Definition of “Employer” Under Section 3(5) of ERISA-Association Health Plans, 28912-28964 [2018-12992]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 83, Number 120 (Thursday, June 21, 2018)]
[Rules and Regulations]
[Pages 28912-28964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12992]



[[Page 28911]]

Vol. 83

Thursday,

No. 120

June 21, 2018

Part II





Department of Labor





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Employee Benefits Security Administration





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29 CFR Part 2510





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

Federal Register / Vol. 83 , No. 120 / Thursday, June 21, 2018 / 
Rules and Regulations

[[Page 28912]]


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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: Final rule.

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SUMMARY: This document contains a final regulation under Title I of the 
Employee Retirement Income Security Act (ERISA) that establishes 
additional criteria under ERISA section 3(5) for determining when 
employers may join together in a group or association of employers that 
will be 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 establishing 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), and otherwise 
removing undue restrictions on the establishment and maintenance of 
Association Health Plans (AHPs) under ERISA, the regulation facilitates 
the adoption and administration of AHPs and expands access to 
affordable health coverage, especially for employees of small employers 
and certain self-employed individuals. At the same time, the regulation 
continues to distinguish employment-based plans, the focal point of 
Title I of ERISA, from commercial insurance programs and other service 
provider arrangements. The final rule also sets out the criteria that 
would permit, solely for purposes of Title I of ERISA, certain working 
owners of an incorporated or unincorporated trade or business, 
including partners in a partnership, without any common law employees, 
to qualify as employers for purposes of participating in a bona fide 
group or association of employers sponsoring an AHP and also to be 
treated as employees with respect to a trade, business or partnership 
for purposes of being covered by the AHP. The regulation would affect 
AHPs, bona fide groups or associations of employers sponsoring such 
plans, participants and beneficiaries with health coverage under an 
AHP, health insurance issuers, and purchasers of health insurance not 
purchased through AHPs.

DATES: 
    Effective date. This final regulation is effective on August 20, 
2018.
    Applicability dates. See Section D of the SUPPLEMENTARY INFORMATION 
section for applicability dates for the final rule for fully-insured 
AHPs and self-insured AHPs. As discussed more fully below, the 
Department has established an applicability date of September 1, 2018, 
for fully-insured AHPs, an applicability date of January 1, 2019, for 
existing self-insured AHPs complying with the Department's pre-rule 
test, and an applicability date of April 1, 2019, for new self-insured 
AHPs formed pursuant to this final rule. The Department has concluded 
that a staggered approach to implementation of this final rule is 
consistent with the objective of allowing stakeholders, including 
States and State insurance regulators, an appropriate amount of time to 
tailor their groups, associations, plans, and regulations to the final 
rule and to address a range of oversight and compliance assistance 
issues, especially with respect to self-insured AHPs.

FOR FURTHER INFORMATION CONTACT: Amber Rivers or Suzanne Adelman, 
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. Background

    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.'' \1\ To advance this policy, the Executive 
Order directed the Secretary to consider issuing regulations or 
revising guidance, consistent with law, that would expand access to 
more affordable health coverage by permitting more employers to form 
AHPs. The Executive Order specifically directed the Secretary to 
consider expanding the conditions that satisfy the commonality of 
interest requirements under existing DOL advisory opinions interpreting 
the definition of an ``employer'' under ERISA section 3(5) and also to 
consider ways to promote AHP formation on the basis of common geography 
or industry.
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    \1\ See Executive Order 13813 at 82 FR 48385 (Oct. 17, 2017).
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    AHPs are an innovative option for expanding access to employer-
sponsored coverage (especially for small businesses). Through AHPs, 
employers band together to purchase health coverage. By participating 
in AHPs, employees of small employers and working owners are able to 
obtain coverage that is not subject to the regulatory complexity and 
burden that currently characterizes the market for individual and small 
group health coverage and, therefore, can enjoy flexibility with 
respect to benefit package design comparable to that enjoyed by large 
employers. AHPs may also help reduce the cost of health coverage to 
participating employer members 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 day-to-day administration of the benefit program is transferred 
from participating employers, who may have little expertise in these 
matters, to the AHP sponsor).
    The Department expects that a substantial number of uninsured 
people will enroll in AHPs because the Department expects the coverage 
will be more affordable than what would otherwise be available to them, 
and other people who currently have coverage will replace it with AHP 
coverage because the AHP coverage will be more affordable or better 
meet their needs. The Department also notes the U.S. Congressional 
Budget Office (CBO) predicted that 400,000 people who would have been 
uninsured will enroll in AHPs and 3.6 million people will enroll in 
AHPs who would have had other coverage, resulting in 4 million 
additional people enrolling in AHPs.\2\
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    \2\ U.S. Congressional Budget Office, ``Federal Subsidies for 
Health Insurance Coverage for People Under Age 65: 2018 to 2028.'' 
https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53826-healthinsurancecoverage.pdf. The Department did not rely on 
the information contained in the CBO report to reach its conclusions 
regarding the effects of the final rule, but notes that the CBO's 
findings are consistent with the Department's own findings.
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    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

[[Page 28913]]

insurance issuers \3\ directly to these individuals and small 
employers, unless the coverage sponsored by the group or association 
constitutes a single ERISA-covered plan. Whether, and the extent to 
which, various regulatory requirements apply to association health 
coverage depends on whether the coverage is individual or group 
coverage and, in turn, whether the group coverage is small or large 
group coverage. Generally, unless the arrangement sponsored by the 
group or association constitutes a single ERISA-covered plan, the 
current regulatory framework disregards the group or association in 
determining whether the coverage obtained by any particular 
participating individual or employer is individual, small group, or 
large group market coverage (the ``look through'' doctrine). 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 employees of the 
particular employer obtaining the coverage. Thus, unless the 
association plan is treated as a single ERISA-covered employee welfare 
benefit plan, the size of each individual employer participating in the 
group or 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). 
Accordingly, different group or association members will have coverage 
that is subject to the individual market, small group market, and/or 
large group market rules concurrently, as determined by each member's 
circumstances, making the arrangement very difficult to administer and 
discouraging employers from banding together to sponsor association 
health coverage.
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    \3\ A ``health insurance issuer'' or ``issuer'' means an 
insurance company, insurance service, or insurance organization 
(including an HMO) that is required to be licensed to engage in the 
business of insurance in a State and that is subject to State law 
that regulates insurance (within the meaning of section 514(b)(2) of 
ERISA). Such term does not include a group health plan. 29 CFR 
2590.701-2. The terms ``health insurance issuer'' and ``issuer'' are 
used interchangeably in this preamble.
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    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, to be an employee 
welfare benefit plan, the plan, fund or program must, among other 
criteria, be established or maintained by an employer, an employee 
organization, or both an employer and an employee organization. With 
respect to groups or associations of employers, only a group or 
association acting as an ``employer'' under ERISA section 3(5) is 
capable of establishing an employee welfare benefit plan.
    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. Based on definitions in Title I of ERISA, and because 
Title I's overall structure contemplates employment-based benefit 
arrangements, DOL historically has recognized that, in the absence of 
the involvement of an employee organization, a group or association of 
employers may sponsor a single ``multiple employer'' plan, if certain 
factors are present.\4\ The key factors have been commonality of 
interests of employer members and control of the benefit arrangement by 
the employer members. These factors are present when an organized group 
or association of employers with common interests unrelated to the 
provision of benefits, 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).\5\
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    \4\ Congress did not intend to treat commercial insurance 
products marketed by private entrepreneurs as ERISA-covered welfare 
benefit plans. Shortly after ERISA's passage, Congress expressly 
noted these concerns in The Report of the Committee on Education and 
Labor, HR. Rep. No. 1785, 94th Cong., 2d Sess. 48 (1977):
    Certain entrepreneurs have undertaken to market insurance 
products to employers and employees at large, claiming these 
products to be ERISA covered plans. For instance, persons whose 
primary interest is in profiting from the provision of 
administrative services are establishing insurance companies and 
related enterprises. The entrepreneur will then argue that [its] 
enterprise is an ERISA benefit plan which is protected, under 
ERISA's preemption provision, from state regulation . . . [W]e are 
of the opinion that these programs are not `employee benefit plans' 
. . . [T]hese plans are established and maintained by entrepreneurs 
for the purpose of marketing insurance products or services to 
others. . . . They are no more ERISA plans than is any other 
insurance policy sold to an employee benefit plan.
    \5\ See AO 2008-07 at www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/2008-07a; AO 2003-17A at 
www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/2003-17a; AO 2001-04A at www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/2001-04a; AO 96-
25A at www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/1996-25a.
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    In defining the type of employer group or association that can act 
as an ERISA section 3(5) employer in sponsoring a single ``multiple 
employer'' plan, DOL has long considered 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'' standard is intended to distinguish bona 
fide groups or associations of employers that 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.\6\
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    \6\ See AO 94-07A at www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/1994-07a and AO 2001-07A at 
www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/2001-07a.
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    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.

[[Page 28914]]

of Public Instruction, 804 F.2d 1059, 1063-1064 (8th Cir. 1986); see 
also MD Physicians & Associates, Inc. v. State Bd. of Ins., 957 F.2d 
178, 183-186 (5th Cir. 1992); National Business Assn. Trust v. Morgan, 
770 F. Supp. 1169 (W.D. Ky. 1991).\7\
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    \7\ Brief of the Secretary of Labor as amicus curiae, MD 
Physicians & Associates, Inc. v. State Bd. of Ins., 957 F.2d 178 
(5th Cir. 1992) (No. CA-2-90-0054), 1991 WL 11248117.
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    DOL advisory opinions and court decisions have applied a facts-and-
circumstances approach to determining whether a group or association of 
employers is 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 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 Department's historical approach to these issues was designed 
to ensure that the Department's regulation of employee benefit plans is 
focused on employment-based arrangements, as contemplated by ERISA, 
rather than merely commercial insurance-type arrangements that lack the 
requisite connection to the employment relationship. But neither the 
Department's previous advisory opinions, nor relevant court cases, 
foreclose DOL from adopting a more flexible test in a regulation, or 
from departing from particular factors previously used 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. Rather, the terms ``employer'' 
and ``indirectly in the interest of an employer'' 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 
``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).
    In addition to the text and structure of Title I of ERISA, a 
regulation under ERISA section 3(5) should be guided by ERISA's 
purposes and appropriate policy considerations, including the need to 
expand access to healthcare and to respond to changes in law, market 
dynamics, and employment trends. Thus, Executive Order 13813 directed 
the Department to address the problem that too many legitimate employer 
associations cannot sponsor ERISA-covered plans because they do not 
satisfy the requirements for being treated as an ``employer'' or as 
``acting in the interest of'' an employer under the Department's 
previous sub-regulatory guidance (``pre-rule guidance''). Instead, too 
many association arrangements for health coverage are treated as a mere 
collection of distinct plans, each separately sponsored by individual 
employers. Under the Department's pre-rule guidance, the association in 
most cases is treated as the mechanism by which each individual 
employer obtains benefits and administrative services for its own 
separate plan. To the extent the separate employers are small 
employers, their insurance is subject to regulation as small group 
coverage for purposes of the Patient Protection and Affordable Care Act 
(ACA). Similarly, in the case of sole proprietors and other business 
owners that do not also employ other individuals, the insurance 
coverage they obtain for themselves through an association is treated 
as individual coverage. As a result, associations that want to form 
AHPs and existing AHPs currently face a complex and costly compliance 
environment insofar as the various employer members of the association 
and the association's health insurance coverage arrangement may 
simultaneously be subject to large group, small group, and individual 
market regulation, which undermines one of the core purposes and 
advantages of an association forming and its employer members joining 
an AHP (i.e., to help small employers obtain better terms on health 
coverage by allowing them to group together to spread risk and 
administrative costs in a large group environment).
    After Executive Order 13813 was issued, on January 5, 2018, the 
Department published a proposed regulation (``Proposed Rule'') on the 
definition of ``employer'' in ERISA section 3(5) that would broaden the 
types of employer groups or associations that may sponsor a single 
group health plan under ERISA for the benefit of the employees of the 
group or association's member employers. The Proposed Rule would 
broaden the criteria for a group or association to satisfy the 
``commonality of interest'' requirement, and provide additional 
flexibility for employer groups or associations to offer health 
coverage in a manner that would be considered a single group health 
plan. Specifically, under the Proposed Rule, employer groups or 
associations would meet the commonality of interest criteria if their 
members were in the same trade, industry, line of business, or 
profession, or maintained their principal places of business in a 
region that does not exceed the boundaries of the same State, or in the 
same metropolitan area (even if the metropolitan area includes more 
than one State).
    The Proposed Rule also included a provision that would establish 
clear criteria under which working owners, such as sole proprietors and 
other self-employed individuals, could participate in AHPs. 
Furthermore, while the Department's regulation at 29 CFR 2510.3-3(b) 
(which excludes ``plans without employees'' from the definition of 
employee benefit plans covered by Title I of ERISA) does not prevent 
sole proprietors or other working owners from being participants in 
broader plan arrangements, such as AHPs, the Proposed Rule also 
included an amendment to that regulation that would expressly permit 
participation of working owners without any common law employees in 
AHPs. Under the Proposed Rule, the participants in an AHP thus could 
consist of common law employees, common law employees and working 
owners, or solely of 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 bona fide 
group or association and an employee participant in the AHP.
    The Department received over 900 comments in response to the 
Proposed Rule from a wide range of stakeholders, including group health 
plan participants, consumer groups, employer groups, individual 
employers (including sole-proprietors), employer associations and other 
business groups, individual health insurance issuers, trade groups 
representing health insurance issuers, State regulators, and existing 
AHPs. The public comments submitted in response to the Proposed Rule 
were posted on the Department's website at https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85. A significant number of commenters, including small 
business owners and self-employed individuals, expressed serious 
concerns regarding the rising cost of healthcare. Many of these small 
business owners currently do not offer health coverage to their 
employees, citing ever-increasing costs

[[Page 28915]]

as the primary reason they cannot offer affordable health coverage to 
their employees and their families. Similarly, small business owners 
that provide health coverage stressed that the premiums are exceedingly 
costly, and the increases in premiums are frequent and unsustainable. 
Many self-employed individuals, for example real estate agents, stated 
that they are forced to purchase insurance in a volatile individual 
insurance market, which tends to offer fewer choices at much higher 
costs. The small business owners who submitted these comments said that 
they were very supportive of the Proposed Rule as a way to expand the 
options they have to obtain more affordable healthcare coverage for 
themselves and their employees.
    After careful consideration of the issues raised by the written 
public comments, the Department decided to adopt the Proposed Rule as a 
final rule, with certain modifications made in response to public 
comments. Small businesses are crucial to the U.S. economy. Small 
business owners are often anxious about their ability to obtain 
healthcare coverage for their employees through employee benefit plans. 
Similarly, sole proprietors and other self-employed individuals who do 
not have employees also find it difficult to obtain affordable coverage 
for themselves and their families through employee benefit plans, or 
through individual coverage. The Department believes that this final 
rule will promote broader availability of group health coverage for 
these small business owners and self-employed people, and help 
alleviate their problems of limited or non-existent affordable 
healthcare options for these small businesses and self-employed people. 
The Department believes it is important to provide an alternative to 
the restrictions present in the Department's pre-rule guidance that 
have hampered the ability of small businesses to join together to 
purchase and provide affordable, quality health coverage for 
themselves, their employees and their families. The Department 
continues to believe that providing additional opportunities for 
employer groups or associations to offer health coverage to their 
members' employees under a single plan may, under the final rule, 
provide many more small businesses and self-employed individuals 
affordable alternatives not currently available in the individual or 
small group markets. The provisions in the final rule are designed to 
achieve the same goals that the Department's guidance regarding AHPs 
has always pursued--i.e., making AHPs available while helping to 
prevent fraud and distinguishing AHPs from commercial health insurance 
issuers--in light of compelling policy objectives, including especially 
the need to provide more, and more affordable, healthcare coverage for 
employees of small businesses and self-employed individuals.
    The Department also continues to believe that the final rule will 
prompt some working owners who were previously uninsured and some small 
businesses that did not previously offer health coverage 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. As under the Proposed Rule, 
AHPs that buy insurance would not be subject to the insurance look-
through doctrine as set forth in 2011 guidance from the Centers for 
Medicare & Medicaid Services (CMS); \8\ instead, because an AHP would 
constitute a single group health plan, whether the AHP would be buying 
insurance in the large or small group market would be determined by 
reference to the total number of employees of all the member employers 
participating in the AHP.
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    \8\ 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. 
Available at https://www.cms.gov/CCIIO/Resources/Files/Downloads/dwnlds/association_coverage_9_1_2011.pdf. Hereinafter referred to as 
``2011 CMS guidance.''
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B. Overview of the Final Rule and Discussion of Public Comments

    The final rule adopts a new regulation at 29 CFR 2510.3-5. 
Subsection (a) of the final rule describes the general purpose of the 
regulation as clarifying which persons may act as an ``employer'' 
within the meaning of ERISA section 3(5) in sponsoring a multiple 
employer group health plan. Subsection (b) sets forth criteria for a 
bona fide group or association of employers capable of establishing a 
group health plan that is an employee welfare benefit plan. Subsection 
(c) sets forth criteria for the requisite commonality of interest that 
employer members of a group or association must have to constitute a 
bona fide group or association of employers. Subsection (d) establishes 
nondiscrimination requirements for any health coverage offered by the 
bona fide group or association, including examples that illustrate the 
application of those requirements. Subsection (e) describes the types 
of working owners without common law employees who can qualify as 
employer members and also be treated as employees for purposes of being 
covered by the bona fide employer group or association's health plan. 
Subsection (f) describes the effective date and applicability dates for 
the final rule. Subsection (g) is a severability provision making it 
clear that individual provisions in the final rule are independent of, 
and severable from, other provisions of the final rule.
    The final rule establishes alternative criteria from those 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 final rule has 
been developed in consultation with the Department of Health and Human 
Services (HHS), the Centers for Medicare and Medicaid Services (CMS), 
the Department of the Treasury (Treasury), and the Internal Revenue 
Service (IRS), with which the Department is working to implement the 
ACA, Executive Order 13813, and Executive Order 13765.\9\ However, the 
final rule will apply solely for purposes of Title I of ERISA and for 
determining whether health insurance coverage of the AHP is regulated 
by Public Health Service Act (PHS Act) provisions that apply to the 
individual, small group, or large group market, and not, for example, 
for purposes of taxation under the Internal Revenue Code (Code).\10\
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    \9\ 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).
    \10\ Both the Proposed Rule and this final rule under ERISA 
section 3(5) are limited to health benefits and AHPs. Accordingly, 
for simplicity, the preamble to this final rule often refers only to 
health benefits, including when discussing the application of prior 
Departmental guidance. Thus, neither this preamble nor the final 
rule address the application of the ERISA section 3(5) statutory 
phrases, ``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. Several 
commenters asked that the final rule include provisions to expand 
the circumstances under which employers and self-employed 
individuals can sponsor and participate in ERISA-covered multiple 
employer plans (MEPs) that provide retirement benefits within the 
meaning of ERISA section 3(2) or other welfare benefits listed in 
ERISA section 3(1). The Department notes that as more Americans 
engage in part-time, contract, self-employment, or other alternative 
work arrangements, it is increasingly important that retirement 
plans and employee benefit regulation in general allow for more 
flexible, portable benefit programs. Although those issues are 
beyond the scope of this rulemaking, the Department will consider 
comments submitted in connection with this rule as part of its 
evaluation of MEP issues in the retirement plan and other welfare 
benefit plan contexts.

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[[Page 28916]]

1. Continued Availability of ``Bona Fide Group or Association of 
Employers'' Definition Under the Department's Pre-Rule Guidance

    The principal objective of the final rule is to expand employer and 
employee access to more affordable, high-quality coverage. Some 
commenters expressed concern, however, that application of the final 
rule's requirements to existing AHPs could reduce coverage. They argued 
that existing AHPs that relied on the Department's pre-rule guidance on 
``bona fide group or association of employers'' did not design their 
operations with the new requirements in mind. As a consequence, 
existing AHPs may not be able to comply with the new conditions without 
reducing existing options for affordable healthcare. The Department 
agrees that would be an undesirable result. Accordingly, the Department 
notes that AHPs may continue to rely upon the Department's previous 
guidance.\11\ This final rule provides an additional mechanism for 
groups or associations to meet the definition of an ``employer'' and 
sponsor a single ERISA-covered group health plan; it is not the sole 
mechanism.\12\
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    \11\  See, e.g., Advisory Opinion Nos. 94-07A, 2003-13A, and 
2007-06A.
    \12\ Also, some commenters indicated that some existing multiple 
employer welfare arrangements (MEWAs) are not interested in 
obtaining single-employer AHP status under ERISA. These commenters 
requested clarification of whether a group or association that 
provides health coverage to more than one employer member must 
sponsor an AHP to provide those benefits. While the final rule 
describes when a group or association of employers is permitted to 
act as an ``employer'' under section 3(5) of ERISA, the final rule 
does not compel the group or association to sponsor an AHP on behalf 
of the group or association's participating employer members. The 
Department believes that a group or association operating a MEWA can 
structure its operations to avoid being deemed an employer 
sponsoring a single ERISA-covered health plan for the employees of 
the participating members. Such a group or association is permitted 
to operate a MEWA under which each employer that gets its health 
coverage through the group or association is considered to have 
established a separate, single-employer health benefit plan covering 
its own employees. As under pre-rule guidance, the Department would 
look to the intent of all parties, as reflected in the plan 
documents, to determine whether there is a single multiple-employer 
plan or there are multiple single-employer plans. MEWAs are 
discussed further below.
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    A central aim of the new regulation is to provide an additional 
opportunity beyond those available under pre-rule guidance for employer 
groups or associations to offer health coverage to their members' 
employees under a single plan. While the Department believes that it is 
appropriate to expand the availability of AHPs to the new arrangements 
permitted under the final rule, it does not suggest that arrangements 
that comply with its pre-rule guidance fail to meet the statutory 
definition of employer. An employer group or association that complies 
with either the requirements under the new rule or the pre-rule 
guidance is considered to be acting in the interest of participating 
employers. In either case, the group or association acts as an 
``employer'' within the meaning of ERISA section 3(5), and has a 
sufficient nexus to employers and employees in the AHP to distinguish 
it from a mere commercial health insurance issuer that lacks the 
requisite connection to the employment-based relationships that ERISA 
regulates.\13\
---------------------------------------------------------------------------

    \13\ The Department's previously issued guidance established 
criteria for determining that an employer group or association is an 
employer within the meaning of ERISA section 3(5) for purposes of 
establishing an AHP (or other employee welfare benefit plan). Among 
the factors considered are the following: How members are solicited; 
who is entitled to participate and who actually participates in the 
group or association; the process by which the group or association 
was formed, the purposes for which it was formed, and what, if any, 
were the preexisting relationships of its members; the powers, 
rights, and privileges of employer members that exist by reason of 
their status as employers; and who actually controls and directs the 
activities and operations of the benefit program. The employer 
members must also have a sufficient employment-based common nexus or 
other genuine organizational relationship unrelated to the provision 
of benefits. That determination is made on the basis of all the 
facts and circumstances involved. The employers that participate in 
a benefit program must also exercise control over the group or 
association's group health plan, both in form and in substance, in 
order to act as a bona fide employer group or association with 
respect to the plan.
---------------------------------------------------------------------------

    Accordingly, the final rule includes additional regulatory text to 
make it clear that this final rule does not supplant the Department's 
previously issued guidance under ERISA section 3(5), but rather 
provides an additional basis for meeting the definition of an 
``employer'' under ERISA section 3(5). The Department emphasizes that 
both existing and new employer groups or associations that conform to 
the Department's pre-rule guidance can sponsor an AHP.

