were weaker than the pre-rule criteria, including the following:

  • The primary purpose of the group acting as “employer” could be providing health coverage, whereas previously, it had to have a different purpose.
  • The rule considered groups of disparate businesses in the same state or metropolitan area to have a sufficient common interest. However, before the rule, shared geography was insufficient to establish commonality.
  • The rule allowed working owners with no common-law employees to participate in AHPs as both employers and employees, although, before the rule, these individuals could not participate as either.

Eleven states and the District of Columbia sued to enjoin the 2018 AHP Rule as contrary to law, in excess of statutory authority, and arbitrary and capricious under the Administrative Procedure Act. The U.S. District Court for the District of Columbia invalidated most of the rule in a 2019 court decision, and the DOL appealed, announcing a temporary safe harbor from enforcement. The DOL sought and received a pause of the appeal in January 2021, which remains in effect.

Reinstatement of Pre-Rule Guidance

DOL’s final rule formally reinstates the pre-2018 AHP Rule guidance. Since the 2018 AHP Rule was finalized but never implemented, existing court decisions and business practices have relied upon the pre-rule guidance.

The pre-rule guidance uses a “facts-and-circumstances” approach to determine whether a group of employers is a bona fide group or association of employers that can sponsor an employee benefit plan under ERISA, using the following criteria:

  • Whether the entity has business or organizational purposes and functions unrelated to the provision of benefits;
  • Whether the employers share a commonality and genuine organizational relationship unrelated to the provision of benefits; and
  • Whether the employers that participate in a benefit program, either directly or indirectly, exercise control over the program, both in form and substance.

The pre-rule guidance also points to numerous factors relevant to the application of these criteria, including:

  • The method of soliciting members;
  • Qualifications for participation and make-up of members;
  • How the association was formed;
  • The purposes for which the association was formed;
  • Any preexisting relationships of its members;
  • The powers, rights, and privileges of employer members due to their status as employers;
  • The individual or entity who controls and directs the activities and operations of the benefit program; and
  • The extent of any employment-based commonality or other genuine organizational relationship unrelated to the provision of benefits.

AHPs are subject to all provisions of ERISA that apply to group health plans, including those found in Title I, such as fiduciary duty and prohibited transactions. Furthermore, AHPs are multiple employer welfare arrangements (MEWAs), so states may apply and enforce their state insurance laws to AHPs. However, the extent to which states may apply their laws to MEWAs, which are ERISA-covered plans, depends on whether they are fully insured.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.