2. Bona Fide Groups or Associations of Employers Under the Final Rule

    Paragraph (b) of the Proposed Rule defines certain criteria for a 
``bona fide group or association of employers'' that may establish a 
group health plan that is an employee welfare benefit plan as those 
terms are defined in ERISA.\14\ Some commenters suggested broadening 
the definition of ``bona fide groups or associations'' to include a 
variety of tax-exempt organizations under Code section 501(c), such as 
scientific, literary, and educational organizations whose members are 
not necessarily employers. These commenters urged the Department to 
expand the regulation to allow groups or associations of individuals to 
sponsor an AHP, without regard to whether such individual's employer is 
a participating member or whether the individual is a ``working 
owner.'' They explained that many well established professional 
associations include individuals in a common trade or business, but who 
are not self-employed and whose employers may not be participating 
members. Accordingly, they argued that the Department's Proposed Rule 
unduly limits these associations' ability to offer AHPs to their 
members, including members who are independent contractors or sole 
proprietors who could otherwise benefit from the new rule's extended 
coverage of ``working owners.'' Whatever the policy merits of these 
arguments, however, the Department's authority to define ``employer'' 
and ``group or association of employers'' under ERISA section 3(5) does 
not broadly extend to arrangements established to provide benefits 
outside the employment context and without regard to the members' 
status as employers. The final rule, like ERISA section 3(5), is 
limited to employers, including working owners, as discussed below. The 
Department cannot expand its definition beyond the statute's scope.
---------------------------------------------------------------------------

    \14\ One commenter also suggested that the term ``bona fide'' 
should be deleted from the rule because ERISA section 3(5) does not 
use that term but merely refers to ``group or association of 
employers.'' The Department has chosen not to adopt this change in 
nomenclature. The term ``bona fide'' properly indicates that the 
group or association of employers must meet certain criteria to be 
eligible to act as an employer sponsor of a single AHP, within the 
meaning of ERISA section 3(5). The Department could have used 
``qualified'' or ``qualifying'' but chose to use ``bona fide'' 
because that is the term used in the Department's previously-issued 
sub-regulatory guidance under ERISA section 3(5).
---------------------------------------------------------------------------

    Some commenters additionally argued that the Department should 
remove the Proposed Rule's ``commonality of interest'' and ``control'' 
requirements altogether because, in the commenters' view, these 
requirements are not supported by the statutory text of ERISA. These 
commenters argued that ERISA section 3(5) does not expressly require 
either commonality or control but rather, requires only that the group 
or association of employers act indirectly in the interest of the group 
or association's employer members. They

[[Page 28917]]

further argued that the Department should apply in this situation its 
regulation at 29 CFR 2530.210(c)(3), which provides that, for employee 
pension plans subject to ERISA's participation and vesting 
requirements, ``multiple employer plan'' means a multiple employer plan 
as defined in Code section 413(b) and (c). The commenters maintained 
that neither Code section 413(c) nor Treasury Regulation section 1.413-
2 requires a ``unique nexus'' between the employers that maintain a 
multiple employer plan. The commenters claimed that, for purposes of 
the Code and, therefore, ERISA, a multiple employer plan is simply a 
plan maintained by more than one employer with no ``nexus'' required. 
As discussed more fully below, with regard to ERISA section 3(5), the 
Department does not agree. Commonality and control requirements are 
retained in the final rule as elements that distinguish employment-
based benefit arrangements from commercial insurance marketing 
programs.
    Other commenters argued that the Department's proposal to redefine 
the criteria for a bona fide group or association such that the group 
or association of employers and the individuals that benefit from the 
plan are no longer required to be tied by a common economic or 
representation interest, unrelated to the provision of benefits, is 
inconsistent with allegedly unambiguous statutory language in ERISA and 
several decades of case law applying ERISA, is in excess of statutory 
authority, and is arbitrary and capricious under the Administrative 
Procedure Act (``APA''). As discussed more fully below, although the 
Department does not believe that the proposal was inconsistent with 
unambiguous statutory language or lacked reasoned analysis, the 
Department has decided that the final rule should require that a bona 
fide group or association of employers have at least one substantial 
business purpose unrelated to the provision of benefits to be eligible 
to sponsor an ERISA-covered group health plan, although the final rule 
makes clear that a group or organization's principal purpose may be the 
provision of benefits.
    Several commenters also argued that the PHS Act, the ACA, and ERISA 
manifest a clear intent to treat the group markets and individual 
market as distinct, and that the Proposed Rule conflicts with the text 
of the ACA by allowing small employers and individuals, who are not 
subject to the employer shared responsibility provisions under section 
4980H of the Code and who were supposed to be purchasing insurance 
coverage that is subject to the essential health benefits (``EHB'') 
requirements, to band together to obtain health insurance that does not 
comply with all the ACA insurance rules applicable to small group 
market insurance. The Department disagrees that the Proposed Rule is 
unlawful under the ACA. As explained in the 2011 CMS guidance, although 
the ACA revised and added to Title XXVII of the PHS Act, it did not 
modify the underlying PHS Act framework for determining whether health 
insurance coverage issued through associations was individual or group 
health insurance coverage. The PHS Act derives its definitions of group 
health plan and employer from the ERISA definitions and where the 
association of employers is, in fact, sponsoring the group health plan 
and the association itself is deemed the ``employer,'' the association 
itself is considered a group health plan for purposes of the ACA 
provisions in Title XXVII of the PHS Act. Single plan MEWAs pre-date 
the ACA and continue to play an important role in the existing 
regulatory environment under the PHS Act, the ACA, and ERISA. Thus, 
employer groups already can group together to collectively sponsor 
ERISA plans, and those plans have to comply with applicable group 
market rules. In line with that recognized practice, here the # DOL has 
simply used its rulemaking authority to define a statutory term in a 
way that allows employers to join together more broadly to promote the 
adoption and administration of AHPs and expand access to affordable 
health coverage, especially among small employers and self-employed 
individuals.
a. Purpose of the Association
    Paragraph (b)(1) of the Proposed Rule stated that a group or 
association may act as an employer within the meaning of ERISA section 
3(5) for purposes of sponsoring a group health plan if 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. This 
represented a departure from previously issued sub-regulatory guidance, 
which required a group or association acting as an employer to exist 
for purposes other than providing health benefits.
    Many commenters, including some who were otherwise supportive of 
the Proposed Rule, objected to this provision. Several commenters 
believed that, because most small businesses already have the 
opportunity to belong to a chamber of commerce or other professional 
association, allowing a group or association to be formed solely for 
the purpose of sponsoring a group health plan is unnecessary to achieve 
the Department's goals. Commenters believed that a proliferation of 
groups or associations established for the exclusive purpose of 
sponsoring an AHP could oversaturate the market, diminishing the value 
of existing trade and professional groups or associations which, for 
decades, have focused on building and maintaining relationships with 
their members and serving their members' needs on a multitude of issues 
well beyond health benefits. Similarly, it could also diminish the 
market power of existing AHPs and those that may be formed by groups 
and associations that exist for other purposes, which could limit their 
opportunities to achieve the economies of scale that make AHPs an 
attractive vehicle for providing affordable coverage in the first 
place. Commenters also expressed the view that established industry and 
trade groups and associations have strong incentives to maintain their 
good reputation and favorable historical record of responsibly acting 
in the interests of their employer members. These reputational 
incentives mitigate the risk that they would set up poorly managed AHPs 
or provide inadequate coverage. In contrast, these commenters argued, 
allowing groups and associations formed for the sole purpose of 
offering an AHP to be considered bona fide groups or associations of 
employers could invite unscrupulous promoters to enter the market with 
mismanaged and thinly funded AHPs and could increase the prevalence of 
fraudulent and abusive practices. Additionally, according to such 
commenters, newly-formed groups and associations are likely to lack the 
knowledge and expertise necessary to prudently operate an AHP, subject 
to all of the complexities of modern health markets and regulatory 
structures. Commenters noted that individuals and small businesses are 
not typically sophisticated purchasers of group health coverage and may 
confront challenges in evaluating AHP options. As a result, these 
persons may be more likely to make imprudent decisions that would drive 
them to select plans with the lowest premiums without understanding the 
impact on access to care, the rights of their employees, and risks 
associated with fraud and insolvency. Several commenters stated that 
self-insured AHPs in particular were ripe for abuse and recommended 
that groups and associations that do not exist for purposes other than 
sponsoring

[[Page 28918]]

an AHP should be limited to offering fully-insured AHPs.
    Commenters offered numerous suggestions for alternative criteria 
for determining a bona fide group or association of employers for 
purposes of the new rule with the aim that those eligible be limited to 
legitimate, well-managed, and well-intended organizations with the 
ability to properly operate an AHP. Some commenters supported retaining 
the requirement in the Department's pre-rule guidance that the group or 
association exist for other purposes unrelated to the provision of 
benefits in order for the group or association to qualify as bona fide. 
Some suggested requiring a group or association to exist for a 
specified minimum length of time before it could sponsor an AHP. Others 
suggested requiring that the group or association meet certain criteria 
for tax-exempt organizations, have minimum revenues unrelated to AHP 
operations, or demonstrate by other means the capacity to oversee the 
administrative requirements associated with managing the complexities 
of an AHP in order to be considered a bona fide group or association.
    After consideration of the public comments, the Department agrees 
that some modification of this provision is appropriate. The intent of 
this final rule is to expand access to AHP coverage options, while 
protecting plan participants and beneficiaries from imprudent, abusive, 
or fraudulent arrangements. Removing undue restrictions for existing 
groups and associations as well as for newly-formed groups and 
associations of employers and working owners is critical to achieving 
the Department's goal of expanding choice in health coverage options. 
But the Department understands the concerns regarding operational risks 
such as fraud and insolvency that commenters believed might be more 
likely with respect to AHPs offered by newly-formed groups and 
associations that exist solely for the purpose of sponsoring an 
AHP.\15\
---------------------------------------------------------------------------

    \15\ In addition, the Department's revisions of the final rule 
are responsive to concerns that, in the absence of some purpose 
other than providing health benefits, there may be insufficient 
basis for treating the group or association as the sort of bona fide 
group or association of employers contemplated by ERISA section 
3(5), as opposed to a commercial insurance operation or issuer that 
should be regulated in the same manner as other insurance companies 
or issuers.
---------------------------------------------------------------------------

    Accordingly, the Department is modifying this provision in the 
final rule to establish a general legal standard that requires that a 
group or association of employers have at least one substantial 
business purpose unrelated to offering and providing health coverage or 
other employee benefits to its employer members and their employees, 
even if the primary purpose of the group or association is to offer 
such coverage to its members. Although the final rule does not define 
the term ``substantial business purpose,'' the rule contains an 
explicit safe harbor under which a substantial business purpose is 
considered to exist in cases where the group or association would be a 
viable entity even in the absence of sponsoring an employee benefit 
plan. The final rule also states that a business purposes is not 
required to be a for-profit purpose.\16\ Thus, for example, a bona fide 
group or association could offer other services to its members, such as 
convening conferences or offering classes or educational materials on 
business issues of interest to the association members. Depending on 
facts and circumstances, a bona fide group or association might be tax-
exempt under Code section 501(a) as an organization described in Code 
section 501(c), with a purpose unrelated to the sponsorship of the AHP, 
if it meets all the requirements for exempt status, including 
furthering an exempt purpose. A bona fide group or association could 
also act as a standard-setting organization that establishes business 
standards or practices. A bona fide group or association could also 
engage in public relations activities such as advertising, education, 
and publishing on business issues of interest to association members 
unrelated to sponsorship of an AHP. A bona fide group or association's 
purpose could simply be to advance the well-being of the industry in 
which its members operate, although in that case the group or 
association would need to advance that well-being through substantial 
other activity in addition to providing health coverage. In each 
instance, the other business purpose(s) or activity should be 
substantial enough that the association could be a viable entity even 
in the absence of acting as a sponsor of an AHP. If, for example, the 
group or association had operated with an active membership before 
sponsoring an AHP, that would be compelling evidence of such a 
substantial business purpose. Nor would it be inconsistent with this 
provision if such a pre-existing group or association created a wholly 
owned subsidiary to administer an AHP, even if the subsidiary exists 
solely to administer the group health plan. In this circumstance, the 
group or association's substantial business purpose unrelated to the 
provision of healthcare benefits is not eliminated by its decision to 
create a subsidiary under its control to administer the AHP.
---------------------------------------------------------------------------

    \16\ This responds to commenters concerns that engaging in 
substantial ``for profit'' activity could have unintended 
consequences with respect to an organization's status under section 
501(c) of the Code. An association that is, or intends to be, tax-
exempt under section 501(a) of the Code should keep in mind that 
engaging in a business ordinarily carried on for profit might affect 
its qualification for, or maintenance of, any recognition as a tax-
exempt organization under federal law if the business activity is 
substantial.
---------------------------------------------------------------------------

    These modifications emphasize that nothing in the final rule should 
be read as prohibiting a bona fide group or association--formed either 
before or after the issuance of this final rule--from sponsoring an AHP 
as its primary purpose, provided that it also has a substantial 
business purpose unrelated to sponsorship of the AHP. Thus, for 
instance, a group or association formed after this final rule is issued 
and that has a primary purpose of providing health coverage, but that 
also convenes conferences and provides educational materials and 
opportunities to its members, would satisfy this rule's requirements, 
if the convening and educational activities are sufficiently 
substantial. The Department believes these modifications assist 
substantially in drawing the line between traditional health insurance 
issuers (which typically exist only to underwrite and sell insurance) 
on the one hand, and those that qualify as an ``employer'' under 
section 3(5) of ERISA, on the other (because of their other substantial 
business purpose).
b. The Group or Association Must Have an Organizational Structure.
    Paragraph (b)(3) of the Proposed Rule required that a group or 
association have ``a formal organizational structure with a governing 
body'' as well as ``by-laws or other similar indications of formality'' 
appropriate for the legal form in which the group or association 
operates in order to qualify as bona fide. Commenters generally 
supported these provisions on the basis that having such formalities 
will not only serve to clarify the rights and obligations of members of 
the association or group, but to promote accountability by enabling 
regulators and others to readily identify those parties who are 
responsible for operations, including the establishment and maintenance 
of the group health plan. These commenters suggested that the existence 
of formalized and robust organizational structures could be an 
important form of protection against fraud and insolvency. For these 
reasons, the final rule adopts these provisions without modification. 
There were requests for minor wording changes to paragraph (b)(3) to 
ensure that certain ongoing entities clearly fit within the

[[Page 28919]]

final rule, and similarly, there were requests to clarify the meaning 
of certain words or phrases in paragraph (b)(3) as applied to specific 
fact patterns. The Department declines in this preamble to address the 
application of the final rule to specific fact patterns. The Department 
has procedures to answer inquiries of individuals or organizations 
affected, directly or indirectly, by ERISA as to their status under 
ERISA and as to the effect of certain acts and transactions.\17\
---------------------------------------------------------------------------

    \17\ ERISA Advisory Opinion Procedure 76-1 (FR Doc. 76-25168).
---------------------------------------------------------------------------

c. Participating Employer Control Over the Group or Association and the 
AHP
    Paragraph (b)(4) of the Proposed Rule required that member 
employers control the functions and activities of the group or 
association, including its establishment and maintenance of the group 
health plan, in order for it to qualify as a bona fide group or 
association. Such control under the Proposed Rule could be direct or it 
could be indirect through the regular election of directors, officers, 
or other similar representatives that control the group or association 
and the establishment and maintenance of the plan. The Department noted 
in the preamble to the Proposed Rule that this ``control test'' was 
intended to largely duplicate the conditions in the Department's pre-
rule guidance under ERISA section 3(5).
    Some commenters who supported the Proposed Rule acknowledged that a 
control test is necessary to ensure that bona fide groups or 
associations act as an ``employer'' in relation to the group health 
plan and ``in the interest'' of participating employers, as required by 
ERISA section 3(5). Indeed, some of these commenters believe that this 
provision would assume heightened importance in light of other 
provisions in the Proposed Rule, notably the special rule on the dual 
treatment of working owners as employers and employees.
    Some commenters who generally opposed the Proposed Rule were 
skeptical that the proposed control test could adequately protect 
against fraudulent MEWAs \18\ and other entities that may not act in 
the best interest of the employer members. These commenters suggested 
that many small employers that join a group or association for the 
purpose of participating in a group health plan (and especially those 
employers that have little or no connection to each other beyond doing 
business in the same State or metropolitan area) are unlikely to have 
sufficient motivation or capacity to evaluate the integrity and 
expertise of those governing the group or association or administering 
the plan. For these reasons, these commenters consider the proposed 
control test to be a largely illusory safeguard, at least in the 
limited context they described. Some of these commenters urged the 
Department to bolster the proposed control test with additional or 
alternative requirements. In particular, commenters proposed that the 
Department clarify that employer members must not only control the 
group or association in form, but also in substance, in order for it to 
qualify as bona fide, because otherwise the protections contemplated by 
the control test could be evaded systematically. The commenters 
advancing this suggestion made reference to a strong historical 
correlation between fraudulent MEWAs and situations where participating 
employers had only nominal control of the entity sponsoring the MEWA.
---------------------------------------------------------------------------

    \18\ A ``MEWA'' is a ``multiple employer welfare arrangement'' 
as defined in ERISA section 3(40). A MEWA can be a single ERISA-
covered plan, or an arrangement comprised of multiple ERISA-covered 
plans, each sponsored by unrelated employer members that participate 
in the arrangement. AHPs are one type of MEWA, and they are single 
ERISA-covered plans.
---------------------------------------------------------------------------

    A few commenters opposed the proposed control test entirely. These 
commenters generally expressed apprehension about the logistics of 
requiring participating employer members to control the functions and 
activities of a large group or association in order for it to qualify 
as bona fide. These commenters argued that at least for well-
established groups or associations, which may have hundreds or even 
thousands of member employers and working owners and already act in the 
interest of their members, the requirement is impractical and 
unnecessary. One commenter argued that the control test set forth in 
the Proposed Rule should be recast as a safe harbor and that, if a 
group or association cannot meet the safe harbor's specific control 
criteria, it should be permitted to demonstrate in other ways that it 
is looking out for and acting in the interest of its members and their 
employees.
    After careful consideration of these comments, the Department 
disagrees with the commenters who believe the proposed control test is 
unnecessary or that it will be ineffective, and the final rule adopts 
the proposed control test, with certain revisions as described below. 
The Department is of the view that the control test is necessary to 
satisfy the statutory requirement in ERISA section 3(5) that the group 
or association must act ``in the interest of'' the employer members in 
relation to the employee benefit plan. It will also help prevent 
formation of commercial enterprises that claim to be AHPs but, in 
reality, merely operate as traditional health insurance issuers, in all 
but name.
    The regulatory text in the final rule is slightly different than in 
the Proposed Rule. Although the Department's intent in the Proposed 
Rule was to replicate the control test as it exists in the Department's 
previously-issued sub-regulatory guidance under ERISA section 3(5), a 
number of commenters questioned whether the language in the Proposed 
Rule would effectively accomplish that objective. The regulatory text 
in the final rule is intended to better align the control test in 
paragraph (b)(4) with the Department's pre-rule guidance under ERISA 
section 3(5), including the requirement that control exist in form and 
substance. As revised, the control test provides that the functions and 
activities of the group or association must be controlled by its 
employer members, and the group or association's employer members that 
participate in the group health plan must control the plan. Control 
must be present both in form and in substance. Whether the requisite 
control exists is determined under a facts and circumstances test.
    Several commenters requested guidance and clarification, including 
specific examples if possible, on what it would mean for participating 
employers (particularly very small employers and working owners) to 
control the functions and activities of the group or association or the 
establishment and maintenance of the plan, especially in cases where 
the group or association and plan are extremely large and the primary 
purpose of the group or association is to sponsor the plan. These 
commenters expressed concern that the control test, as proposed, could 
be construed as requiring that participating employers be responsible 
for management and day-to-day operations of the group or association 
and AHP in order for the group or association to qualify as bona fide. 
Thus, the commenters specifically asked that the final rule clarify the 
type and degree of control that employer members must exercise over the 
group or association in order for it to qualify as bona fide, and 
suggested that the Department identify specific activities or other 
criteria that would be sufficient to demonstrate the necessary degree 
of control. For instance, these commenters requested clarification on 
whether the Department intended that the proposed control test would 
require participating employers to actively manage administrative and 
operational functions of the AHP, such

[[Page 28920]]

as network composition, benefit and funding levels, marketing, and 
distribution.
    The final rule does not require group or association members to 
manage the day-to-day affairs of the group or association or the plan 
in order for the group or association to qualify as bona fide. As has 
long been the case, the Department will consider all relevant facts and 
circumstances in determining whether the functions and activities of 
the group or association are sufficiently controlled by its employer 
members, and whether the employer members who participate in the group 
or association's group health plan sufficiently control the group 
health plan. In the Department's view, the following factors, although 
not exclusive, are particularly relevant for this analysis: (1) Whether 
employer members regularly nominate and elect directors, officers, 
trustees, or other similar persons that constitute the governing body 
or authority of the employer group or association and plan; (2) whether 
employer members have authority to remove any such director, officer, 
trustees, or other similar person with or without cause; and (3) 
whether employer members that participate in the plan have the 
authority and opportunity to approve or veto decisions or activities 
which relate to the formation, design, amendment, and termination of 
the plan, for example, material amendments to the plan, including 
changes in coverage, benefits, and premiums. The Department ordinarily 
will consider sufficient control to be established if these three 
conditions are met.\19\
---------------------------------------------------------------------------

    \19\ A number of commenters requested clarification or 
confirmation that the control test would be satisfied in an array of 
fact patterns involving different control structures, membership 
classifications, and participation privileges, including subgroup 
structures and associations of groups or associations. As stated 
elsewhere in this preamble, control must be present both in form and 
in substance, and whether control exists is determined under a facts 
and circumstances test. The Department declines in this preamble to 
address the application of the final rule to specific fact patterns. 
As noted above, the Department has procedures to answer inquiries of 
individuals or organizations affected, directly or indirectly, by 
ERISA as to their status under ERISA and as to the effect of certain 
acts and transactions. See ERISA Advisory Opinion Procedure 76-1 (FR 
Doc. 76-25168).
---------------------------------------------------------------------------

    A number of commenters raised issues regarding the 
interrelationship between the control test and the status of a group or 
association's board members under the definition of ``fiduciary'' under 
section 3(21) of ERISA. Whether, and the extent to which, any 
particular board members are fiduciaries under ERISA turns on whether 
they engage in activity described in section 3(21) of ERISA with 
respect to the AHP. Thus, although in many circumstances board members 
in fact will be fiduciaries under ERISA, the relevant facts and 
circumstances of the particular situation will dictate the outcome. 
Some commenters suggested that the final rule should require board 
members to acknowledge in writing their status as fiduciaries under 
ERISA. Section 402 of ERISA already provides that every employee 
benefit plan shall be established and maintained pursuant to a written 
instrument, and that such instrument shall provide for one or more 
named fiduciaries who jointly or severally shall have authority to 
control and manage the operation and administration of the plan. Some 
commenters suggested that the final rule could contain a deeming 
provision under which the control test would be considered satisfied if 
a group or association's board members (along with other officers) 
acknowledged in writing their fiduciary status. Whether group or 
association members in fact have sufficient control of the functions 
and activities of the group or association for it to be considered bona 
fide, however, is entirely independent of and unrelated to whether the 
group or association's key officials or board members are fiduciaries 
of the AHP. For these reasons, the Department declines to adopt the 
suggestions of these commenters.
    Other commenters suggested revisions that the Department considers 
to be unnecessary, unduly burdensome, or beyond the scope of this 
rulemaking. For example, one suggestion was that the Department should 
require that a majority of the group or association's board members be 
participating employer members in order for it to be considered bona 
fide. Another suggestion was that the Department should dictate that 
groups or associations grant each employer member voting rights with 
respect to affairs of the group or association, health plan, or both, 
or require that groups or associations confer officer or director 
rights or status to some subset of participating employer members in 
order for the group or association to be considered bona fide. While 
these factors could be relevant to whether the members had the 
requisite degree of control, the Department is reluctant, and 
accordingly declines, to dictate specific governance structures (e.g., 
by requiring a board structure and specifying the board's powers, 
selection process, and membership criteria). The test is whether the 
employer members exercise control in form and substance, not whether 
they adopted a specific organizational structure.
d. Definition of Eligible Participant
    The Proposed Rule provides that only employees and former employees 
of employer members and their families or other beneficiaries (for 
example, spouses and dependent children) would be able to participate 
in a group health plan sponsored by the group or association. 
Commenters asked the Department to clarify or modify the definition of 
the individuals who are eligible to participate in an AHP. Some 
commenters said the rule should expressly state that retirees and 
COBRA-eligible persons \20\ do not lose their status as eligible 
participants if their employer decides to no longer continue as a 
member of the bona fide group or association or ceases to be an 
employer member for other reasons (e.g., the employer goes out of 
business). Others said that the term ``former employees'' is too broad 
to the extent individuals would be able to join an AHP merely because 
at some time in the past they worked for an employer that currently is 
a member of the bona fide group or association. The commenters 
expressed concern that such an expansive approach would introduce 
adverse selection issues. Another commenter stated that the term 
``family member'' is too broad and that the term ``beneficiary'' alone 
would suffice. Some commenters suggested defining eligible participants 
under paragraph (b)(6) as including only employees, spouses, and 
dependent children. One commenter requested clarification regarding 
whether employees of the bona fide group or association (as opposed to 
employees of employer members) can participate in the AHP.
---------------------------------------------------------------------------

    \20\ COBRA means Title X of the Consolidated Omnibus Budget 
Reconciliation Act of 1985, as amended. COBRA added ERISA sections 
601-609, which require, among other things, group health plans to 
offer temporary continuation health coverage to covered employees, 
former employees, spouses, former spouses, and dependent children 
when group health coverage would otherwise be lost due to certain 
specific events.
---------------------------------------------------------------------------

    The Department agrees that some clarification of the definition of 
eligible participant is appropriate. Thus, the final rule provides that 
an eligible participant includes employees of a current employer member 
of the group or association, former employees of a current employer 
member of the group or association who became entitled to coverage 
under the group's or association's group health plan when the former 
employee was an employee of the employer, and beneficiaries of

[[Page 28921]]

such individuals (e.g., spouses and dependent children). The 
Department's objective with this final rule provision is to provide 
participating employers and their employees with the same basic rule 
for defining participants as would apply if the employer member of the 
association established its own separate group health plan. To achieve 
this objective in the case of working owner coverage, the final rule 
includes a special provision that states that, except as may be 
required for purposes of COBRA continuation coverage, an individual 
eligible for coverage under the group health plan as a working owner 
(and the individual's beneficiaries) cannot continue to be eligible for 
coverage under the group health plan for any plan year after it is 
determined that the individual does not meet the conditions for being 
treated as a working owner under paragraph (e)(2). In the Department's 
view, these provisions make it clear that, when applicable, an AHP must 
provide COBRA continuation coverage and certain other post-employment 
coverage to persons who became eligible for coverage by virtue of an 
employment relationship to an employer member that has a connection to 
the bona fide group or association and the AHP. The Department also 
believes that the provision clarifies that employment with an employer 
unrelated to the employer's membership in the group or association 
sponsoring the AHP, in itself, is insufficient for an individual to be 
eligible for coverage under the AHP. For example, an employment 
relationship entered into with an employer only after the employer 
ceased being a member of the bona fide group or association would not 
be sufficient to allow the individual to be a covered participant in 
the AHP.
    The Department also agrees with the commenters who suggested that 
it use the existing ERISA-defined term ``beneficiary'' rather than 
``spouses,'' ``dependent children,'' or ``family member.'' Since an AHP 
may provide coverage to any ERISA beneficiaries (for example, 
dependents for federal tax purposes) and is not limited to spouses or 
dependent children, or other family members, the Department agrees that 
using the term ``beneficiary'' is more accurate.
    The Department also agrees that it is not unusual for employer 
groups or associations to be established as separate legal entities 
that have their own employees, and for the group or association to 
choose to participate in the group or association's arrangement for the 
provision of health benefits as a way of providing benefits to its own 
employees. In the case of a geography-based AHP under the final rule, 
the group or association could be a participating employer by having 
its principal place of business within the relevant state or 
metropolitan area. In the case of an industry-based AHP under the final 
rule, the Department added a provision to the final rule to explicitly 
state that the group or association will be treated as being in the 
same trade or industry as the other employer members of the group or 
association.\21\
---------------------------------------------------------------------------

    \21\ The Department notes that it would similarly conclude under 
its pre-rule guidance that employees of the sponsoring association 
could participate in the association's AHP.
---------------------------------------------------------------------------

    Some commenters asked the Department to hold harmless health 
insurance issuers and third party administrators who exercise diligence 
and good faith in relying on the bona fide group or association's 
representations of participant eligibility in cases where an ineligible 
individual is enrolled in an AHP. Another commenter asked that issuers 
and administrators be given access to the documentation necessary to 
verify employee eligibility. Issues of legal responsibility for 
operational errors in the establishment or implementation of an AHP 
would invariably depend on the particular facts and circumstances 
involved, including contractual provisions establishing the parties' 
respective rights and obligations. In the Department's view, this 
definitional rulemaking is not an appropriate vehicle for addressing 
such issues. Similarly, although the Department would expect a bona 
fide group or association to furnish its service providers (including 
issuers and third party administrators) access to documents and 
information necessary for those service providers to perform their 
obligations, the establishment of such information- sharing obligations 
is beyond the scope of this rulemaking under ERISA section 3(5).
    Several commenters were concerned that if an AHP made coverage 
available to eligible participants on a continuous basis, as opposed to 
limiting enrollment to specified periods, the AHP could be subject to 
adverse selection as participants switched in and out of AHP coverage 
according to their current health needs. This could, in turn, make it 
difficult for AHPs to achieve stable risk pools and create challenges 
for issuers when setting rates for the policies they would offer to 
fully-insured AHPs. These commenters suggested that a final rule should 
require, or at least permit, AHPs to set temporal restrictions on 
enrollment such as only making coverage available to eligible 
participants during set open enrollment periods.
    The Department declines to impose any specific requirements for 
AHPs with respect to the use of open enrollment periods. Although open 
enrollment periods are common for participant enrollment in group 
health plans, they are not required under any provision of Federal law 
and nothing in these final rules affects or restricts an AHP's ability 
to limit open enrollment periods.\22\
---------------------------------------------------------------------------

    \22\ Of course, group health plans must provide special 
enrollment periods under certain circumstances. For example, current 
employees and their dependents who have experienced a loss of 
coverage must have an opportunity to enroll in the plan under a 
special enrollment period if they are otherwise eligible to enroll 
and the coverage was previously offered at a time when the employee 
had other health coverage. Additionally, special enrollment periods 
must be provided for certain dependent beneficiaries who experience 
a qualifying life event such as marriage, birth, or adoption. See 
ERISA section 701(f) and 29 CFR 2590.701-6. In addition, a group 
health plan, and a health insurance issuer offering group health 
insurance coverage, must not apply any waiting period that exceeds 
90 days. See PHS Act section 2708 and ERISA section 715. See also 29 
CFR 2590.715-2708.
---------------------------------------------------------------------------

e. Health Insurance Issuer Cannot Sponsor an AHP
    The final rule retains the requirement in the Proposed Rule that 
the group or association sponsoring the AHP cannot be a health 
insurance issuer or owned or controlled by a health insurance issuer in 
order for it to qualify as bona fide. Several commenters supported this 
requirement as important to differentiate bona fide employer groups 
from commercial entities selling insurance to employers. Others asked 
the Department to strengthen this prohibition further by including 
other entities with similar conflicts of interest, such as healthcare 
systems and network providers. Some commenters also sought 
clarification that this requirement would not prohibit insurance 
issuers from serving as third party administrators or providing certain 
services to bona fide groups or associations. Those commenters 
explained that health insurance issuers and insurance agents and 
brokers often provide significant assistance to groups or associations, 
such as plan design advice and development, marketing, and 
administrative services (including claims administration).
    Other commenters opposed this requirement and argued that insurance 
issuers should be allowed to form and operate AHPs because, they 
argued, issuers are uniquely capable of guarding against fraud and are 
already subject to

[[Page 28922]]

measures designed to protect against insolvency. These commenters 
argued that insurance carriers can leverage their existing knowledge to 
reduce the risks of insolvency and fraud, run AHPs efficiently, and 
improve the affordability of coverage for AHPs. One commenter argued 
that the prohibition was inconsistent with the Proposed Rule's 
provision that allowed AHP sponsors to be created solely for the 
purpose of providing health benefits. The same commenter stated that 
the Department did not provide any rationale for prohibiting health 
insurance issuers from sponsoring or controlling an AHP.
    Other commenters noted that it is not uncommon for an employee of 
an issuer to sit on the boards of employer groups or associations. Such 
commenters asked the Department to confirm that an insurance issuer, 
agent, or broker providing services to an AHP or having members on the 
governing body of the bona fide group or association or the AHP would 
not be considered to be ``controlling'' the bona fide group or 
association. One commenter also suggested that the final rule should 
allow AHPs to engage in joint ventures with insurance companies.
    The Department believes that it is important to continue to 
preclude health insurance issuers in their capacity as health insurance 
issuers from constituting or controlling a bona fide group or 
association under the final rule. As the Department explained in the 
preamble to the Proposed Rule, this prohibition was designed to draw a 
line between the sorts of employer-sponsored arrangements that are 
regulated by ERISA and commercial insurance arrangements that lack the 
requisite connection to the employment relationship.\23\ Being an 
insurance company or concern necessarily would require the group or 
association to serve and advance the exclusive business interests of 
the company or concern, including its shareholders or other owners, 
which might stand as an obstacle to acting in the interests of the 
employer members of the group or association, as is required by section 
3(5) of ERISA in order for the group or association to qualify as bona 
fide. The prohibition also serves to prevent the various conflicts of 
interest that could arise in a situation where, for example, a health 
insurance issuer acts as both an AHP plan sponsor and also offers an 
insurance policy or administrative services in connection with the plan 
in exchange for compensation. Further, there may be limited 
circumstances where such a person could be on a governing board, e.g., 
appointed as a part of a temporary board during an initial period of 
establishing the group or association or AHP, or serving as a non-
voting member. But in general the Department does not believe it would 
be consistent with the final rule to have insurance issuer 
representatives on an AHP governing body due to concern that such 
structures suggest that the participating employers have effectively 
ceded control to an insurance issuer. However, this prohibition does 
not prevent a health insurance issuer from participating as an employer 
member of a bona fide association of insurers that sponsors an AHP. Nor 
does it prevent a group or association of health insurance issuers 
acting as employers from sponsoring an AHP for the benefit of their 
employees. In such cases, the health insurance issuers would be 
controlling the AHP in their capacity as employers of covered 
employees, and not in their capacity as health insurance companies, 
insurance services, or insurance organizations. The final regulation 
includes additional language to reflect this.
---------------------------------------------------------------------------

    \23\ See ERISA section 733(b)(2) and 29 CFR 2590.701-2, which 
provide that a health insurance issuer is an insurance company, 
insurance service, or insurance organization (including a health 
maintenance organization) that is required to be licensed to engage 
in the business of insurance and that is subject to state law that 
regulates insurance but does not include a group health plan 
(emphasis added).
---------------------------------------------------------------------------

    The Department agrees that, just as in the case of health insurance 
issuers, a group or association or plan that is controlled by a network 
provider, a healthcare organization, or some other business entity that 
is part of the U.S. healthcare delivery system would not be a bona fide 
group or association or AHP under this rule. The Department does not 
believe it is necessary or advisable to try to include an exhaustive 
list of all such entities in this provision of the rule. This is 
because such a control relationship would result in the employer group 
or association and plan failing the requirements in the final rule that 
the group or association must be controlled by its employer members and 
that the AHP be controlled by the employer members who participate in 
the plan. The Department acknowledges that the provision prohibiting 
control by a health insurance issuer could similarly be said to be 
redundant, however, in light of the fact that a key objective of 
various conditions in this final rule is to distinguish AHPs as 
employment-based benefit plans from commercial insurance arrangements, 
the Department believes that highlighting health insurance issuers in 
this provision helps reinforce that objective. The Department believes 
it would be consistent with the Department's purpose in including the 
health insurance issuer provision in the rule, and would also respond 
at least in part to the commenters, if the provision in the final rule 
was revised to expressly include subsidiaries of affiliates of health 
insurance issuers. The final rule includes such a revision. This 
provision of the final rule has been further revised to make clear that 
it does not preclude health issuers, their subsidiaries, or affiliates 
from being involved in the control of a bona fide group or association 
or AHP in such entity's capacity as a participating employer (e.g., an 
issuer participating in an AHP as an employer member of an industry-
based or geography-based bona fide employer group or association).
    Moreover, nothing in this rule precludes a health insurance issuer 
or other business entity that is part of the U.S. healthcare delivery 
system from providing administrative services to an AHP. For example, a 
health insurance issuer could provide third party claims administration 
and payment services to an AHP. Similarly, a health insurance issuer 
could provide services to an AHP such as medical provider network 
design, pharmacy network design, formulary design, recordkeeping 
services, reporting and disclosure services, wellness program 
administration, 24-hour nurse helpline services, or audits services, as 
well as assistance in setting up the AHP.
f. Commonality of Interest
    Paragraph (c) of the Proposed Rule addressed the ``commonality of 
interest'' required for a group or association of employers to sponsor 
an AHP. Under the Proposed Rule, commonality could be established by 
employers that (1) are 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). The final rule adopts the commonality of interest test 
from the Proposed Rule without substantive change.\24\ Comments and 
clarifications

[[Page 28923]]

on the main provisions are addressed below.
---------------------------------------------------------------------------

    \24\ Paragraph (c) of the final rule contains a minor 
modification in wording. Paragraph (c) of the Proposed Rule 
contained introductory language stating that the commonalty test 
would be ``determined based on relevant facts and circumstances.'' 
That language was intended for those groups and associations that 
would prefer to rely on the Department's pre-rule guidance regarding 
when, and under what circumstances, a group or association of 
employers is able to act as an employer within the meaning of ERISA 
section 3(5). Paragraph (a) of this final rule now contains language 
to more clearly make this point.
---------------------------------------------------------------------------

(i) Trade, Industry, Line of Business, or Profession
    Commenters generally supported the provision in the Proposed Rule 
establishing trade, industry, line of business, or profession, as a 
basis for finding commonality of interest, noting that groups or 
associations comprised of these classes of employer groups tend to be 
more stable, provide more predictable risk pools, allow formation of 
AHPs that are tailored to healthcare needs in the industry, and are 
more cost effective. Many commenters, however, requested that the 
Department clarify the terms ``trade,'' ``industry,'' ``line of 
business,'' and ``profession'' so that persons interested in forming 
AHPs would have more certainty regarding the permissible scope and 
membership classifications that would satisfy the rule. Some of these 
commenters suggested that the Department develop specific definitions 
for these terms, including one suggestion that these definitions 
dovetail with existing definitions of similar terms for VEBAs under 
Treasury Regulations.\25\ Other commenters suggested a number of 
preexisting industry classification systems that the Department could 
sanction for this purpose. Among them were the North American Industry 
Classification System (NAICS) codes developed in part by the Office of 
Management and Budget (and which the Department incorporates in its 
Form 5500 series returns), the codes for the Standard Industrial 
Classification, which preceded the NAICS, and the OECD \26\ 
International Standard Industrial Classification.
---------------------------------------------------------------------------

    \25\ A VEBA is a ``voluntary employees' beneficiary 
association'' described in Code section 501(c)(9).
    \26\ Organization for Economic Cooperation and Development.
---------------------------------------------------------------------------

    Determinations of what is a ``trade,'' ``industry,'' ``line of 
business,'' or ``profession,'' as well as whether an employer fits into 
one or more these categories, are based on all the relevant facts and 
circumstances. The Department is not persuaded that embracing 
proscriptive definitions or sanctioning a specific industry 
classification list is appropriate because doing so might interfere 
with the ability of groups or associations to determine the scope of 
their own membership. In general, the Department intends for these 
terms to be construed broadly to expand employer and employee access to 
AHP coverage.\27\ The Department will consider the use of any 
generally-accepted classification system of the sort identified by the 
commenters above, as sufficient to meet the commonality condition in 
paragraph (c)(1)(i) of the final rule.\28\ That is because each of 
these definitions adequately articulates a concept of nexus or 
commonality that serves to distinguish a bona fide association from a 
commercial health insurance issuer. Similarly, if an association or 
group can establish that it would satisfy the ``line of business'' 
definition for VEBAs, as applicable in Treasury Regulations, the 
association or group is considered to meet the commonality test under 
the requirements of the final rule.\29\ Finally, in the case of a bona 
fide group or association that is sponsoring an AHP and that is itself 
an employer member of the group or association, the Department will 
consider any trade, industry, line of business, or professional group 
or association to be in that same trade, industry, line of business, or 
profession, as applicable, as the other employer members of the bona 
fide group or association.
---------------------------------------------------------------------------

    \27\ A few commenters requested clarification whether the ``line 
of business'' test is limited to ``for profit'' businesses or other 
organizations and excludes non-profit organizations. Paragraph 
(c)(1)(i) of the final rule is not limited in this manner. Thus, a 
non-profit employer does not fail to have commonality with for-
profit employers in the same trade, industry, line of business, or 
profession in which it operates merely because of its non-profit 
status. Accordingly, paragraph (c)(1)(i) of the final rule would 
permit groups of for-profit employers, non-profit employers, or 
both.
    \28\ The business code subcategories in the NAICS may be more 
restrictive than what would constitute an industry, trade, line of 
business or profession under the final rule. For instance, although 
each of the twenty subcategories of manufacturing listed by the 
NAICS, e.g., ``Food Manufacturing,'' ``Beverage and Tobacco Product 
Manufacturing,'' ``Paper Manufacturing,'' etc. could be a ``trade, 
industry, line of business or profession'' within the meaning of 
paragraph (c)(1)(i) of the final rule, combinations of the listed 
manufacturing subcategories could also satisfy this provision in the 
final rule. However, a categorization that is defined or applied so 
broadly so as to potentially include practically any type of 
business would not satisfy the final rule.
    \29\ 26 CFR 1.501(c)(9)-2(a)(1) says that membership in a VEBA 
must consist of individuals who become entitled to participate by 
reason of their being employees and whose eligibility for membership 
is defined by reference to objective standards that constitute an 
employment-related common bond among such individuals. That 
regulation further states that employees of one or more employers 
engaged in the same line of business in the same geographic locale 
will be considered to share an employment related bond for purposes 
of an organization through which their employers provide benefits.
---------------------------------------------------------------------------

    Several commenters requested clarification on whether subsets of 
businesses clearly within trades, industries, or professions could 
further organize themselves around shared principles, values, or 
beliefs that, alone, would not be sufficient to establish commonality 
under paragraph (c) of the final rule. According to the commenters, 
these situations tend to focus on the characteristics of the owners, 
such as owners who are women, minorities, or veterans, or the structure 
of the businesses, such as franchises or companies owned by an employee 
stock ownership plan (ESOP). Commenters suggested that subset-
associations organized in this manner may share more in common than 
those linked by line of business alone, including a shared culture or 
regulatory scheme. As mentioned above, the commonality test is based on 
all the relevant facts and circumstances. In the Department's view, 
therefore, a subset of otherwise eligible employers does not cease to 
have the requisite level of commonality under the final rule merely 
because it chooses to further segment itself inside its trade, 
industry, or profession into smaller groups based on other, reasonable 
similarities among employers, and thus such segmentation is permitted, 
provided that it is not a subterfuge for discriminating based on a 
health factor as prohibited under paragraph (d) of this final rule.\30\ 
Therefore, for example, a subset of information technology firms, such 
as cloud storage companies, could meet this test, without having to 
cover the entire information technology industry. Restaurant owners 
that are military veterans could also meet this test, without having to 
include all restaurant owners.\31\
---------------------------------------------------------------------------

    \30\ As discussed elsewhere in this preamble, other Federal and 
State nondiscrimination rules may also apply.
    \31\ This flexibility is also consistent with the final rule's 
nondiscrimination rules, described below, which permit employment-
based distinctions to be used within an AHP, provided that such 
distinctions are not directed at individual participants or 
beneficiaries based on any health factor.
---------------------------------------------------------------------------

(ii) Geography
    The Proposed Rule's definition also permits a bona fide employer 
group or association to base its membership on a common geographic 
location, even if the membership is comprised of unrelated employers in 
multiple unrelated trades, industries, lines of business or 
professions. To meet the terms of the geographic test, the group or 
association's employer members each must 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). The preamble to the

[[Page 28924]]

Proposed Rule cited examples of such metropolitan areas as 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. 
The preamble also made it clear that AHPs could satisfy the commonality 
requirement by limiting themselves to a smaller geographic region, such 
as a city or county.
    The Department invited comments specifically on whether more 
clarification would be helpful regarding the definition of a 
metropolitan area. The Department asked in particular whether a federal 
designation by the U.S. Census or the Office of Management and Budget 
(OMB), which delineates and defines 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 also asked whether there is any reason for 
concern that groups or associations could manipulate geographic 
classifications to avoid offering coverage to employers expected to 
incur more costly health claims. The Department also sought comments on 
whether there are other examples that would be helpful to clarify the 
provision and on whether there should be a special process established 
to obtain a determination from the Department that all of a group or 
association's members have a principal place of business in the same 
metropolitan area.
    Many commenters supported this provision and said a geography-based 
ability to satisfy the commonality requirement would provide employer 
groups and associations with important flexibility and allow more 
employers to join together to secure lower cost healthcare coverage for 
themselves and their employees through AHPs. Many commenters supporting 
an expansion of the commonality of interest test to allow employers 
with a principal place of business in a single State said that such a 
provision in the final rule would allow well-established organizations 
like a State chamber of commerce to take advantage of the new health 
coverage choice that AHPs represent. Many commenters also sought 
clarification of what would constitute a metropolitan area for purposes 
of the final rule. Some commenters suggested that the final rule define 
a metropolitan area consistent with definitions developed by OMB and 
used by the Census Bureau and other federal agencies, such as the 
Bureau of Labor Statistics (BLS). Some of those commenters noted that 
although they would prefer the OMB Metropolitan Statistical Areas 
definition, other federal sources would be acceptable. The commenters 
noted that OMB, in identifying Metropolitan Statistical Areas, requires 
that the regions demonstrate high degrees of economic and social ties, 
and that Metropolitan Statistical Areas could, therefore, serve as 
appropriate geographic markers for bona fide associations and AHPs. 
Some of those commenters noted that one of the benefits of using the 
OMB definition of Metropolitan Statistical Areas is that it is an 
objective and standard benchmark that would create a level of certainty 
for groups and associations to use in structuring the scope of their 
bona fide group and association and their AHP. Others suggested that 
the rule expressly allow associations and groups sponsoring AHPs to 
rely on OMB's definitions of Metropolitan and Micropolitan Statistical 
areas. One commenter urged the Department not to limit the geographic 
commonality standard to one State or a single Metropolitan Standard 
Area, claiming it was arbitrary because employers that satisfy the 
commonality of interest requirement on the basis of trade, industry, 
line of business, or profession are not subject to geographic 
constraints and any employer group or association that sponsors an AHP 
will demonstrate that it acts in the interest of its members by meeting 
the control requirements. The commenter suggested that if any 
geographic limitation were to be included in the final rule it should 
allow employers in three contiguous States to meet the test.
    Other commenters generally opposed the geography-based expansion of 
the commonality of interest test, saying it is so broad that employers 
with no genuine common interest other than being in the same State will 
be allowed to join together to offer AHPs, opening the door to 
fraudulent entities to offer coverage. These commenters expressed 
concern that the proposed test was so permissive as to promote the 
formation of AHPs across State lines with the result that some sponsors 
of AHPs might attempt to manipulate geographic boundaries with the goal 
of choosing particular State regulators. They argued that the ability 
of State insurance regulators to assist consumers would also decrease 
because State regulatory jurisdiction typically does not extend across 
State lines. One commenter said that the final rule should allow multi-
State metropolitan areas only if, after consultation with the NAIC, the 
Department finds that such a provision would not diminish the ability 
of States to have proper oversight. One commenter said that if the 
final rule envisions AHPs operating in multiple States, then the 
Department should establish an independent task force to resolve issues 
of interstate regulation and oversight among impacted States. One 
commenter suggested that the Department create a process to review and 
issue a determination that all of the employer members of a bona fide 
group or association sponsoring an AHP have a principal place of 
business in the same metropolitan area. The commenter reasoned that 
verification that the plan service areas align with the employers' 
principal places of business is essential to determining an accurate 
quote for the cost of coverage.
    Some commenters said the ``principal place of business'' standard 
was confusing. They said that health insurance issuers typically 
declare a ``situs'' State for large employer plans that is typically 
the location of the company's headquarters and/or the State where most 
of the employees reside. The commenter was concerned that, without more 
conditions, the principal-place-of-business provision could be used by 
sponsors of AHPs to pick as a situs one State with perceived regulatory 
advantages. The commenter suggested that the final rule also require 
that the situs State be where the principal place of business of most 
of the employer members of the AHP are or are anticipated to be. 
Another suggested that if an AHP is formed for members in a certain 
region, the AHP should be required to cover a minimum number of members 
to assure that the group or association is not formed to provide a 
special benefit for a limited number of individuals. Another suggestion 
was that the final rule require the situs of the AHP to be a physical 
location and not merely a post office box.
    Other commenters said that if the geography provision was included 
in the final rule, the group or association and AHP should be required 
to cover the whole State or metropolitan area or, if sub-areas were 
permitted, the sub-areas should be required to be contiguous in order 
for the group or association to qualify as bona fide. The commenters 
said that, without such requirements, an AHP could ``redline'' to 
achieve favorable risk pools by defining a region or a metropolitan 
area

[[Page 28925]]

to avoid areas that are less affluent and, therefore, more likely to 
have chronic health problems. Other commenters similarly argued that 
the Proposed Rule should be revised to prohibit redlining in geographic 
or commonality definitions. The commenters expressed concern that 
geographically-based AHPs, in particular, could cater to upper income, 
more highly educated zip codes and avoid lower-income, inner-city areas 
with lower levels of college-educated residents, and effectively 
exclude individuals in poorer health. The commenters also expressed 
concern about the ability of AHPs to use geographic restrictions to 
exclude certain high-cost areas or high-risk profession employees 
(e.g., defining their region to cover only a high density area while 
excluding a rural area) and to favor participation of lower risk 
industries, professions, and geographic areas. One commenter suggested 
that the Department rely on rating areas that already exist in every 
State. The commenter said each State already has a set of geographic 
rating areas that issuers must use to set rates, and that these areas 
are generally the size of Metropolitan Statistical Areas, or larger to 
include adjacent rural areas, and are designed to be reasonably 
economically diverse.
    This final rule retains the geography standard as a basis for 
meeting the commonality test as proposed without substantive revision. 
The Department acknowledges stakeholders' interest in clear guidelines 
so that employer groups interested in establishing and maintaining AHPs 
pursuant to the final rule can have an acceptable level of certainty 
regarding the group or association's status as an employer under ERISA 
section 3(5) and the plan's status as an employee welfare benefit plan 
under ERISA section 3(1). The Department did not intend the commonality 
of interest provisions to be overly restrictive or to be applied in an 
overly rigid way. In the Department's view, an area that matches a 
Metropolitan Statistical Area or a Combined Statistical Area, as 
defined by OMB (and as used by U.S. government agencies for statistical 
purposes), would constitute a metropolitan area for purposes of the 
rule.\32\ The Department does not intend, however, that the OMB 
standard be the exclusive definition of metropolitan area for purposes 
of the final rule. Rather, by adopting the proposed geography provision 
as the final rule the Department intends to leave open the possibility 
that other geographic areas may also qualify as metropolitan areas 
based on the particular facts and circumstances involved. For instance, 
the area from which a city regularly draws its commuters may qualify as 
a metropolitan area, regardless of whether it would qualify under OMB's 
definition.
---------------------------------------------------------------------------

    \32\ The Office of Management and Budget is responsible for 
maintaining and updating statistical area delineations, a task it 
has performed every decade since the 1950 Census. OMB establishes 
and maintains these areas solely for statistical purposes. The 
delineations are intended to provide a nationally consistent set of 
geographic areas for collecting, tabulating, and publishing federal 
statistics. More information, including current and historical 
federal statistical area delineation files, is available on the 
Census Bureau website at www.census.gov/programs-surveys/metro-micro.html. In periodically reviewing and revising the definitions 
of these areas, OMB does not take into account or attempt to 
anticipate any nonstatistical uses that may be made of the 
definitions, nor will OMB modify the definitions to meet the 
requirements of any nonstatistical program. Thus, OMB has advised 
agencies that in cases where there is no statutory requirement and 
an agency elects to use the Metropolitan, Micropolitan, or Combined 
Statistical Area definitions in nonstatistical programs, it is the 
sponsoring agency's responsibility to ensure that the definitions 
are appropriate for such use.
---------------------------------------------------------------------------

    Further, as noted in the Proposed Rule, the Department did not 
intend, and nothing in the final rule requires, that a group or 
association or their AHP cover the entire State or an entire 
metropolitan area in order for the group or association to qualify as 
bona fide. Rather, as explained elsewhere in this preamble, in the 
Department's view, the final rule provides substantial flexibility for 
groups and associations to cover segments of a geographic area that 
otherwise meets the commonality of interest definition, provided such 
segmentation is not gerrymandered or manipulated in such a way as to be 
a subterfuge for discriminating based on a health factor.\33\
---------------------------------------------------------------------------

    \33\ See ERISA sections 510 and 702. See also 29 CFR 2590.702. 
Other federal and State nondiscrimination laws may also apply.
---------------------------------------------------------------------------

    The Department does not agree that it would be appropriate to 
expand the single-State provision to include, as one commenter 
suggested, three contiguous States. The Department believes that the 
final rule's provisions allowing nationwide AHPs based on a common 
trade, industry, line of business or profession and multi-state AHPs 
based on a common metropolitan area provide sufficient flexibility to 
groups or associations interested in sponsoring multi-State AHPs. At 
the same time, the final rule appropriately balances the need for 
flexibility with the concerns expressed by State regulators and other 
stakeholders about potential confusion related to compliance with 
insurance laws and regulations when AHPs, especially self-insured AHPs, 
operate in multiple States.
    With respect to the comments suggesting that more clarity is needed 
in defining the ``principal place of business'' provision, the 
Department does not agree that further clarification is necessary or 
would be helpful. First, several commenters raising this issue seemed 
to believe that the principal place of business provision applied to 
the group or association and their AHP. However, the requirement in the 
Proposed Rule, which is adopted in the final rule, applies to the 
principal place of business of the employers that are participating in 
the group or association, not the principal place of business of the 
group or association or AHP. To the extent the commenters were 
intending to raise issues about situs states and state insurance 
regulation, those issues are not germane here. The application and 
coordination of state insurance law remains the province of the States 
and is discussed by the Department elsewhere in this document in 
connection with other provisions of the final rule.
    The Department believes that the inclusion of the subterfuge 
provision in the final rule, as well as other provisions of federal and 
State law, sufficiently address the concern about groups or 
associations and their AHPs being structured to define eligibility for 
membership in a way that will avoid high cost areas and/or high risk 
professions.\34\ The Department agrees with those commenters who 
suggested that these issues are more appropriately addressed under 
State authorities. Additionally, the Department explains elsewhere in 
this preamble that the final rule does not change existing ERISA 
preemption rules that authorize broad State insurance regulation of 
AHPs, either through the health insurance issuers through which they 
purchase coverage or directly in the case of self-insured AHPs. State 
insurance regulators have a long history of preventing redlining in 
insurance; the Department is confident that States will continue to use 
their authority to play that important role successfully in this

[[Page 28926]]

context.\35\ Moreover, the Department does not believe that imposing 
contiguity requirements or similar constraints would effectively 
address the rating and redlining concerns described above because even 
with such restrictions an AHP could rate coverage within the AHP based 
on sub-areas.
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    \34\ As discussed elsewhere in this preamble, if a group or 
association organizes or offers health coverage to a segment of an 
industry or geography as a subterfuge for discriminating against an 
individual based on a health factor, the association will not meet 
the commonality of interest requirement. Moreover, the HIPAA health 
nondiscrimination rules and paragraph (d) of the final rule prohibit 
AHPs from making distinctions between groups of participants for 
purposes of eligibility, benefits, or premiums, if such distinctions 
are directed at individual participants or beneficiaries based on 
any health factor.
    \35\ See, e.g., https://kaiserfamilyfoundation.files.wordpress.com/2013/01/8328.pdf.
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(iii) Other Factors for Commonality of Interest
    The Proposed Rule also requested comments on whether the final 
rule, if adopted, should also recognize other bases for finding a 
commonality of interest. In response, stakeholders suggested other 
bases for finding commonality such as ownership characteristics (e.g., 
an association of owners who are women, minorities or veterans), 
business models or structures (such as businesses owned by ESOPs, 
franchises, or not-for-profits), size of business (e.g., small 
businesses), shared religious and moral convictions, and those without 
any commonality at all. According to the commenters, employers within 
these relationships often share unique bonds, interests, needs, and 
regulatory schemes, and may have significantly more commonality of 
interest than those in the same industry or region due to these shared 
traits. Commenters argued that permitting such employers to work 
together through their groups and associations to establish market 
power and economies of scale is consistent with the Department's stated 
goals, and, therefore, should be permitted to benefit from the final 
rule.
    The Department does not agree that these characteristics should be 
included as additional commonality of interest criteria in the final 
rule. To the extent these classes of unrelated businesses are not part 
of a single trade, industry, line of business, or profession, the 
geography standard for establishing a commonality of interest at 
paragraph (c)(1)(ii) already provides them with the ability to form 
State-wide and metropolitan area groups and associations that qualify 
as an employer for purposes of sponsoring an AHP. Thus, for example, 
groups or associations of employers with no commonality of interest 
other than shared moral convictions may sponsor AHPs, provided they 
satisfy the geography standard and other requirements of the final 
rule. Similarly, the ``same business'' standard in paragraph (c)(1)(i) 
also is available to all of these scenarios to the extent the employers 
are in the same trade, industry, line of business, or profession. For 
example, a national affinity group or association of military veteran 
business owners or franchise operators may, through its constitution 
and bylaws, establish subgroups of its members along relevant industry 
or business lines, such as entertainment, construction, security, 
agriculture, gaming, information technology and so forth. Each 
subgroup, in turn, could serve as the ``employer'' for purposes of 
section 3(5) of ERISA and could establish an AHP without geographic 
limitations covering the employer members within the subgroup. In these 
circumstances, the provisions of the rule would apply at the subgroup 
level, including the control requirement in section (b), and the 
subgroups could rely on their membership in the national affinity group 
or association to satisfy the requirement that the subgroup have a 
substantial business purpose other than providing benefits. However, a 
test that would treat all nationwide franchises, all nationwide small 
businesses, or all nationwide minority-owned businesses, as having a 
common employment-based nexus--no matter the differences in their 
products, services, regions, or lines of work--would not be sufficient 
to establish commonality of interest for a national group or 
association and AHP because it would be impossible to define or limit 
(e.g., business owners who support democracy) and, in the Department's 
view, would effectively eviscerate the genuine commonality of interest 
required under ERISA.
g. Nondiscrimination
    The Proposed Rule included certain nondiscrimination requirements 
that built on the existing health nondiscrimination provisions 
applicable to group health plans under the Health Insurance Portability 
and Accountability Act of 1996 (HIPAA).\36\ As explained in the 
preamble to the Proposed Rule, the HIPAA health nondiscrimination rules 
generally prohibit health discrimination in eligibility for benefits 
and premiums \37\ 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 health nondiscrimination rules at 29 CFR 2590.702, generally 
provides that plans may, subject to an anti-abuse provision for 
discrimination directed at individuals, treat groups of 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.
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    \36\ See ERISA section 702 and 29 CFR 2590.702-1. This final 
rule generally refers to the HIPAA health nondiscrimination 
provisions in ERISA. Parallel provisions are included in the Code 
and PHS Act at Code section 9802, PHS Act section 2705, 26 CFR 
54.9802-1 and 45 CFR 146.121. The Department notes that HIPAA was 
amended by the ACA in certain respects not relevant to this final 
rule.
    \37\ 29 CFR 2590.702(c)(3) provides that, notwithstanding the 
general nondiscrimination rule, a plan or issuer may vary premium or 
contribution amounts that it requires similarly situated individuals 
to pay based on whether an individual has met the standards of a 
wellness program that satisfies 29 CFR 2590.702(f).
---------------------------------------------------------------------------

    As stated in the HIPAA 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 (e.g., determining eligibility for other employee 
benefits or determining other terms of employment). Examples in the 
HIPAA 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 the HIPAA 
health nondiscrimination rules at 29 CFR 2590.702(d)(3), 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.\38\
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    \38\ The term health factor means, in relation to an individual, 
any of the following health status-related factors: Health status, 
medical condition (including both physical and mental illnesses), 
claims experience, receipt of healthcare, medical history, genetic 
information, evidence of insurability, or disability. Evidence of 
insurability includes conditions arising out of acts of domestic 
violence and participation in activities such as motorcycling, 
snowmobiling, all-terrain vehicle riding, horseback riding, skiing, 
and other similar activities. ERISA section 702(a)(1); 29 CFR 
2590.702(a). In the Department's view, ``[t]hese terms are largely 
overlapping and, in combination, include any factor related to an 
individual's health.'' Nondiscrimination in Health Coverage in the 
Group Market; Interim Final Rules and Proposed Rules, 66 FR 1378, 
1379 (Jan. 8, 2001).
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    In addition, under the HIPAA health nondiscrimination rules, a plan 
may, generally, subject to certain anti-abuse provisions for 
discrimination directed at

[[Page 28927]]

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, with respect to children of a participant, 
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 health 
nondiscrimination rules generally allow group health plans to treat 
participants and beneficiaries as distinct groups.
    The HIPAA nondiscrimination rules apply to group health plans, 
including AHPs. Therefore, AHPs, like any other group health plan, 
cannot discriminate in eligibility, benefits, or premiums against an 
individual within a group of similarly situated individuals based on a 
health factor. AHPs, like other group health plans, generally may make 
distinctions between groups of individuals based on bona fide 
employment-based classifications consistent with the employer's usual 
business practice, provided such distinction is not directed at 
individual participants or beneficiaries based on a health factor. 
Accordingly, as illustrated in examples in the final rule, an 
agricultural AHP may offer a different coverage package to dairy 
farmers than to corn growers, and a metropolitan AHP may offer 
different pricing to retailers than to restauranteurs, provided such 
distinctions are not directed at individual participants or 
beneficiaries based on a health factor.
    The Proposed Rule proposed that, in applying the HIPAA health 
nondiscrimination rules for defining similarly-situated individuals, 
the group or association may not treat member employers as distinct 
groups of similarly-situated individuals if it wishes to qualify as a 
bona fide group or association for purposes of sponsoring an AHP. As 
noted above, the HIPAA health nondiscrimination rules apply within 
groups of similarly-situated individuals. If a bona fide group or 
association could treat different employer-members as different bona 
fide employment classifications, the preamble to the Proposed Rule said 
that the nondiscrimination protections in paragraphs (d)(1) through 
(d)(3) could be ineffective, as AHPs could offer membership to all 
employers meeting the group or association's membership criteria, but 
then charge specific employer members higher premiums, based on the 
health status of those employers' employees and dependents. 
Accordingly, the preamble to the Proposed Rule stated that a group or 
association that 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. The Department 
sought 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.
    Many commenters strongly supported the proposed nondiscrimination 
provisions and urged that such provisions be retained in any final 
rule. Some commenters believed that the nondiscrimination provisions 
would provide important protection for AHP participants and 
beneficiaries and that they would reduce, if not eliminate, 
opportunities for AHPs to engage in risk selection. One commenter felt 
that prohibiting discrimination based on health factors alone is 
appropriate for AHPs because AHPs differ from single-employer plans 
which typically have steady enrollment based on the employer's 
workforce and do not see variability in the underlying demographics of 
the eligible versus enrolled population. The commenter speculated that 
allowing AHPs to make distinctions based on non-health factors would 
ensure that premiums and contributions will be sufficient to pay 
incurred claims and attract a mix of risk.
    Numerous commenters also expressed support for the proposed 
restriction on AHPs treating different employers as distinct groups 
based on a health factor of an individual or individuals within an 
employer member. These commenters argued that this provision is 
essential for preventing AHPs from discriminating against at-risk 
populations and individuals with preexisting conditions. In their view, 
without this requirement, AHPs would also have an excessively unfair 
advantage over commercial insurance issuers offering coverage in the 
community rated small group and individual markets, which would lead to 
adverse selection and increased premiums for non-AHP employer sponsored 
coverage. Many commenters urged DOL to go even further in a final rule 
because non-health factors such as age, gender, industry, occupation, 
and geography are closely related to health status and, in their view, 
rating on these criteria would actually be a pretext for discrimination 
based on health factors. These commenters stated that AHPs should be 
limited to the rating factors currently allowed in the small group 
market.
    Other commenters argued that additional requirements are necessary 
and pointed to the fact that age, gender, occupation, and other 
characteristics are likely to affect an individual's claims experience 
but do not meet the definition of a health factor. Thus, the commenters 
stated, groups and associations that wish to be treated as a bona fide 
group or association and offer a group health plan may still be able to 
set criteria for membership and set rates in ways that favor healthier 
populations, because, for example, younger age correlates with lower 
healthcare expenditures. Commenters also asserted that the Proposed 
Rule could create an uneven playing field where AHPs were exempt from 
rating rules and nondiscrimination requirements applicable to health 
insurance issuers (especially those in the individual and small group 
markets) and could therefore exercise competitive advantages by 
charging more actuarially fair premiums. Such practices could encourage 
healthy groups to obtain AHP coverage while discouraging less healthy 
groups from doing so. As a result, premiums would likely rise for 
individuals and small employers with non-AHP coverage. Many of these 
commenters further suggested that these effects could be avoided if 
AHPs were made subject to some or all of the rating rules that apply to 
issuers in the individual and small group markets.
    Other commenters argued that the proposed nondiscrimination 
provisions were too restrictive. With respect to paragraph (d)(4) of 
the Proposed Rule, which provides that different employer members of a 
group or association offering an AHP may not be treated as distinct 
groups of similarly-situated individuals if the group or association 
wishes to qualify as bona fide, many commenters claimed that this 
provision presented a new regulatory restraint for existing AHPs and 
would discourage the formation and use of new AHPs. They argued that 
the provision would effectively prohibit AHPs from setting rates for 
each employer member based on prior or expected claims experience 
(``experience-rate''). Such rate-setting, they argued, is critical to 
AHPs' ability to offer affordable coverage because a key component of 
balancing risk and creating a stable and sustainable plan is directly 
related to the ability to assign appropriate premiums through medical 
underwriting of each employer-member. The commenters asserted that if 
AHPs cannot separately experience-rate each

[[Page 28928]]

employer member based on the health status of its employees, employers 
with healthier employees will leave the AHP to obtain better rates 
elsewhere, leaving the AHP with a less stable risk pool. Several 
commenters noted that it is common for existing AHPs to treat employer 
members as distinct groups of similarly-situated individuals and 
experience-rate each employer-member. Some commenters believed that 
requiring existing AHPs to comply with the proposed nondiscrimination 
rules could be so burdensome and disruptive that it would cause many 
AHPs to cease operations.
    One commenter stated that omitting a risk adjustment mechanism to 
address differences in enrollees' aggregate health conditions would 
make AHPs unstable and would lead to their failure. Another commenter 
argued that this would disincentivize large employers, whose plans can 
be experience-rated, from participating in an AHP unless their risk 
pool was significantly sicker than that of the AHP. Some commenters 
also stated that experience rating was necessary due to the fact that 
AHPs have a smaller risk pool as compared to a commercial insurer and 
without the ability to manage risk by experience rating, they will be 
unable to compete with commercial issuers. Another commenter claimed 
that without the ability to experience-rate each member employer, AHPs 
would be left to compete with other coverage options on the basis of 
benefits, such as by offering less generous benefit packages to achieve 
lower prices. A few commenters were also concerned that the Proposed 
Rule could interfere with AHPs' ability to establish wellness programs 
by preventing AHPs from rewarding those groups that do participate, or 
by reducing the incentive to offer wellness programs.\39\
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    \39\ The Department is not persuaded that AHPs will fail to 
offer wellness programs due to paragraph (d)(4). Paragraph (d)(4) 
does not preclude an AHP established under this final rule from 
offering a wellness program. Employers will retain many incentives 
to offer incentives to offer wellness programs, even though an AHP 
cannot rate the employer based on a health factor (e.g., reduced 
absenteeism and increased productivity).
---------------------------------------------------------------------------

    Commenters also claimed that a prohibition against experience-
rating was not necessary to distinguish AHPs from commercial insurance 
arrangements because the Proposed Rule retained the requirements of 
commonality and control. Also, several commenters pointed out that some 
States, including Washington and Kentucky, appear to allow such 
practices pursuant to laws and regulations applicable to MEWAs. Many 
commenters suggested that the Department should include a type of 
grandfather rule to accommodate AHPs that already use experience-rating 
for each employer-member, to prevent market disruption and burdens 
associated with coming into compliance with new rules that are 
inconsistent with long-standing business practices.
    After considering the comments and feedback received from 
stakeholders, the Department is finalizing the proposed 
nondiscrimination provisions in paragraph (d) with one clarification 
and adding four new examples to illustrate the nondiscrimination 
provisions.\40\ The final rules include an adaptation of the HIPAA 
health nondiscrimination rules for AHPs, but the Department declines to 
adopt additional rating requirements in this final rule. Federal rating 
rules that some commenters suggested should apply to AHPs are grounded 
in the PHS Act and apply to health insurance issuers in the individual 
and small group markets, but not to issuers in the large group market 
or to group health plans. Thus, these rules do not apply those Federal 
rating rules to self-insured AHPs, or to insured AHPs that have 
employer members with a total of more than 50 employees, as insurance 
coverage sold to the latter would generally be regulated as large group 
coverage.
---------------------------------------------------------------------------

    \40\ As explained elsewhere in the preamble, bona fide employer 
groups or associations and AHPs that meet the Department's pre-rule 
sub-regulatory guidance are not required to satisfy the standards of 
this final rule, including paragraph (d)(4) of this final rule, in 
order to be considered an employer under ERISA section 3(5) that can 
sponsor a single group health plan. The pre-rule sub-regulatory 
guidance had a stronger employer nexus requirement in that 
geography, alone, was not sufficient to establish commonality, and 
working owners without common law employees were not permitted to 
participate in the plan. Accordingly, whether a single plan MEWA 
that meets the Department's pre-rule sub-regulatory guidance can 
treat employer members as distinct groups of similarly-situated 
individuals depends on whether the creation or modification of the 
classification is directed at individual participants or 
beneficiaries based on a health factor. For example, if the 
classification was implemented to single out individual participants 
and beneficiaries based on a health factor and deny them health 
coverage, the classification would not be permitted under the HIPAA 
health nondiscrimination rules. 29 CFR 2590.702(d)(3). See also 29 
CFR 2590.702(d)(4) Example 5.
---------------------------------------------------------------------------

    Additionally, AHPs' ability to discriminate based on non-health 
factors is subject to State regulation. As discussed in more detail in 
section B.7., below (entitled ``ERISA Preemption and State Regulation 
of AHPs''), under ERISA section 514, States maintain significant 
authority to impose additional rating rules on insured AHPs through 
regulation of the underlying insurance policies obtained by AHPs to 
fund the benefits they provide, and may also impose similar 
requirements for self-insured AHPs.
    The Department understands the concerns raised by commenters 
regarding the importance of allowing AHPs to experience-rate each 
employer member but has decided to keep paragraph (d)(4), with one 
clarification and several new examples to illustrate the circumstances 
under which an AHP could charge different premiums to different member 
employers under paragraph (d)(4). As explained in the preamble to the 
Proposed Rule, paragraph (d)(4) was intended to distinguish bona fide 
AHPs from commercial arrangements that more closely resemble State-
regulated private insurance offered to the market at large, a 
distinction the Department viewed as especially important with the 
broadening of the employment nexus requirement. See, e.g., Advisory 
Opinion 94-07A; Advisory Opinion 2001-04A.\41\ As discussed earlier in 
this document, Congress did not intend to treat commercial insurance 
products marketed by private entrepreneurs, who lack the close economic 
or representational ties to participating employers and employees, as 
ERISA-covered welfare benefit plans.\42\
---------------------------------------------------------------------------

    \41\ See AO 94-07A at www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/1994-07a and AO 2001-04A at 
www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/2001-04a.
    \42\ See supra footnote 4.
---------------------------------------------------------------------------

    Accordingly, as noted above, the touchstone of the Department's 
analysis 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. Only groups or associations 
that have such a nexus can be appropriately treated as sponsors of 
ERISA-covered plans, as opposed to commercial insurance providers. 
Moreover, when plans are sponsored by employers, or by groups or 
associations that have the requisite connection or commonality, there 
is less cause for concern about fraud, because an employer or group or 
association with the requisite commonality pursues objectives--e.g., 
maintaining a satisfied workforce or advancing the well-being of a 
particular industry or economic community--that could be imperiled by 
fraud. Because the final rule relaxes the Department's pre-rule 
guidance on the groups or associations that may sponsor a single ERISA-
covered group health plan, it is especially important to maintain 
paragraph (d)(4) as proposed. In the context of these new, broader 
arrangements, paragraph (d)(4) ensures

[[Page 28929]]

that the group or association is distinguishable from commercial-
insurance-type arrangements, which lack the requisite connection to the 
employment relationship and whose purpose is, instead, principally to 
identify and manage risk on a commercial basis. Such an AHP that 
provides benefits for employer members (including working owners 
without employees), but classifies each of them as distinct groups of 
similarly-situated individuals that can be experience-rated or 
otherwise discriminated against based on a health factor, may be more 
comparable to a commercial insurance issuer.
    An important purpose of the commonality of interest test is to 
ensure that the members of the group or association are bound by a 
common interest as employers, as reflected in the uniform treatment of 
members based on their common nexus. Generally, one of the primary 
benefits of participation in a group health plan is that required 
premiums and contributions, as well as benefits, are determined for 
groups of similarly-situated individuals and individual employees 
cannot be singled out. Absent paragraph (d)(4), the rating practices of 
AHPs forming under the broader nexus test could too closely resemble 
medically-underwritten individual or small employer market commercial-
type insurance coverage.
    At the same time, the final rule clarifies that AHPs are not 
precluded from making distinctions between employer members in all 
circumstances. Several commenters asked the Department to confirm that 
paragraph (d)(4) of the Proposed Rule would not have prevented an AHP 
from charging employer members different premiums or contributions 
based on non-health factors, such as age, case size, industry, and 
gender. According to these commenters, many AHPs may fail without the 
ability to make these distinctions. Distinctions based on a factor 
other than a health factor (such as industry, occupation, or geography) 
are permitted, provided they are not directed at individual 
participants or beneficiaries based on a health factor of one or more 
of those individuals. This clarification is consistent with the HIPAA 
health nondiscrimination rules. AHPs could draw distinctions based on 
non-health attributes of a particular member employer (e.g., the 
industry or region in which it operates) or based on non-health factors 
of a member employer's workforce (e.g., adjusting the member employer's 
rate based on the employees' occupations within the member).\43\
---------------------------------------------------------------------------

    \43\ Under HIPAA, employer members could then pass through the 
different premium charges to their employees based on these same 
non-health factors.
---------------------------------------------------------------------------

    New examples seven through nine in the final rule illustrate some 
circumstances under which an AHP could charge different premiums to 
different member employers while complying with paragraph (d)(4) of the 
final rules. These examples draw on the bona fide business 
classification principles set forth in the HIPAA health 
nondiscrimination rules.\44\ For this reason, AHPs will be permitted to 
charge different premiums to different member employers in much the 
same way that a single large employer could charge different premiums 
to employees in different operating divisions, locations, or 
occupations within the company, but may not make distinctions in 
premiums that a single large employer could not make. The final rule 
thus continues to maintain the important distinction between rating 
approaches that are appropriate for AHPs and those that are used by 
commercial insurers.
---------------------------------------------------------------------------

    \44\ As discussed earlier in this preamble, examples in the 
HIPAA 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 
locations, 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 the HIPAA health nondiscrimination rules at 29 CFR 
2590.702(d)(3), 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.
---------------------------------------------------------------------------

    New example 10 was also added to make clear that the wellness 
program provisions of the HIPAA health nondiscrimination rules at 29 
CFR 2590.702(f) apply. The wellness program provisions permit plans to 
vary benefits (including cost-sharing mechanisms, such as a deductible, 
copayment, or coinsurance), and the amount of premium or contribution 
they require similarly situated individuals to pay, based on whether an 
individual has met the standards of a wellness program that satisfies 
the HIPAA health nondiscrimination rules. The HIPAA health 
nondiscrimination rules generally permit rewards of up to the 30 
percent of the total cost of coverage under the plan, except that the 
percentage is increased by an additional 20 percentage points (to 50 
percent) to the extent that the additional percentage is in connection 
with a program designed to prevent or reduce tobacco use. Moreover, the 
total cost of coverage for such purpose is generally determined based 
on the total cost of employee-only coverage under the plan. However, 
if, in addition to employees, any class of dependents (such as spouses, 
or spouses and dependent children) may participate in the wellness 
program, the plan may use the total cost of the coverage in which an 
employee and any dependents are enrolled. In either case, the cost of 
coverage is determined based on the total amount of employer and 
employee contributions towards the cost of coverage for the benefit 
package under which the employee is (or the employee and any dependents 
are) receiving coverage.
3. Working Owner Provision
a. Treatment of Working Owners as Employers and Employees
    A number of commenters, including many associations and working 
owners (such as farm owners, realtors and court reporters) strongly 
supported the ``working owner'' provision of the Proposed Rule. These 
small business owners noted that while most Americans get their health 
coverage through an employer, self-employed professionals without 
common law employees are forced to purchase insurance in the more 
volatile individual insurance market, which tends to offer fewer 
choices at much higher costs. These commenters said that the working 
owner provision will offer sole proprietors and other self-employed 
individuals without employees more flexibility in insurance plan 
design, improved negotiating power, and lower cost health coverage. The 
Department agrees that allowing working owners such as sole proprietors 
to participate in AHPs covered by ERISA will give additional coverage 
options to certain individuals who may not currently have access to 
affordable health coverage. In the time since the Department first 
issued sub-regulatory guidance on bona fide groups or associations, 
increasing numbers of workers fall into these categories.\45\ The

[[Page 28930]]

final rule is responsive to these changes in the composition of the 
workforce and to the needs of that workforce.
---------------------------------------------------------------------------

    \45\ The number and proportion of U.S. workers with at least 
some degree of self-employment or working-ownership has been 
increasing for some time. See for example: Emilie Jackson, Adam 
Looney, and Shanthi Ramnath, ``The Rise of Alternative Work 
Arrangements: Evidence and Implications for Tax Filing and Benefit 
Coverage,'' U.S. Department of the Treasury, Office of Tax Analysis 
Working Paper 114 January 2017, https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-114.pdf; Steven F. 
Hipple and Laurel A. Hammond, ``Self-employment In The United 
States,'' U.S. Bureau of Labor Statistics Spotlight on Statistics, 
March 2016, https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/pdf/self-employment-in-the-united-states.pdf; and 
Katharine G. Abraham, John C. Haltiwanger, Kristin Sandusky, and 
James R. Spletzer, ``Measuring the Gig Economy: Current Knowledge 
and Open Issues,'' March 2, 2017, https://aysps.gsu.edu/files/2016/09/Measuring-the-Gig-Economy-Current-Knowledge-and-Open-Issues.pdf.
---------------------------------------------------------------------------

    Other commenters opposed the working owner provision and argued 
that allowing working owners without employees to participate in AHPs, 
and even permitting an AHP to consist entirely of such individuals, 
would harm the small group and individual markets. These commenters 
expressed concern that such AHPs would be able to design and market 
plans with the result that a disproportionate number of healthy 
individuals might shift out of ACA-compliant individual markets and 
small group markets, resulting in increased rates and decreased choice 
in those markets. These commenters also argued that allowing working 
owners without employees to be considered ``employers'' under ERISA 
section 3(5) would upset existing DOL guidance and court decisions. 
Specifically, these commenters asserted that the Department has 
consistently taken the position in sub-regulatory guidance that where 
membership in a group or association is open to anyone engaged in a 
particular trade or profession regardless of employer status (such as 
working owners and self-employed individuals without common law 
employees), and where control of the group or association is not vested 
solely in employer members, the group or association is not a group or 
association of employers within the meaning of ERISA section 3(5).
    Some commenters also noted that the Proposed Rule would have 
permitted an AHP to consist entirely of working owners. They complained 
that it was an impermissible reading of ERISA for the Department to 
conclude that a plan with no common law employees was an employment-
based plan that Congress intended to be regulated under ERISA. They 
cited the U.S. Supreme Court decision in Nationwide Mutual Insurance 
Co. v. Darden, 503 U.S. 318 (1992), as supporting that argument. They 
asserted that even where a working owner participates in an AHP with 
unrelated persons who are common law employees, there still is no 
employment-based nexus sufficient for that working owner to be treated 
as a plan participant.
    Additionally, some commenters argued that the inclusion of 
``working owners'' in the definition of ``employer'' is in conflict 
with the ACA. Specifically, they argued that Congress, in adopting the 
ACA, was aware of the existing case law and the Department's sub-
regulatory guidance, and intended to retain that legal structure, as 
reflected in the ACA's inclusion of various protections for individual 
market participants. In particular, they point to ACA definitions of 
the individual, small group, and large group markets (42 U.S.C. 18024) 
that continue to provide that owners of businesses who have no 
employees cannot qualify for group coverage (although the ACA permitted 
small group coverage for groups that included only one employee other 
than the owner). They claim that adopting the working owner provision 
as part of the final rule would violate the ACA.
    The Department disagrees. As described in the preamble to the 
Proposed Rule, the working owner provision is consistent with the 
Department's longtime recognition that working owners should be able to 
participate in ERISA-covered plans. See Advisory Opinion 99-04A 
(various ERISA and Code provisions ``reveal a clear Congressional 
design to include `working owners' within the definition of 
`participant' for purposes of Title I of ERISA.''). The Department also 
explained in the preamble to the Proposed Rule that the policy 
underlying its regulation at 29 CFR 2510.3-3, which excludes ``plans 
without employees'' from the definition of employee benefit plans 
covered by Title I of ERISA, was not to prevent working owners from 
participating in ERISA covered plans, but to confirm that ERISA does 
not mandate that a working owner incur costs to comply with reporting 
and disclosure, fiduciary, and enforcement provisions that serve no 
practical purpose in the context of a plan run by and covering only the 
working owner and spouse. In the case of an AHP, however, many or most 
of the affected employers and employees will not be directly involved 
in the administration of the AHP or the provision of benefits, and 
would benefit from ERISA's prudence and loyalty requirements for those 
administering 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.
    The working owner provision in the rule also is consistent with 
longstanding conclusions the Department has reached that address the 
operational impracticalities of having a plan alternate between being 
ERISA and non-ERISA coverage as a result, for example, of a sole 
proprietor sometimes having common law employees and sometimes not 
based on business cycles, or a person who was a common law employee 
participating in the plan becoming an independent contractor of the 
member employer. See, e.g., DOL Advisory Opinion 99-04A (acknowledging 
that nothing in the definition of Title I of ERISA precluded a working 
owner who had initially participated in a plan as an employee of a 
contributing employer from continuing to participate in the plan).
    The Department also does not believe that the U.S. Supreme Court 
decision in Darden precludes it from including the working owner 
provision in this rule. The Darden Court did not address the validity 
of an agency rule promulgated after notice and comment defining 
``employer'' or ``employee'' under ERISA. It also must be read in the 
context of the specific issue the Court was addressing (an attempt to 
disqualify an individual from receiving benefits) and the fact that the 
``expectations'' test advocated by the plaintiff would have severely 
undermined ERISA purposes insofar as it would have ``severely 
compromise[d] the capacity of companies to figure out who their 
`employees' are and what, by extension, their pension-fund obligations 
will be.'' Id. at 327. In the subsequent case Yates v. Hendon, 541 U.S. 
1 (2004), the Court clarified 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.'' Id. at 14.
    Also, unlike the issue in Darden, there are other provisions of 
ERISA and related federal laws governing employee benefit plans that 
address the ability of working owners to act both as employer members 
of groups or associations and to participate as employee participants 
in AHPs. The varying treatment of working owners in Title I, Title II, 
and Title IV of ERISA establishes that the statute allows the 
Department, where appropriate, to treat a working owner as having dual 
status as an ``employer'' and ``employee.'' \46\
---------------------------------------------------------------------------

    \46\ Congress in HIPAA itself expressly provided for dual status 
treatment of partners and other working owners in defining group 
health plans covered by Part 7 of Title I of ERISA, which 
encompasses plans that cover only sole proprietors and spouses. See 
ERISA section 732(d) and PHS Act 2721.

---------------------------------------------------------------------------

[[Page 28931]]

    Moreover, the Department's treatment of working owners as such does 
not violate the ACA. The PHS Act definitions (which were added to the 
PHS Act by HIPAA and later amended by the ACA and the Protecting 
Affordable Coverage for Employees Act \47\ (PACE Act)) all specifically 
incorporate the ERISA definitions of employer, employee, and employee 
welfare benefit plan under ERISA sections 3(5), (3)(6), and 3(1), 
respectively, by reference. Under all of the ACA provisions, related to 
whether coverage is in the individual or group market, who is an 
employer (and who is an employee) is determined under ERISA section 
3(5).
---------------------------------------------------------------------------

    \47\ Public Law 114-60 (2015).
---------------------------------------------------------------------------

    Accordingly, although a working owner without common law employees 
generally would not meet the PHS Act definition of a small employer 
(and, thus, would generally have to purchase insurance in the 
individual market, to the extent he desired coverage), such a working 
owner participating in a group or association that meets the ERISA 
section 3(5) definition of an employer would be counted as an employee 
of the single group or association employer, which allows him to obtain 
group health coverage through the AHP. The final rule makes explicit 
that working owners without common law employees may qualify as both an 
employer and as an employee for purposes of participating in an AHP. 
HHS has reviewed this final rule and has advised the Department that 
nothing in the PHS Act precludes the Department from amending its 
interpretation of the definition of an employer under ERISA section 
3(5), and that it concurs with this interpretation of PHS Act section 
2791(d)(6) in light of this final rule.\48\
---------------------------------------------------------------------------

    \48\ One commenter stated that the PHS Act definitions supersede 
ERISA in that ERISA section 715(a)(2) provides that, to the extent 
any provision of ``this part'' conflicts with a provision of part A 
of title XVII of the PHS Act with respect to group health plans or 
health insurance issuers, then the provisions of the PHS Act shall 
apply. First, the reference to ``this part'' is to the provisions of 
Part 7 of ERISA, which does not include section 3(5) of ERISA. 
Moreover, the Department does not agree there is a conflict between 
the PHS Act definitions that cross-reference ERISA in any case.
---------------------------------------------------------------------------

b. Working Owner Definition and Verification of Working Owner Status
    As in the Proposed Rule, the working owner criteria in the final 
rule are designed to ensure that a legitimate trade or business exists, 
because ERISA governs benefits provided in the context of a work 
relationship, as opposed to the mere marketing of insurance to 
individuals unrelated to their status as employees in a trade or 
business and any benefits they obtain through that status. Thus, a 
group or association would fall outside the purview of the final rule 
if it offered coverage to persons who are not genuinely engaged in a 
trade or business (e.g., a group or association offering AHP coverage 
could not make eligibility for ``working owners'' turn on such de 
minimis ``commercial activities'' as merely registering with a ride 
sharing service or 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 engage in the supposed ``trade 
or business'' ever again). The rule is intended to cover genuine work 
relationships, including self-employment relationships, not to permit 
individual coverage masquerading as employment-based coverage.
    The Department also solicited comments on whether the criteria in 
the proposed standard were workable, 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.
    The Proposed Rule's definition of ``working owner'' required that 
the individual either work at least 30 hours per week or 120 hours per 
month providing services to the trade or business, or have 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 beneficiary in the group health plan. The Proposed Rule also 
expressly would have allowed the group or association sponsoring the 
group health plan to rely on written representations from the 
individual seeking to participate as a working owner as a basis for 
concluding that these conditions are satisfied.
    The Department received comments stating that the final rule should 
(1) retain requirements for minimum hours worked or income; (2) include 
a verification or audit process to confirm that participating working 
owners meet eligibility requirements and confirm that issuers may 
separately verify that working owners meet eligibility requirements as 
a condition of providing insurance coverage; and (3) clarify that 
issuers will be held harmless in the event of fraudulent enrollments of 
working owners.\49\
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    \49\ Some commenters urged that the final rule make clear that 
the AHPs are not required to include working owners in their plans 
and, therefore, are permitted to exclude working owners from their 
AHPs. The Department believes the final rule leaves groups or 
associations with substantial flexibility to determine their own 
membership requirements, including whether to include working 
owners. If groups or associations decide to include working owners 
they can also set criteria for working owner participants that are 
more stringent than the minimum criteria in the final rule, provided 
such criteria are consistent with the applicable nondiscrimination 
provisions under paragraph (d) of this final rule.
---------------------------------------------------------------------------

    With respect to the verification process, some commenters said that 
the Proposed Rule would allow working owner enrollment in an AHP based 
on the mere attestation that the individual is actually a ``working 
owner,'' without a requirement that the AHP take steps to confirm this 
basic element of eligibility. Some commenters argued that such an 
attestation approach invites abuse and does not ensure an adequate 
employment nexus as required by ERISA. Those commenters suggested that, 
if the Department decided to retain the working-owners provision in the 
final rule, the Department should strengthen the verification 
requirements to ensure that these individuals 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. Other commenters suggested that the Department should 
include a requirement in the final rule that the working owners have 
been in business for a certain number of years before joining the AHP.
    The Department notes as a preliminary matter, that the attestation 
provision was included in the Proposed Rule to reduce compliance 
burdens and potential liability exposure in the case of errors or 
failures. Plan fiduciaries have an obligation under ERISA to take steps 
to ensure that only eligible individuals participate and receive 
benefits under the plan. In carrying out that responsibility, ERISA 
section 404(a)(1)(B) requires fiduciaries to make eligibility 
determinations ``with the care, skill, prudence, and diligence under 
the circumstances then prevailing that a prudent man acting in a like 
capacity and familiar with such matters would use . . . .'' The 
Department agrees with commenters that a written representation from an 
individual that he or she meets the working owner conditions, without 
more, may be insufficient in some cases and even could lead to abuses. 
The Department revised the final rule to eliminate that provision. In 
its place, the final rule

[[Page 28932]]

offers flexibility, but clarifies that plan fiduciaries have a duty to 
reasonably determine that the conditions of paragraph (e)(2) are 
satisfied and monitor continued eligibility for coverage under the AHP. 
The Department recognizes that there are various ways that fiduciaries 
could establish prudent processes for making working owner (and other 
eligibility) determinations, and it would not be appropriate for the 
Department to establish a one-size-fits-all process under this final 
rule. For instance, in the Department's view, a reasonable 
determination could involve the fiduciary relying on the accuracy of 
the information in written documentation or a sworn statement submitted 
by a working owner, without independent verification, unless something 
in the written document or sworn statement, or other knowledge of the 
fiduciary, would cause a reasonable fiduciary to question the accuracy 
or completeness of the documentation. Nothing in the final rule 
precludes groups or associations sponsoring AHPs from establishing 
their own, separate verification processes and requirements for working 
owners, or any employer or employee, as a condition of membership in 
the group or association. Similarly, health insurance issuers doing 
business with AHPs could establish a verification and monitoring 
requirement as part of the insurance policy or an administrative 
service arrangement with the AHP.
    Commenters stated that the Proposed Rule's ``hours worked'' 
provision should be modified to take into account that many industries 
include workers that do not have a defined work schedule that results 
in a steady and predictable 30-hour work week or 120-hour month. One 
commenter noted that in its industry, over 15% of working owners work 
fewer than 30 hours per week and make less than $10,000. The commenter 
also suggested that the provision should also provide for workers who 
are reducing their hours, as they make a transition out of their former 
job. Another commenter suggested that the final rule include a 
``variable'' worker provision allowing flexibility in making an hours-
worked determination to address situations in which a working owner's 
time performing services for his business can often vary due to various 
industry, seasonal, and other business and market factors, and said it 
would be particularly useful to owners of start-up businesses and other 
newly formed entities. The Department agrees that the ``hours-worked'' 
criterion could be made more flexible without impairing the objective 
of limiting the provision to self-employed individuals who are 
genuinely engaged in a trade or business. Accordingly the final rule 
reduces the hours-worked provision to an average of 20 hours per week 
or 80 hours per month. A working owner could demonstrate this by 
evidence of a work history or a reasonable projection of expected self-
employment hours worked in a trade or business. For this purpose, 
consistent with the principles of the gig economy, hours worked in a 
trade or business can be aggregated across individual jobs or 
contracts. Therefore, for example, an on-demand driver could aggregate 
hours driven using different ride assignment technology platforms. 
(Similarly, wages earned could be aggregated so that, for example, a 
pianist could aggregate money earned teaching piano lessons and money 
earned while giving performances.)
    The Proposed Rule stated that the earned income standard and other 
group health eligibility provisions 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. (In the final rule, the term ``self-employment income'' 
replaces the term ``earned income'' that was used by the Proposed 
Rule.) \50\ Accordingly, in applying the working owner provisions of 
paragraph (e) of the final rule, AHPs may rely on the definitions of 
``wages'' and ``self-employment income'' in Code sections 3121(a) and 
1402(b) (but without regard to the exclusion in section 1402(b)(2)), 
respectively.
---------------------------------------------------------------------------

    \50\ In paragraph (e)(2)(iii)(B) of the final rule, the words 
``wages or self-employment income'' replace ``earned income'' to 
conform this paragraph to language in paragraph (e)(2)(ii) of the 
final rule. This change is to eliminate the use of inconsistent 
terminology in these two paragraphs and to avoid confusion.
---------------------------------------------------------------------------

    Concerns about the potential liability of issuers with respect to 
ineligible individuals wrongly treated as working owners would 
invariably depend on the particular facts and circumstances involved, 
including contractual provisions establishing the parties' respective 
rights and obligations. Accordingly, the final rule does not include 
any provision on that subject.\51\
---------------------------------------------------------------------------

    \51\ Some commenters asked the Department more generally to 
address the liability of the respective parties to the AHP for 
violations of the nondiscrimination provisions in the rule, general 
ERISA reporting and disclosure requirements and fiduciary rules, 
Code section 4980H and the related Code sections 6055 and 6056 
reporting requirements, Form W-2 reporting, COBRA compliance, and 
``all of the other responsibilities that come with the maintenance 
of a single large employer plan.'' With regard to the provisions 
under the Department's jurisdiction, the Department does not believe 
this document is the appropriate place to address these questions 
because they also will invariably depend on the application of the 
particular law involved and the particular facts and circumstances 
of each case. The Code provisions listed are under the jurisdiction 
of Treasury and the IRS and are outside the scope of this 
rulemaking; stakeholders should refer to the relevant Code sections 
and guidance thereunder.
---------------------------------------------------------------------------

    Section 2510.3-5(e)(2)(iii) of the Proposed Rule would have 
provided that an individual would not be treated as a ``working owner'' 
if the individual was eligible to participate in any subsidized group 
health plan maintained by any other employer of the individual or the 
individual's spouse. Many commenters opposed this provision. Some 
argued that coverage available through a separate employer or through a 
spouse's employer may not be the most affordable option for a family, 
the AHP coverage may in fact provide more comprehensive coverage than 
that made available by a separate employer, and that the provision in 
the Proposed Rule would result in a ``marriage penalty'' that is not 
applied to other employers or their employees. These commenters also 
noted that this requirement would be very hard to enforce and would 
require the fiduciary of the AHP to establish a verification process 
that would add unnecessary complexity and burden to the working-owner 
provision. For example, commenters said that they did not believe the 
Department intended that eligibility for ``excepted benefits'' would be 
disqualifying. Excepted benefits generally provide only limited health 
coverage (e.g., dental-only coverage, vision-only coverage, certain 
employee assistance plans, or fixed indemnity coverage) or are 
generally not primarily health insurance coverage (e.g., accidental 
death and dismemberment or automobile coverage).\52\ Those commenters 
said that if ``excepted benefits'' coverage was not disqualifying, 
administrators of AHPs would not only have to monitor for group health 
coverage but would also have to make determinations on whether the 
coverage was limited to excepted benefits. Other commenters pointed out 
that the Proposed Rule did

[[Page 28933]]

not include any guidance on how administrators would address situations 
when a working owner or a working owner's spouse is offered or loses 
subsidized coverage during the middle of the year.
---------------------------------------------------------------------------

    \52\ See ERISA section 733. See also Preamble to Health 
Insurance Portability for Group Health Plans; Interim Rules, 
explaining that there are four types of excepted benefits and that 
``category 1'' benefits, for example, automobile insurance, 
liability insurance, workers compensation and accidental death and 
dismemberment coverage, are generally not ``health insurance 
coverage'' and are excepted in all circumstances. The other three 
categories are considered health insurance (for example, limited 
scope dental and vision benefits, employee assistance programs) and 
are excepted only if certain conditions are met. 62 FR 16894, 16903 
(April 8, 1997).
---------------------------------------------------------------------------

    After consideration of the public comments, the Department agrees 
that the condition is not a good indicator of whether a working owner 
is involved in a legitimate trade or business, as opposed to engaged in 
de minimis ``commercial activities'' that cannot fairly be classified 
as meaningful self-employment. Accordingly, the subsidized health 
coverage provision in the Proposed Rule is not adopted as part of the 
final rule.

4. Essential Health Benefits and Comprehensive Coverage Requirements

    Many commenters opposed the Proposed Rule on the grounds that 
because AHPs will generally be insured in the large group market or be 
self-insured, AHPs would not be subject to the requirement to provide 
EHBs, which only applies to non-grandfathered individual market and 
small group market insurance coverage. Commenters raised the 
possibility that AHPs would seek to deliver low premiums by providing 
benefits that are not as comprehensive as other coverage options 
available to working owners and small employers. They asserted that the 
Proposed Rule could lead to adverse selection in the individual and 
small group markets because healthier groups and working owners could 
be attracted to AHPs providing minimal benefits because of the lower 
costs, while less healthy groups and working owners would seek out more 
robust coverage in the individual and small group markets. This could 
lead to less stable risk pools in the individual and small group 
markets, rising premiums, and cascading effects that could leave 
certain markets without any active health insurance issuers. Further, 
they stated that AHPs offering comprehensive benefits may also be 
disadvantaged, as healthy members could leave to join lower-cost AHPs 
(and return when their medical needs increase). Commenters noted that 
certain populations with specific needs, such as those with 
disabilities, could be disproportionately affected if their coverage 
does not include a robust level of benefits. Some of these commenters 
suggested that in order to mitigate these effects, the Department 
should require AHPs to provide EHBs or some other minimum level of 
benefits, or require them to provide ``minimum value'' within the 
meaning of Code section 36B(c)(2)(C)(ii) and 26 CFR 1.36B-6.\53\
---------------------------------------------------------------------------

    \53\ Unless otherwise specified, the Department interpreted 
commenters' use of ``minimum value'' to refer to the term as used in 
Code section 36B(c)(2)(C)(ii) and 26 CFR 1.36B-6, which generally 
means that the percentage of the total allowed costs of benefits 
provided under the plan is greater than or equal to 60 percent, and 
that the plan also provides substantial coverage for inpatient 
hospitalization and physician services. See also 45 CFR 156.145.
---------------------------------------------------------------------------

    Other commenters acknowledged concerns that AHPs may provide 
inadequate benefits but did not believe that legitimate membership 
organizations would risk their goodwill and reputation by offering such 
health plans. Instead, they argued that economies of scale would enable 
AHPs to offer more comprehensive coverage to their members than they 
would be able to purchase on their own. Another commenter noted that 
even though self-insured plans and large group market policies are not 
required to provide EHBs, most do, in fact, provide comprehensive 
coverage.
    The Department declines to adopt commenters' recommendations to 
make the provision of EHBs in an AHP a condition for a group or 
association to qualify as bona fide. Such a mandate would run contrary 
to the goal of leveling the playing field between small employers in 
AHPs, on the one hand, and large employers, on the other, who generally 
are not subject to the EHB requirements. Furthermore, such a mandate 
could reduce AHPs' flexibility to tailor coverage to the particular 
needs of the members of the group or association offering the benefits, 
and thereby reduce access to AHPs by making them less attractive 
options for providing affordable coverage. For this reason, the 
Department also declines to require the provision of minimum value 
coverage as a condition for a group or association to qualify as bona 
fide. The ability to design AHP benefit packages and set cost-sharing 
requirements without the burden of certain Federal restrictions is 
critical to enabling AHPs to provide an additional, more affordable 
coverage option to small businesses and working owners who may 
otherwise have been unable or unwilling to obtain higher-priced 
coverage. Moreover, the Department believes that concerns regarding 
adverse selection as result of AHPs not providing comprehensive 
coverage are overstated because we agree with those commenters who 
asserted that AHPs are not likely to offer relatively low levels and 
scope of benefits, which could jeopardize their relationship with their 
members and because other federal and State coverage requirements may 
apply.
    The Department notes that for those AHPs that choose to offer 
coverage to employers that are applicable large employers subject to 
the employer shared responsibility provisions of Code section 4980H, 
the participating applicable large employers face the possibility of 
having to make an employer shared responsibility payment if the AHP 
does not provide minimum value coverage.\54\ AHPs also remain subject 
to Federal and State laws other than EHB requirements that require the 
provision of certain benefits. For example, AHPs must provide coverage 
for certain recommended preventive services without the imposition of 
cost-sharing.\55\ These services include:
---------------------------------------------------------------------------

    \54\ See Code sections 36B and 4980H.
    \55\ See PHS Act section 2713, which is incorporated in ERISA 
section 715 and Code section 9815.

    (1) Evidence-based items or services that have in effect a 
rating of A or B in the current recommendations of the United States 
Preventive Services Task Force (Task Force) with respect to the 
individual involved;
    (2) Immunizations for routine use in children, adolescents, and 
adults that have in effect a recommendation from the Advisory 
Committee on Immunization Practices of the Centers for Disease 
Control and Prevention (Advisory Committee) with respect to the 
individual involved. A recommendation of the Advisory Committee is 
considered to be ``in effect'' after it has been adopted by the 
Director of the Centers for Disease Control and Prevention. A 
recommendation is considered to be for routine use if it appears on 
the Immunization Schedules of the Centers for Disease Control and 
Prevention;
    (3) With respect to infants, children, and adolescents, 
evidence-informed preventive care and screenings provided for in the 
comprehensive guidelines supported by the Health Resources and 
Services Administration (HRSA); and
    (4) With respect to women, evidence-informed preventive care and 
screening provided for in comprehensive guidelines supported by HRSA 
(not otherwise addressed by the recommendations of the Task Force).

    In addition, Title VII of the Civil Rights Act (as amended by the 
Pregnancy Discrimination Act and administered by the Equal Employment 
Opportunity Commission (EEOC)) generally provides that pregnancy-
related expenses for employees and their spouses must be reimbursed in 
the same manner as those incurred for other medical conditions.\56\
---------------------------------------------------------------------------

    \56\ 29 CFR 1604.110(b); EEOC Enforcement Guidance: Pregnancy 
and Related Issues, No. 915.003 (June 25, 2015), available at 
https://www.eeoc.gov/laws/guidance/pregnancy_guidance.cfm. Moreover, 
the protections of the Newborns' and Mothers' Health Protection Act 
contained in section 9811 of the Code, 711 of ERISA, and section 
2725 of the Public Health Services Act generally provides, if plans 
cover hospital stays in connection with childbirth, that plans must 
provide hospital stays of at least 48 hours (or 96 hours in the case 
of a caesarian section) following delivery.

---------------------------------------------------------------------------

[[Page 28934]]

    Many AHPs, or the insurance coverage that insures them, will also 
be subject to State benefit mandates. The State of Pennsylvania, for 
example, requires policies issued in the large group market to cover 
in-patient and out-patient services for severe mental illness, 
inpatient and outpatient services for substance use disorders, autism 
services, childhood immunizations, and mammography.\57\ These types of 
State mandates may apply to fully-insured AHPs through the health 
insurance policies they purchase. In addition, under ERISA's provisions 
saving State regulation of MEWAs from preemption, States may also 
extend benefit mandates to self-insured AHPs.
---------------------------------------------------------------------------

    \57\ See 40 P.S. sections 764g, 908-2, 764h, 3502, 764c. (For a 
list of state benefit mandates, see generally the Center for 
Consumer Information & Insurance Oversight Information on Essential 
Health Benefits (EHB) Benchmark Plans available at https://www.cms.gov/cciio/resources/data-resources/ehb.html; or see https://www.ncsl.org/research/health/state-ins-mandates-and-aca-essential-benefits.aspx#State_EHB_2016).
---------------------------------------------------------------------------

    Some commenters also expressed concern that the maximum out of 
pocket limit (MOOP) under PHS Act section 2707(b) (incorporated into 
ERISA section 715) and the prohibition of lifetime and annual dollar 
limits under PHS Act section 2711 (also incorporated into ERISA section 
715) only apply with respect to EHBs. These commenters were generally 
concerned that in the absence of these protections, AHPs would impose 
burdensome cost-sharing requirements or annual and lifetime limits for 
critical benefits, such as mental health care, substance-use disorder 
services, prescription drugs, and maternity services, in an effort to 
drive down costs, as had happened in the pre-ACA insurance market.
    While group health plans that are offered in the large group market 
or are self-insured are exempt from the requirement to offer EHBs, all 
non-grandfathered group health plans are subject to the MOOP and the 
prohibition on annual and lifetime dollar limits on EHBs. Accordingly, 
to the extent a plan covers EHBs, the MOOP and annual and lifetime 
dollar limits provisions apply.\58\ As such, if an AHP covers a benefit 
that would be considered an EHB, the AHP must count an individual's 
out-of-pocket spending for in-network provision of that benefit toward 
the MOOP; any EHBs in excess of the MOOP must be covered without cost-
sharing.\59\ Similarly, if an AHP covers any benefits that would be 
considered an EHB, all such benefits must be covered without any annual 
or lifetime dollar limit.
---------------------------------------------------------------------------

    \58\ For more information regarding the application of the MOOP 
and prohibition of lifetime and annual limits for plans not subject 
to the requirement to provide EHBs, see 29 CFR 2590.715-2711(c); See 
also Q10 of Frequently Asked Questions on Essential Health Benefits 
Bulletin, available at https://www.cms.gov/CCIIO/Resources/Files/Downloads/ehb-faq-508.pdf.
    \59\ See Frequently Asked Questions about Affordable Care Act 
Implementation, Part XII, Q2 (February 22, 2014), available at 
https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xii.pdf and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs12.html and Frequently Asked Questions about 
Affordable Care Act Implementation, Part XVIII Q2, (January 9, 
2014), available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-xviii.pdf 
and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs18.html.
---------------------------------------------------------------------------

5. Application of ERISA Group Health Plan Requirements to AHPs

    An AHP sponsored by a bona fide group or association under this 
final rule is a group health plan and an employee welfare benefit plan 
under ERISA. Accordingly, the AHP is subject to all ERISA provisions 
applicable to group health plans and employee welfare benefit plans, 
including Title I of ERISA.
    Some commenters expressed concerns about the Proposed Rule on the 
broad assumption that AHPs would be exempt from various consumer 
protections included in ERISA and other Federal laws, including changes 
made by the ACA, and that the rule would lead to a diminution in rights 
and protections for AHP participants. As the Department explained in 
the Proposed Rule, the primary purpose of allowing more flexibility for 
groups or associations to sponsor AHPs is to expand access to 
affordable health coverage, especially among small employers and 
working owners--many of whom currently do not provide health benefits 
to their workers--by removing undue restrictions on the establishment 
and maintenance of AHPs. However, as noted above, an AHP offered by a 
bona fide group or association under this final rule remains a group 
health plan under ERISA and participants in AHPs are entitled to the 
same protections under ERISA that are available to participants in 
single employer group health plans.
    Some commenters requested that the Department provide clarification 
with respect to the application of the Paul Wellstone and Pete Domenici 
Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) and the 
COBRA continuation coverage requirements. Specifically, because these 
requirements include an exemption for employers with a certain number 
of employees, commenters inquired whether it was the total number of 
employees of the separate participating member-employers or the number 
of employees of employers, collectively, participating in the bona fide 
group or association that matters for purposes of determining whether 
the requirements apply to an AHP.
    Generally, MHPAEA requires that financial requirements and 
treatment limitations for mental health and substance use disorder 
benefits must be no more restrictive than those placed on medical and 
surgical benefits. MHPAEA provides an exemption for group health plans 
for ``any plan year of a small employer.'' \60\ Under ERISA section 
712(c)(1)(B), a small employer is defined as an employer who employed 
between 2 (or 1 in the case of an employer residing in a State that 
permits small groups to include a single individual) and 50 employees 
on business days during the preceding calendar year. As one commenter 
observed, because the ERISA provisions of MHPAEA provides a definition 
of a ``small employer'' that makes no reference to the separate 
definition of an ``employer'' under ERISA section 3(5), some AHP 
operators may try to argue that the definition refers to the common law 
definition of employer, rather than the definition in ERISA section 
3(5), and that an AHP is, therefore, exempt if all the participating 
employer-members meet the definition of ``small employers.''
---------------------------------------------------------------------------

    \60\ ERISA section 712(c)(1).
---------------------------------------------------------------------------

    MHPAEA amended ERISA, the Code, and the PHS Act and is subject to 
joint interpretive jurisdiction by the Departments of Labor, the 
Treasury, and HHS (collectively, the Departments).\61\ For purposes of 
ERISA, the Department interprets the term ``small employer,'' as 
specified in ERISA section 712(c)(1)(B) to mean an ``employer'' of a 
certain size, using the ERISA definition of ``employer'' in section 
3(5). The Department has consulted with HHS, which has advised the 
Department that it uses the same interpretation for purposes of 
applying the MHPAEA small employer exemption in the PHS Act.\62\ 
Accordingly, for a bona fide group or association, the determination of 
whether MHPAEA applies under ERISA and the PHS Act depends on the size 
of the AHP, which generally would

[[Page 28935]]

be based on the number of employees employed in the aggregate during 
the preceding calendar year by the employer members of the bona fide 
group or association. This interpretation is consistent with the 
approach described earlier in this preamble of treating AHPs like large 
employers.
---------------------------------------------------------------------------

    \61\ See HIPAA section 104. See also Memorandum of Understanding 
64 FR 70164 (Dec. 15, 1999).
    \62\ The Code does not reference the ERISA definition of 
employer. For purposes of determining applicability of, and 
potential for excise taxes under, the Code, interested parties 
should contact the Internal Revenue Service.
---------------------------------------------------------------------------

    COBRA provides for a temporary continuation of group health 
coverage that would otherwise be lost due to certain life events, but 
does not apply to a group health plan for any calendar year if ``all 
employers maintaining such plan normally employed fewer than 20 
employees'' on a typical business day during the preceding calendar 
year.'' \63\ Commenters asked for clarification on how the law would 
apply to those employers with fewer than 20 employees that joined a 
bona fide group or association whose member employers, collectively, 
employ 20 or more employees. The coverage provisions of the COBRA 
continuation coverage requirements are within the interpretive 
jurisdiction of Treasury and the IRS. The Department will consult with 
Treasury and the IRS and anticipates future guidance on the application 
of COBRA to such plans.
---------------------------------------------------------------------------

    \63\ ERISA section 601.
---------------------------------------------------------------------------

6. Application of Federal Laws Other Than ERISA to AHPs

a. Application of Federal Healthcare Laws
    Numerous commenters requested that the Department provide 
clarifications with respect to the application of a wide variety of 
Federal laws and regulations that are not grounded in ERISA but may 
implicate or apply to AHPs. Examples include the employer shared 
responsibility provisions, premium tax credit eligibility rules, 
network adequacy standards, the Pregnancy Discrimination Act of 1978, 
other federal nondiscrimination laws, and Medicare secondary payer 
rules.
    The Department considers these comments to be beyond the scope of 
this rulemaking. In setting out additional criteria for determining 
whether an employer group or association can act as an employer within 
the meaning of ERISA section 3(5) for purposes of sponsoring a single 
group health plan for its employer-members, the intent of this final 
rule is to expand the number of organizations that are eligible to 
sponsor an AHP. However, many AHPs currently exist and therefore the 
interaction between AHPs and the various laws and regulations discussed 
by these commenters are not a consequence of this rule. Further, these 
laws and regulations are not within the Department's interpretive 
jurisdiction and therefore any guidance provided would be outside the 
scope of its regulatory authority.
b. Use of Voluntary Employees' Beneficiary Associations (VEBAs)
    A VEBA is a type of tax-exempt organization that could be used by 
employee welfare benefit plans, including multiple employer welfare 
benefit plans, to hold plan assets.\64\ The VEBA rules are administered 
by the IRS and are outside the interpretive jurisdiction of the 
Department. Some commenters argued that conditions in the Proposed Rule 
conflict in several ways with IRS guidance regarding the use of VEBAs, 
and expressed concern that the differences could limit the expansion of 
AHPs. The commenters noted in particular that VEBA regulations may 
require that membership consist of individuals who are employees and 
who have an employment-related common bond, and the way for a fund 
covering employees who work for multiple employers to meet this 
requirement is for the employees participating in a VEBA to work for 
employers in the same line of business in the same geographic locale. 
This differs from the Proposed Rule, which allowed employer groups to 
be in the same industry or the same geographic locale. They also noted 
that an organization including working owners who did not have common 
law employees may not meet VEBA requirements under which no more than 
10% of the VEBA members can be sole proprietors and other working 
owners. The commenters requested that the Department work with the IRS 
on harmonizing the VEBA requirements with those of AHPs. Commenters 
also suggested that IRS issue guidance treating membership in a group 
or association sponsoring an AHP pursuant to the Department's rule as 
similar to membership in a labor union by employees, and to regard 
employer participation in the group or association as having a 
sufficient employment-related common bond to use a VEBA trust in 
connection with the AHP.
---------------------------------------------------------------------------

    \64\ See Code section 501(c)(9). An organization described in 
Code section 501(c)(9) is exempt from tax under Code section 501(a).
---------------------------------------------------------------------------

    The Department acknowledges that applicable IRS guidance regarding 
the use of VEBAs sets out different criteria for employer groups and 
associations that seek to establish and use those arrangements than 
this final rule sets out for sponsorship of a group health plan under 
ERISA. Although VEBAs are often a convenient way for multiple employers 
to fund certain employee welfare benefits in a tax-advantaged 
environment, VEBAs are not the sole vehicle for funding of multiple 
employer plans. To the extent that an employer group or association 
that offers an AHP chooses to use a VEBA in connection with the AHP, 
the arrangement must comply with applicable VEBA requirements. For more 
information on the use of VEBAs and the process for obtaining an IRS 
determination on VEBA status under Code section 501(c)(9), see 26 CFR 
1.501(c)(9)-1 through -8, and Revenue Procedure 2018-5 (or latest 
update).
c. AHPs and Joint Employer Status Under Federal Laws
    Commenters requested that the Department should include language to 
ensure that employers, including franchisors whose franchisees 
participate in an AHP, are not considered joint employers under ERISA 
or the Fair Labor Standards Act (FLSA). Similarly, commenters requested 
clarification that a person or entity who contracts with individuals as 
independent contractors does not, by participating in an AHP with 
independent contractors, facilitating formation or operation of an AHP 
by independent contractors, or promoting an AHP for those independent 
contractors, become the employer of the independent contractors. The 
commenters argued that the question of who is an ``employer'' or 
``joint employer'' carries significant legal consequences because of 
the increasing prevalence of independent contractor and other third-
party relationships in today's workplace, such as those between a 
business and a contractor's employees, or between a corporate parent 
and its franchisees' workers. The commenters said that the legal test 
for employment or joint employment under the FLSA has become less 
clear, with many tests for employer or joint employer liability looking 
to a variety of factors. There may also be increased risk of joint 
liability under ERISA section 510 for a franchisor. Commenters claimed 
that the potential increased risk for expanded employer or joint-
employer liability could limit the expansion of AHPs. Some commenters 
requested, on similar grounds, that we clarify that franchisors 
assisting in the start-up and ongoing administration of an AHP 
involving their franchisees and entities providing similar assistance 
in connection with AHPs for independent contractors would not be 
grounds for finding joint employer status.

[[Page 28936]]

    The employer group or association provision in ERISA section 3(5) 
merely authorizes separate employers to maintain a single plan to 
provide benefits to their separate employees. It does not impose any 
independent employer obligation upon businesses with respect to the 
employees of other employers that obtain benefits under the plan. 
Participation in an AHP does not involve any agreement between 
employers to share employee services, or any sharing of direct or 
indirect control of an employee or independent contractor or his or her 
employment. By participating in an AHP, the individual participating 
employers also are not acting directly or indirectly in the interest of 
the other individual employers in relation to an employee, or in the 
interest of any independent contractor who may participate in the AHP 
as a working owner. Although the group itself may be acting in the 
interest of the participating employers in sponsoring the AHP, that is 
not analogous to one individual employer acting in the interest of 
another individual employer with respect to an employee or in the 
interest of an independent contractor. The individual employers are 
not, by reason of participating in the AHP, involved in hiring, firing, 
disciplining, setting rates or methods of pay, maintaining records, 
controlling, or directing and supervising the work of the other 
participating employers' employees or of independent contractors. 
Therefore, nothing in the final rule is intended to indicate that 
participating in an AHP sponsored by a bona fide group or association 
of employers gives rise to joint employer status under any federal or 
State law, rule, or regulation. The final rule also should not be read 
to indicate that a business that contracts with individuals as 
independent contractors becomes the employer of the independent 
contractors merely by participating in an AHP with those independent 
contractors, who would participate as working owners, if applicable, or 
promoting participation in an AHP to those independent contractors, as 
working owners.

7. ERISA Preemption and State Regulation of AHPs

    The Department received many comments, including from State 
insurance regulators, expressing the view that it is very important 
that the final rule not undermine or impair the current ERISA 
preemption provisions that broadly permit States to regulate AHPs under 
State insurance laws and regulation. The commenters expressed concern 
about a history of abuses involving unlicensed entities that compete 
with State-licensed health insurance issuers, but are exempt from many 
of the solvency standards and consumer protections that apply to 
traditional issuers in the State-regulated individual and small-group 
markets. These commenters argued that AHPs operating in multiple States 
should be required to abide by the regulations of each of the States in 
which the plan is providing health care coverage, and not just the 
State in which the group or association or their AHP is deemed to be 
domiciled.
    Commenters expressed concerns about potential abuses that could 
arise if AHPs were exempt from consumer protections that apply to 
entities marketing and selling insurance in their States. The 
commenters cited cases of healthcare arrangements purporting to be AHPs 
that left State residents with unpaid claims for their healthcare when 
the purported AHP failed, or the operators of the arrangement left the 
State. Some commenters stated that the States have a relatively strong 
oversight record and existing mechanisms to protect against fraud. 
These commenters noted that State officials and the insurance agents 
they regulate serve as ``eyes on the ground'' to detect and report 
fraudulent schemes in their local markets. Another commenter suggested 
that the final rule should distinguish self-insured AHPs, which have 
historically presented problems in the market, from fully-insured AHPs, 
which are backed by licensed health insurance issuers and subject to 
oversight by State insurance commissioners and HHS. A few commenters 
asked that the Department promulgate a rule under ERISA section 520 
which authorizes the Department to make persons operating AHPs subject 
to otherwise preempted State insurance laws to prevent fraud and abuse, 
before we finalize the AHP regulation, in order to give the Department 
an additional oversight and enforcement tool.
    The main point of these commenters was that the Department should 
make it clear that the final rule in no way limits the ability of 
States under State insurance laws to regulate AHPs, health insurance 
issuers offering coverage through AHPs, and insurance producers 
marketing that coverage to employees. In particular, they requested 
that the Department make a clear and unequivocal statement that States 
retain full authority to set and enforce solvency standards for all 
AHPs, and comprehensive licensure requirements and oversight for non-
fully-insured AHPs including benefit, rating and consumer protection 
standards, and laws specifying who is eligible to apply for licensure.
    The Department agrees that the final rule does not modify or 
otherwise limit existing State authority as established under section 
514 of ERISA. If an AHP is fully insured, ERISA section 514(b)(6)(A)(i) 
provides that State laws that regulate the maintenance of specified 
contribution and reserve levels (and that enforce those standards) may 
apply, and State insurance laws are generally saved from preemption 
when applied to health insurance issuers that sell policies to AHPs and 
when applied to insurance policies that AHPs purchase to provide 
benefits. In addition, in the case of fully-insured AHPs, it is the 
view of the Department that ERISA section 514(b)(6) clearly enables 
States to subject AHPs to licensing, registration, certification, 
financial reporting, examination, audit and any other requirement of 
State insurance law necessary to ensure compliance with the State 
insurance reserves, contributions and funding obligations. Furthermore, 
under this framework, if an AHP established pursuant to this final rule 
is not fully insured, then, under section 514(b)(6)(A)(ii) of ERISA, 
any State law that regulates insurance may apply to the AHP to the 
extent that such State law is ``not inconsistent'' with ERISA.
    Some commenters oppose continued application of State insurance 
laws, stating that navigating the varying or contradictory standards of 
multiple States has made it difficult for AHPs to actually operate 
across State lines. For example, some expressed concern about State 
MEWA statutes that prohibit participation across different industries, 
prohibit self-employed individuals from being covered by MEWAs, and 
prohibit MEWAs from operating in the State if established solely for 
the purpose of obtaining or providing insurance. Some commenters noted 
that several States currently prohibit AHPs from self-insuring. These 
commenters say that the varying State laws prevent AHPs from providing 
uniform insurance and healthcare coverage across State lines. Some of 
these commenters support broader Federal oversight and regulation of 
self-insured AHPs rather than joint Federal-State regulation.\65\ 
Others

[[Page 28937]]

support applying only the laws of one State, such as the State in which 
the AHP is domiciled.
---------------------------------------------------------------------------

    \65\ One commenter recommended that the Department establish a 
federal oversight board to, among other things, review and approve 
benefit designs for AHPs and to establish caps on annual premium 
rate increases. According to this commenter, such a federal board 
also could provide notice to participants if there are material 
changes in benefit levels or coverage under the AHP. A different 
commenter recommended that the Department establish a high-risk pool 
or other reinsurance mechanism to provide support to the individual 
and small group markets that would be affected by the final rule. 
The Department lacks the statutory authority to establish an 
oversight board of the type described by the commenters. It also 
lacks the statutory authority to establish a high-risk pool or other 
reinsurance mechanism. Further, even if such steps were within the 
Department's authority, the suggested actions are beyond the scope 
of this rulemaking, and at least some of the concerns underlying the 
comments may be better addressed through application of existing 
State insurance laws or amendments of State insurance laws.
---------------------------------------------------------------------------

    Several commenters asserted that the Proposed Rule was unclear or 
in direct conflict with State law, such as group size calculations used 
to determine the applicability of pooling, loss ratio, community 
rating, and essential health benefit requirements. These commenters 
requested that the Department render an opinion, or opinions, as to 
whether such laws (such as benefit mandates, rating rules, and 
licensing and registration requirements, among others) would be 
superseded by or because of the final rule.
    The Department declines the invitation of the commenters to opine 
on specific State laws. The provisions in ERISA section 514 are clear 
and well established, and both the Department's interpretations and 
federal court rulings generally have upheld such State laws when they 
have been challenged as preempted by ERISA. The final rule is not the 
appropriate vehicle to issue opinions on whether any specific State law 
or laws would be superseded because of the final rule.
    Several commenters recommended that the final rule establish 
competency standards for persons offering or operating AHPs, and 
minimum funding requirements for self-insured AHPs. A few commenters 
encouraged the Department to require a criminal background check of 
each fiduciary of any self-insured AHP, and a cap on broker 
compensation for self-insured AHPs. Other commenters suggested that the 
final rule require self-insured AHPs to meet risk-based capital 
requirements to ensure the group or association has the capital 
necessary to support overall business operations, and to engage an 
insurance underwriter.
    As noted above, some commenters called for an increased federal 
role in regulating AHPs as an alternative to state insurance 
regulation. One commenter stated that while the states should be 
responsible for enforcement of standards provided in the final rule, 
the Department should have the authority to intervene. Other commenters 
emphasized the need for increased coordination between the states and 
DOL to evaluate the financial resources of AHPs and protect consumers 
against fraud and abusive practices. Other commenters noted that DOL 
should take enforcement action against AHPs that fail to file timely 
and complete M-1 forms with the Department, and one commenter suggested 
that all self-insured AHPs should be required to register with the 
federal government.
    Among the commenters arguing for an increased federal role, some 
urged the Department to use its authority under section 514(b)(6)(B) of 
ERISA to exempt AHPs from aspects of State insurance law. Most of these 
commenters focused on the potential benefits of uniform standards, and 
the need for interstate AHPs to be free of potentially overlapping, 
cumbersome, different, or contradictory patchworks of regulations that, 
they asserted, could be so detrimental to the operation of multi-state 
AHPs as to prevent them. Some commenters suggested that the Department 
could replace state protections by crafting an exemption with 
additional federal consumer protections that AHPs must comply with as a 
condition of the exemption.
    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 by 
class, from certain State insurance regulations. ERISA section 
514(b)(6)(B) does not, however, give the Department unlimited exemption 
authority. Significantly, ERISA section 514(b)(6)(B) does not give the 
Department any authority to exempt any fully-insured AHP from any state 
insurance laws that can apply to a fully-insured MEWA plan under ERISA 
section 514(b)(6)(A). Furthermore, section 514(b)(6)(B) does not allow 
the Department to exempt self-insured AHPs from state insurance laws 
that can be applied to fully-insured AHPs, i.e., laws related to 
reserve and contribution requirements that must be met in order for the 
fully-insured MEWA plan to be considered able to pay benefits in full 
when due, and provisions to enforce such standards. Notwithstanding 
these limitations, ERISA section 514(b)(6) provides a potential future 
mechanism for preempting state insurance laws that go too far in 
regulating non-fully-insured AHPs in ways that interfere with the 
important policy goals advanced by this final rule. But, as noted in 
the Proposed Rule, doing so at this time lies outside the scope of this 
proceeding.
    While no state is required by Federal law to take legislative 
action in order to regulate AHPs, many states regulate AHPs and other 
MEWAs under their general insurance statutes while others have chosen 
to adopt MEWA-specific insurance laws. For example, under some state 
insurance laws, a self-insured MEWA is subject to the state's general 
insurance laws and regulations applicable to licensed health insurance 
issuers unless the state has adopted a specific MEWA licensing law. To 
guard against fraud and abuse, a number of States provide that self-
insured MEWAs must be licensed, registered, have a minimum number of 
participating employers, obtain an actuarial opinion that the MEWA can 
meet promised benefits and require that the MEWA keep a minimum level 
of reserves.\66\ DOL anticipates close cooperation with State 
regulators to guard against fraud and abuse.
---------------------------------------------------------------------------

    \66\ See e.g., CA Ins. Code, Art. 4.7; TX Ins. Code sec. 3.95-2; 
Rev. Code of WA sec 48.125.020.
---------------------------------------------------------------------------

8. ERISA Fiduciary Status and Responsibilities of AHP Sponsors

    Several commenters asked the Department to provide guidance on 
fiduciary liabilities and responsibilities of a bona fide group or 
association that sponsors an AHP and clarify that any individual 
charged with the operation or management of an AHP is considered a 
fiduciary under ERISA. They stressed that it is important for groups 
and associations that sponsor an AHP to understand that they are 
obligated to protect the interests of the participants of the plan, and 
may be held individually liable if they fail to do so. Some of the 
commenters also requested the Department to clarify who will be 
responsible for ensuring compliance with ERISA and other federal 
requirements, such as COBRA compliance, ERISA reporting and disclosure 
requirements, compliance with certain requirements under the Code, 
compliance with the nondiscrimination requirements under paragraph (d) 
of this final rule and all of the other responsibilities that come with 
the maintenance of a single large employer plan.
    An AHP offered by a bona fide group or association under the final 
rule is subject to all of the ERISA provisions applicable to group 
health plans, including the fiduciary responsibility and prohibited 
transaction provisions in Title I of ERISA. The Department notes that 
the bona fide group or association that sponsors the AHP assumes and 
retains responsibility for operating and administering the AHP, 
including

[[Page 28938]]

ensuring compliance with these requirements.\67\
---------------------------------------------------------------------------

    \67\ Some commenters suggested that the final rule should set 
limits on compensation that may be received by plan fiduciaries and 
brokers. The Department declines this suggestion, and notes that the 
fiduciary responsibility provisions in Part 4 of ERISA already 
establish rules and requirements for service provider compensation 
and other expenses of administering a plan, including a requirement 
that service providers receive no more than reasonable compensation 
for their services. See ERISA section 408(b)(2) and 29 CFR 
2550.408b-2.
---------------------------------------------------------------------------

    Several commenters requested that the Department clarify that all 
notice requirements applicable to ERISA group health plans apply to 
AHPs, including the Summary of Benefits and Coverage (SBCs) and Summary 
Plan Description (SPDs), as well as notices under FLSA section 18B, 
which is imposed on the employer, rather than the plan. Commenters also 
requested that the Department require AHPs to disclose to employer 
groups and potential beneficiaries if they do not provide specific 
consumer protections or benefits the covered customers would have 
otherwise received in the traditional insurance market, including a 
comparison to EHBs, whether dollar limits apply to any benefit, whether 
the plan provides minimum value, and the right to receive coverage on 
the health insurance Exchanges. Other commenters requested that the 
Department coordinate with State regulators regarding the content of 
any notices to avoid confusion and excessive administrative costs.
    As group health plans, AHPs are subject to the disclosure 
requirements of Title I of ERISA. This includes the requirement to 
provide an SPD, Summary of Material Modifications (SMMs) and Summaries 
of Material Reductions in Covered Services or Benefits (SMRs).\68\ The 
AHP's SPD must disclose, in a manner calculated to be understood by the 
average plan participant, the participants' rights and obligations 
under the plan. The SPD must include, among other requirements, a 
description of the cost-sharing provisions, limits on benefits, and the 
extent to which preventive services, prescription drugs, and medical 
tests, devices and procedures must be covered under the plan.\69\ The 
AHP must also furnish a Summary of Benefits and Coverage and Uniform 
Glossary under PHS Act section 2715, as incorporated into ERISA by 
section 715. PHS Act section 2715 requires plans and issuers to provide 
to applicants, enrollees and policyholder or certificate holders a 
Summary of Benefits and Coverage (SBC) that describes the benefits and 
coverage under the plan. The current SBC template requires a plan to 
disclose whether it meets minimum value standards, how it covers 
benefits, including prescription drugs, maternity care, mental health 
and substance abuse services, and any limitations, exceptions and other 
important information (such as dollar limits).
---------------------------------------------------------------------------

    \68\ See 29 CFR 2520.104b-2, 2520.104b-3(a), (d)(3).
    \69\ 29 CFR 2520.102-3(j)(3).
---------------------------------------------------------------------------

    The AHP also must describe services that it does not cover or 
excludes. The SBC must be provided to participants and beneficiaries as 
part of any written application materials distributed to participants 
and beneficiaries, or (if no written application materials are 
distributed) no later than the first date a participant is eligible to 
enroll in coverage. This ensures that participants and beneficiaries 
have the opportunity to familiarize themselves with the terms of their 
coverage before they enroll. The SBC must also be provided by the first 
day of coverage if there are changes; upon special enrollment; upon 
renewal, reissuance or reenrollment (either when application materials 
are provided or no later than 30 days prior) and within seven business 
days upon request.\70\ The AHP is subject to a fine if it fails to 
provide the SBC as required by law. 26 CFR 54.9815-2715(e); 29 CFR 
2590.715-2715(e); and 45 CFR 147.200(e). Similarly, those employers who 
participate in an AHP and are subject to the FLSA must provide a notice 
at the time of hiring notifying an employee of the existence of an 
Exchange, the availability of premium tax credits if the employer plan 
fails to cover 60% of the total allowed costs and that if the employee 
purchases a qualified health plan through the Exchange, he or she may 
lose the employer contribution to any health benefit plan, which may be 
excludable from income. FLSA section 18B. As ERISA-covered group health 
plans, AHPs are subject to numerous other disclosure requirements.\71\
---------------------------------------------------------------------------

    \70\ Special rules for duplication apply. See 26 CFR 54.9815-
2715(a)(1)(iii); 29 CFR 2590.715-2715(a)(1)(iii), and 45 CFR 
147.200(a)(1)(iii).
    \71\ See, e.g., ERISA sections 104(b), 502(c), 503, 712(a)(4) 
and 715; PHS Act sections; 2719; 2719A; 29 CFR 2520.104b-1, 
2560.503-1, 2590.712(d)(3) and 2590.715-2719. To assist with 
compliance, a summary of EBSA's reporting and disclosure 
requirements for employee benefits plans may be found at 
www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/reporting-and-disclosure-guide-for-employee-benefit-plans.pdf.
---------------------------------------------------------------------------

    In addition, AHPs are MEWAs and, as such, are subject to existing 
federal regulatory standards governing MEWAs. Sponsors of AHPs will 
need to exercise care to ensure compliance with those standards, 
including those established in the ACA.
    The ACA also expanded reporting and required registration for MEWAs 
with the Department. MEWA registration requirements require plan and 
non-plan MEWAs to file Form M-1s under ERISA section 101(g) and 29 CFR 
2520.101-2. All AHPs under the final rule will be MEWAs and, as MEWAs, 
required to file the Form M-1 regardless of the plan size or type of 
funding. Further, all employee welfare benefit plans that are MEWAs 
subject to the Form M-1 requirements, including AHPs under the final 
rule, will be required to file the Form 5500, regardless of the plan 
size or type of funding. In addition, the ACA added new criminal 
penalties under ERISA section 519 for any person who knowingly submits 
false statements or makes false representations of fact about the 
MEWA's financial condition, the benefits it provides, or its regulatory 
status as a MEWA in the marketing of a MEWA. The ACA also amended ERISA 
section 501(b) to impose criminal penalties on any person who is 
convicted of violating the prohibition in ERISA section 519.
    Thus, as ERISA-covered plans and MEWAs, AHPs will be subject to 
comprehensive disclosure requirements. In light of these existing 
requirements, the Department does not believe adding new, and 
potentially redundant, disclosure requirements on AHPs of the sort 
suggested by some commentators is necessary or advisable at this time 
based on the record before the Department. Thus, the final rule does 
not include any special disclosure requirements on bona fide groups or 
associations of employers that sponsor AHPs or on AHPs established 
pursuant to the final rule. As noted elsewhere in this document, the 
Department intends to work with state insurance regulators on overall 
implementation of the final rule, including the interaction of any 
applicable state insurance law disclosure requirements with the 
disclosure requirements applicable to group health plans, such as AHPs, 
under Title I of ERISA.\72\
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    \72\ The Department intends to reexamine existing reporting 
requirements for AHPs/MEWAs, including the Form M-1 and possibly the 
Form 5500, and may be asked to propose class or individual 
prohibited transaction exemptions for AHPs that want to use 
affiliates to serve as their administrative service providers or act 
as issuers providing benefits under the AHP.
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C. Economic Impact and Paperwork Burden

1. Summary

    This final rule is intended to facilitate the creation and 
maintenance of AHPs

[[Page 28939]]

to offer more affordable health insurance to small businesses, 
including working owners. Millions of Americans are working owners of 
small businesses, employees of small businesses, or are family members 
of such working owners or employees. Too many have unaffordable options 
for health insurance or lack health insurance altogether. By revising 
the Department's rules and promoting formation of AHPs for small 
businesses and working owners, this final rule will make affordable 
health insurance available to many of these people, including a 
substantial number who would otherwise be uninsured.
    Many employer groups or associations have a thorough knowledge of 
the economic challenges that their members face. Using this knowledge 
and the regulatory flexibility provided by this final rule, AHPs may 
tailor health coverage to better meet the needs of their members at 
lower and more actuarially fair prices \73\ than plans currently 
available in the small group and individual health insurance markets 
under the ACA and state laws applicable to those markets. Thus, this 
final rule will increase the choice of affordable health coverage 
available to many small businesses, including working owners. Small 
businesses may use some of the economic gains that they will reap from 
affordable AHP health coverage to raise pay, hire more employees, and 
invest in new equipment, structures, and intellectual property, all of 
which contributes to economic growth.
---------------------------------------------------------------------------

    \73\ For purposes of this document, ``actuarially fair'' 
generally means that coverage is priced so that the premium paid by 
an individual or business reflects the risks associated with 
insuring the particular individual or business covered by that 
policy.
---------------------------------------------------------------------------

    AHPs will pursue economies of scale by encouraging more small 
businesses and working owners to band together to (1) make health 
coverage design and purchasing decisions; and (2) provide 
administrative functions. Like large health insurance issuers, AHPs 
with large shares in local healthcare markets may exercise bargaining 
power with local healthcare providers and achieve economies of scale in 
purchasing healthcare services. AHPs sponsored by geographically-based, 
multi-industry organizations, which the final rule authorizes, are more 
likely than AHPs sponsored by industry-based organizations with widely 
scattered memberships, which the Department's current pre-rule guidance 
allows (and this new regulation will continue to permit), to garner 
sufficient numbers of insured in local healthcare markets to achieve 
such economies of scale.
    There are many well-established, geographically-based 
organizations, such as local chambers of commerce, that lend themselves 
to sponsoring AHPs, but generally cannot under the Department's pre-
rule guidance. Such organizations can, and sometimes do, help their 
members purchase health insurance policies in the individual and small 
group markets. However, the ACA and state laws and regulations 
governing individual and small group markets limit both the 
propensities of such organizations to undertake group purchasing of 
health insurance and the economies of scale that such organizations can 
achieve from group purchasing. This final rule will enable such 
geographically-based organizations to sponsor AHPs that will provide or 
purchase health insurance for their small business members through the 
more lightly regulated large group market. Moreover, the final rule 
will also encourage newly formed employer organizations to sponsor 
AHPs, and will enable AHPs to extend membership to working owners.
    Fully-insured and self-insured AHPs established under this final 
rule generally will be subject to federal benefit mandates that apply 
to the large group insurance and self-insured ERISA-covered markets, 
respectively.\74\ AHPs established under this rule will also be subject 
to substantial nondiscrimination rules. State laws and regulations may, 
to a varying degree, impose additional benefit mandates and pricing 
restrictions. At the same time, however, AHPs formed under this rule 
will not be subject to federal mandates (e.g., the ACA's ten categories 
of EHBs) and federal pricing rules (e.g., modified community rating 
rules) that apply exclusively to the individual and small group 
insurance markets. Placing AHPs in the same regulatory environment as 
large employers will help small employers to tailor their benefits 
packages resulting in plan designs that more accurately reflect the 
coverage and pricing that some small businesses and their employees may 
value.
---------------------------------------------------------------------------

    \74\ This discussion of ``economic impact and paperwork burden'' 
addresses AHPs that enjoy sufficient participation to constitute 
large groups. Such large AHPs are expected to account for the 
overwhelming majority of AHP enrollment. Smaller AHPs' impacts would 
be different and are not considered here.
---------------------------------------------------------------------------

    Relative to health insurance issuers in the individual and small 
group markets under ACA and state laws applicable to those markets, 
AHPs established under this final rule can use their regulatory 
flexibility to design more tailored, less comprehensive health coverage 
and set more actuarially fair prices that generally are lower for lower 
risk groups and higher for higher risk ones, provided the prices comply 
with applicable nondiscrimination standards. This regulatory 
flexibility in design and pricing will necessarily lead to some 
favorable risk selection toward AHPs and adverse selection against 
individual and small group markets.
    To the extent that small businesses that use AHPs avoid paying 
forced cross subsidies to the ACA-compliant individual and small group 
markets (and thereby reap economic gains), premiums in those ACA-
compliant markets will increase. Individual policy holders with 
household incomes at or below 400 percent of the federal poverty level 
generally will be protected from these premium increases (i.e., by 
premium tax credits), but higher-income individuals and small 
businesses that lack attractive, affordable AHP options will not. 
Facing premium increases, small businesses and working owners that 
remain in the ACA-compliant individual and small group markets may drop 
insurance or be less able to invest, hire, and grow.
    In the past, some AHPs and other MEWAs suffered from mismanagement 
and abuse, leading to unpaid claims and loss of coverage. Congress, the 
Department, and states have made progress combatting MEWA abuse and 
will continue their efforts as AHPs become more prevalent in response 
to this rule. AHPs with tighter ties to, and that are more controlled 
by, employer members are likely to be more insulated from mismanagement 
and abuse. The final rule requires certain minimum such ties and 
control in order to reduce operational risks. Nonetheless, risks 
remain.
    The final rule in effect broadens the flexibility of states to 
tailor their laws and regulations to their local market conditions and 
policy preferences. The ACA has constrained this flexibility with 
respect to health insurance in the individual and small group markets. 
AHPs present an opportunity for states to make affordable health 
coverage options that the ACA has otherwise foreclosed available to 
small businesses, including working owners. States' long experience 
regulating individual and small group markets and close-in knowledge of 
local market conditions position states to optimize AHPs' role.
    Overall, and as discussed more fully below, the Department has 
concluded that this rule delivers social benefits that justify any 
attendant social costs.

[[Page 28940]]

2. Relevant 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 final rule is economically significant within 
the meaning of section 3(f)(1) of the Executive Order. Therefore, OMB 
has reviewed the rule pursuant to the Executive Order.
    The background to the rule is discussed earlier in the preamble. 
This discussion assesses the rule's expected impacts.

3. Introduction and Need for Regulation

    Presently, U.S. households obtain health benefits from a number of 
different private and public sources. Essentially all individuals age 
65 or older are covered by Medicare; many poor individuals under age 65 
are covered by Medicaid; and 60 percent of individuals under age 65 
have employer-sponsored coverage. Nearly all large employers offer 
health coverage to their employees, but only about one-third of 
employers with fewer than 50 employees do. Thirty-seven percent of 
individuals under age 65 obtain coverage from private employers with 50 
or more employees, nine percent from smaller private employers and 13 
percent from governmental employers. Another nine percent purchase 
individual policies.\75\
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    \75\ Population statistics are from 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. Employer statistics are from the Medical 
Expenditure Panel Survey, Insurance Component, available at https://meps.ahrq.gov/data_stats/summ_tables/insr/national/series_1/2016/tia2.pdf.
---------------------------------------------------------------------------

    Today, businesses generally purchase health insurance in one of 
three market segments, depending on their size. These segments are: (1) 
The individual market, which includes working owners if they are not 
covering employees and therefore cannot establish a group health plan, 
other individuals, and their families; (2) the small group market, for 
small employers; and (3) the large group market, which generally 
includes employers with more than 50 employees. Many large employers 
self-insure rather than purchase group insurance in the large group 
market.
    Relative to large employers, small businesses purchasing health 
insurance in the individual and small group markets generally face at 
least two inherent economic disadvantages. First, owing to their small 
size, working owners and other small businesses lack very large 
employers' potential for administrative efficiencies and negotiating 
power. Second, unlike large businesses, individual small businesses do 
not constitute large, naturally cohesive risk pools. Any single small 
business's claims can spike abruptly due to one serious illness. 
Relative to large employers, small businesses also face more rigorous 
regulatory requirements. The ACA imposes requirements in the individual 
and small group health insurance markets that do not apply in the large 
group market or to self-insured plans. For example, the ACA imposes 
adjusted community rating rules and mandates coverage of ten categories 
of EHBs.\76\ These requirements, which aimed to make comprehensive 
coverage affordable for individuals and small businesses with high 
expected or actual claims, generally have caused adverse selection by 
limiting choice and raising premiums for those who do not expect to 
have high medical needs.
---------------------------------------------------------------------------

    \76\ See PHS Act sections 2701, 2702, and 2707(a).
---------------------------------------------------------------------------

    While some AHPs exist today, before the issuance of this final 
rule, their reach was limited by the Department's prior interpretation 
of the conditions when an AHP constitutes an employer-sponsored plan 
under ERISA. Under the prior interpretation, eligible group or 
association members had to share a common interest (usually, in 
practice, operate in the same industry) and genuine organizational 
relationship, join together for purposes other than providing health 
coverage, exercise control over the AHP, and have one or more employees 
in addition to the business owner in order for the group or association 
to qualify as bona fide. Absent any one of these criteria, AHPs were 
treated not as single, large-group plans, but as issuers or 
distributers of separate individual, small-group, and/or large-group 
policies to participating members, based on the status or size of the 
member. The prior interpretation precluded an AHP's potential advantage 
of allowing small businesses and working owners to tailor benefit 
packages under largely the same rules available to large employer 
plans. Instead, the prior interpretation forced AHPs not meeting the 
requirements of the prior interpretation to subject their members to 
different rules, depending on the members' status as an individual 
working owner, or small or large employer, diminishing any potential 
for administrative cost savings. Accordingly, after consideration of 
public comments on the Proposed Rule, the Department is publishing this 
final rule, which broadens the conditions under which an AHP will be 
treated as a single large group plan. As a result, the number of small 
businesses eligible to participate in such AHPs will increase, and many 
Americans will have new, affordable employment-based health coverage 
options.
    The final rule generally does this in four important ways. First, 
it relaxes the requirement that group or association members share a 
common interest, as long as they operate in a common geographic area, 
in order for the group or association to qualify as bona fide. Second, 
it confirms that groups or associations whose members operate in the 
same trade, industry, line of business or profession can sponsor AHPs 
under the final rule, regardless of geographic distribution. Third, it 
clarifies the existing requirement that bona fide groups or 
associations sponsoring AHPs must have at least one substantial 
business purpose unrelated to the provision of benefits. Fourth, it 
permits AHPs that meet the final rule's new requirements to enroll 
working owners without employees. Consequently, for example, the final 
rule would newly allow a local chamber of commerce that meets the other 
conditions in the rule to offer AHP

[[Page 28941]]

coverage to all of its members, including self-employed working owners, 
based on having their principal places of business within a single 
state or metropolitan area. This rule does not supplant the 
Department's previously issued sub-regulatory guidance, which in effect 
generally permits an AHP to condition each employer member's premiums 
on its employees' collective health status factors, as long as such 
rating complies with the HIPAA nondiscrimination requirements, 
including the requirement that it does not single out one or more 
individuals based on their health. On the other hand, an AHP providing 
health coverage under this final rule must not treat the employees of 
an employer member as a distinct group of similarly-situated 
individuals based on the employees' health factors. (Such an AHP may, 
however, treat employees of subsets of employer members as distinct 
groups of similarly situated individuals based on bona fide employment-
based classification based on other, non-health factors, such as its 
industry or location, or its employees' ages or genders, or 
occupations.)

4. Increased Choice

    Under this final rule, AHPs will be able to offer many small 
businesses more attractive and affordable health coverage options than 
are currently available to them in the ACA-compliant individual and 
small group markets. These options will include tailored plans that 
omit certain benefits that some small businesses and their employees 
may prefer to forgo in return for reduced cost. Small businesses taking 
advantage of these tailored options may accrue economic advantages for 
themselves and their employees.
    Absent this final rule, many small businesses' health coverage 
choices would be more limited. Under existing ACA federal and state 
rules, non-grandfathered individual and small group insurance policies 
generally must provide coverage for ten categories of EHB, and meet 
certain other benefit standards, for example with respect to actuarial 
value, and network adequacy. These limits, which are not applicable to 
large employer plans, hamper the ability of many small employers to 
offer benefits packages tailored to their needs. Under this final rule, 
AHPs generally will be subject to the same, more flexible rules to 
which large employer plans are subject, consistent with leveling the 
federal regulatory playing field between small and large employers. The 
Department notes, however, that AHPs and large employers differ with 
respect to their economic incentives, and the Department does not 
expect that their behavior will be the same. For instance, AHPs 
generally will have incentives to tailor benefits to appeal to lower-
risk groups--an incentive that large employers generally do not share, 
as discussed below.
    AHPs established under this final rule will be able to match more 
closely the preferences of many small businesses and often of their 
employees for the design and price of health coverage than health 
insurance issuers can in ACA-compliant individual and small group 
markets. Such closer matches generally will improve the welfare of AHP 
members. For example, a working owner opting for less comprehensive 
coverage can devote the attendant savings to uses he or she values 
more, and will be less apt to overuse medical care (although possibly 
at more risk of forgoing beneficial care). The same can be said of 
small business employees whose employer switches from an ACA-compliant 
small group policy to more affordable AHP coverage that better matches 
employer and employee preferences on the optimal mix of wages and 
health benefits and the composition of health benefits.
    Some comments expressed concern that AHPs, by offering more 
tailored, less comprehensive coverage that appeals mostly to less 
costly groups, will raise the price of comprehensive policies for some 
small businesses that prefer them, and generally erode choice and 
affordability for consumers limited to the ACA-compliant individual and 
small group markets.\77\ Some comments additionally expressed concern 
that AHPs, by offering less comprehensive coverage and increasing the 
cost of more comprehensive coverage offered by others, will erode 
access to needed healthcare services. Some comments recommended that 
the Department address these concerns by requiring AHPs to cover EHB 
and satisfy other ACA and state benefit standards. Some comments 
expressed concern that AHPs would reduce choice for some small 
businesses by increasing premiums in individual and small group markets 
and possibly prompting some insurers to withdraw offers in those 
markets. Even some businesses joining AHPs may in fact have preferred 
offers that are no longer available because of AHPs. The Department 
believes that these concerns are justified by the economic advantages 
that will accrue to the small businesses to which AHPs will offer more 
attractive choices.\78\
---------------------------------------------------------------------------

    \77\ The American Academy of Actuaries commented that ``flexible 
benefit rules could allow AHPs to create plans more attractive to 
lower-cost groups, resulting in positive selection (and lower 
premiums) for AHPs and adverse election (and higher premiums) for 
ACA plans.'' The comment pointed to potentially less comprehensive 
coverage of rehabilitative and habilitative services (including 
chiropractic, physical therapy, and other therapies) and behavioral 
health services, and to narrower drug formularies. (See comment 
letter from the American Academy of Actuaries, February 9, 2018, 
(Comment # 106 on EBSA web page last accessed at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00106.pdf).) According to 
another public comment, AHPs can be expected to behave like 
unregulated individual and small group issuers, in that they will 
``offer more limited coverage packages that appeal distinctively to 
particular demographics or health profiles.'' (See comment letter 
from Mark A. Hall, Professor of Law and Public Health, Wake Forest 
University School of Law, Feb 16, 2018, (Comment # 146 on EBSA web 
page last accessed at https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85).) 
Another commenter notes that ``AHPs stand to gain from using 
[benefit design] to avoid very high-cost enrollees and attract 
people who cost less to cover.'' (See comment letter from the Center 
on Budget and Policy Priorities, March 6, 2018 (Comment # 537 on 
EBSA web page last accessed at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00537.pdf).) According to another commenter, 
before the ACA required coverage of EHB, individual policies covered 
little or no maternity services, often excluded or limited mental 
health coverage, and often lacked pharmacy coverage. See comment 
letter from the Consumers Union, March 1, 2018 (Comment # 294 on 
EBSA web page last accessed at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00294.pdf). One existing AHP publicly markets its 
ability ``to design plan and deductible options, and keep costs low 
since MEWAs are not subject to some of the Affordable Care Act's 
(ACA) mandated benefits.'' See MEWA FAQs question three from the 
Council of Smaller Enterprises available at: https://
www.cosemewa.com/~/media/Files/PDF/COSE/MEWA/2017/
112116%20COSE%20Helath%20and%20Wellness%20Trust%20FAQ%20V3%20Dec%2014
%20pdf.pdf?la=en.
    \78\ For some discussions of the potential benefits of increased 
choice of health plans, see Bundorf, M. Kate, Jonathan Levin, and 
Neale Mahoney. 2012. ``Pricing and Welfare in Health Plan Choice.'' 
American Economic Review, 102 (7): 3214-48. https://www.aeaweb.org/articles?id=10.1257/aer.102.7.3214; and Dafny, Leemore, Kate Ho, and 
Mauricio Varela. 2013. ``Let Them Have Choice: Gains from Shifting 
Away from Employer-Sponsored Health Insurance and toward an 
Individual Exchange.'' American Economic Journal: Economic Policy, 5 
(1): 32-58.
---------------------------------------------------------------------------

    The Department notes that AHPs operating under this final rule, 
like other large group plans, though not subject to the requirement to 
cover EHB and other requirements applicable only to issuers in the 
small group and individual markets, are in fact subject to some other 
significant benefit mandates. These include, for example, a ban on 
charging participants and beneficiaries higher premiums because they 
have a pre-existing health condition; a ban on denying coverage of an 
otherwise covered but pre-existing health condition; a requirement that 
if the plan

[[Page 28942]]

offers dependent coverage it must do so for dependent children up to 
age 26; a ban on annual or lifetime dollar limits on EHB that the plan 
covers; for non-grandfathered plans, a requirement to cover certain 
preventive health services without cost-sharing; special enrollment 
rights (for example, upon marriage or birth of a child); for non-
grandfathered plans, caps on out-of-pocket expenses for covered EHB; 
prohibitions on waiting periods for coverage that exceed 90 days; for 
non-grandfathered plans, additional protections for selection of in-
network primary care providers, pediatricians, and OB/GYNs without 
referral and without prior authorization; non-grandfathered plan 
protections for coverage of emergency room services; protections for 
coverage of post-breast-cancer-surgery benefits; protections for the 
length of a hospital stay in connection with childbirth (if such stay 
is a covered benefit under the plan),\79\ and procedural protections 
governing appeals of denied health claims (for non-grandfathered health 
plans, this also includes external review). These mandates place 
significant constraints on AHP benefit designs, but leave ample room 
for AHPs to offer more tailored, less comprehensive, and more 
affordable health coverage than is available in ACA-compliant 
individual and small group markets.\80\
---------------------------------------------------------------------------

    \79\ ERISA does not mandate coverage of maternity benefits. 
However, Title VII of the Civil Rights Act (as amended by the 
Pregnancy Discrimination Act and administered by the EEOC) generally 
applies to employers with 15 or more employees and provides that 
pregnancy-related expenses for employees and their spouses must be 
reimbursed in the same manner as those incurred for other medical 
conditions. Historically many individual insurance policies and some 
policies for very small plans limited or excluded coverage for 
maternity care, in order to limit adverse selection. AHPs covering 
employers with 15 or more employers would need to ensure compliance 
with Title VII in connection with such coverage, and, though not 
required to do so, may, for administrative simplicity and other 
reasons, offer maternity benefits to all participants and 
beneficiaries regardless of a member employer's size. Some AHPs 
covering only working owners and very small plans may exclude 
coverage of such services. For more information regarding Title VII, 
contact the EEOC. In addition, other State law provisions may apply.
    \80\ One commenter acknowledged concerns that AHPs may offer 
less comprehensive benefits, but stated that legitimate membership 
organizations would not risk their goodwill and reputation with 
their members by offering substandard health plans.
---------------------------------------------------------------------------

    This final rule in effect broadens states' flexibility to tailor 
their local market rules to their local market conditions and policy 
preferences. The ACA, in particular, had constrained that flexibility 
with respect to individual and small group insurance. Expanded AHPs 
under this rule present an opportunity for states to make available to 
their local small businesses affordable health coverage options that 
the ACA had otherwise foreclosed. States' long experience regulating 
individual and small group markets and close-in knowledge of local 
market conditions position them to optimize AHPs' role.
    Many AHPs will be subject to State benefit mandates. Pennsylvania, 
for example, requires policies issued in the large group market to 
cover in-patient and out-patient services for severe mental illness, 
inpatient and outpatient services for substance use disorders, autism 
services, childhood immunizations, and mammography.\81\ Where present 
and applicable, these types of State mandates will apply to fully 
insured AHPs through State regulation of the health insurance policies 
they purchase, or directly to self-insured AHPs as permitted under 
ERISA's MEWA preemption provisions. Moreover, under this final rule, 
States retain the authority to adopt minimum benefit standards, 
including standards similar to those applicable to individual and small 
group insurance policies under the ACA, for all AHPs. To the extent 
that States adopt such standards, AHPs generally will have less 
opportunity to expand choices of more affordable coverage options for 
many small businesses.
---------------------------------------------------------------------------

    \81\ See 40 P.S. sections 764g, 908-2, 764h, 3502, 764c. (For a 
list of state benefit mandates, see generally https://www.ncsl.org/research/health/state-ins-mandates-and-aca-essential-benefits.aspx#State_EHB_2016).
---------------------------------------------------------------------------

5. Economies of Scale

    Many AHPs will pursue advantages of economies of scale that small 
businesses do not currently enjoy. AHPs sponsored by pre-existing 
groups or associations that perform multiple functions for their 
members other than offering health coverage (such as chambers of 
commerce or trade associations) might have more potential to deliver 
administrative savings than those established for the principal purpose 
of offering health coverage. These existing organizations may already 
have extensive memberships and thus may have fewer setup, recruitment, 
and enrollment costs than organizations newly formed to offer 
insurance. These existing organizations that have been limited in their 
ability to offer AHPs to some or all of their existing members (for 
example, to working owners or workers outside of a common industry) by 
the Department's prior interpretations could newly extend AHP 
eligibility to such members.
    As with traditional insurers of individuals and small groups, AHPs' 
most promising potential for economies of scale may be an ability to 
negotiate discounts with healthcare providers. Such discounts may 
reflect a combination of (1) administrative efficiencies from economies 
of scale; (2) influence over providers' utilization decisions and 
practices; (3) reduction of any excess provider profits; and (4) 
sometimes modest cost-shifting to other payers who have less 
negotiating leverage.
    Only large AHPs are likely to secure provider discounts similar to 
those that large health insurance issuers often can deliver to their 
individual and small group customers. Large issuers have the benefit of 
aggregating their purchasing power across all market segments in which 
they participate, potentially including private individual, small and 
large group insurance, large self-insured employer customers, Medicare 
Advantage, and Medicaid. These latter segments often account for a 
disproportionately large fraction of provider utilization volume. AHPs 
generally will have more potential to negotiate provider discounts if 
they opt to keep their provider networks narrow, so as to concentrate 
use and scale among available providers. Geographically-based AHPs, 
which this final rule allows for the first time, may be most likely to 
be able to secure provider discounts. On the other hand, AHPs' entry 
sometimes could dilute other payers' abilities to obtain discounts,\82\ 
thereby increasing costs for such payers' enrollees.
---------------------------------------------------------------------------

    \82\ For a discussion of market concentration and issuers' 
market power see Sheffler, Richard M. and Daniel Arnold. ``Insurer 
Market Power Lowers Prices in Numerous Concentrated Provider 
Markets.'' Health Affairs 36, no. 9 (2017).
---------------------------------------------------------------------------

    Accordingly, AHPs with large shares in local health markets will be 
best positioned to negotiate discounts with providers. Without the 
benefit of this final rule, AHP participation has been constricted to 
date--especially as common geography has not constituted an allowable 
basis to form an AHP--and as a result, prior AHPs generally have been 
unable to achieve large local participation. Among MEWAs operating as 
single large group health plans (hereafter, ``plan MEWAs''), total 
enrollment averaged just 3,437 in 2016. Twenty-eight had more than 
10,000 enrollees, and four had more than 50,000, but many of these were 
dispersed across multiple States.
    This final rule, by enabling AHPs to be comprised of otherwise 
unrelated small employers and working owners who share a common 
geographic area, will open the door for more AHPs to claim large 
fractions of local markets and thereby pursue advantages of scale. 
There are many well established,

[[Page 28943]]

geographically based organizations, such as local chambers of commerce, 
that lend themselves to sponsoring AHPs, but cannot under the 
Department's pre-rule guidance. Under that guidance, such organizations 
could, and sometimes did, help their members purchase health insurance 
in the individual and small group markets. However, ACA and State laws 
and regulations governing individual and small group markets limit both 
the propensities of such organizations to undertake group purchasing of 
health insurance and the economies of scale that such organizations can 
achieve from group purchasing. This final rule will enable such 
geographically-based organizations to sponsor AHPs (plan MEWAs).
    The large group market's regulatory flexibility is likely to 
encourage and enable more existing organizations to pursue more 
potential scale advantages for small business members. These might 
include some MEWAs that currently do not constitute single large group 
plans but instead encompass multiple plans, each sponsored separately 
by a participating employer (hereafter ``non-plan MEWAs''). In 2016, 
one non-plan MEWA covered more than 50,000 enrollees in Connecticut. A 
second covered more than 100,000 across 22 States and more than 20,000 
in Tennessee alone.\83\ These and other heretofore non-plan MEWAs might 
qualify to become AHPs with large local market shares under this final 
rule. The final rule will also encourage the establishment of new 
organizations to sponsor AHPs, and will enable both existing and new 
AHPs to extend membership to working owners.
---------------------------------------------------------------------------

    \83\ DOL calculations based on Form M1 Filings.
---------------------------------------------------------------------------

    Under favorable conditions, AHPs may achieve other economies of 
scale. For example, small group and individual insurance sometimes can 
be beset by high distribution costs, reflecting for example commissions 
paid to agent and brokers who sell policies, possibly amplified by 
churning of small businesses into or out of the market or between 
issuers. AHPs, unlike large employer plans, must themselves incur some 
cost to distribute insurance to large numbers of small businesses. 
However, relative to traditional health insurance issuers and agents, 
some AHPs might reduce these costs, for example if they are able to 
take economic advantage of members' existing ties to the sponsoring 
group or association and/or if they are more able or inclined than 
traditional issuers and agents to minimize churn. Little hard data 
exists on the degree to which such scale advantages might flow to 
future AHPs, due to a rapidly changing marketplace and the restrictive 
requirements imposed on AHPs before this rule. Several commenters 
argued that these advantages have been elusive in the past, and under 
this rule are likely to be small and available only under certain 
favorable conditions. One such public comment stated that where 
available, ``administrative savings of more than 2-3 percent appear to 
be highly unlikely . . . .'' \84\ Administrative savings of 2-3 percent 
of total insurance premiums is nonetheless significant.
---------------------------------------------------------------------------

    \84\ See comment letter from Mark A. Hall, Professor of Law and 
Public Health, Wake Forest University School of Law, Feb 16, 2018 
(Comment # 146 on EBSA web page last accessed at https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85).
---------------------------------------------------------------------------

    A 2011 report \85\ found that in Washington State, issuers' \86\ 
average loss ratio was a bit higher (and administrative costs therefore 
likely lower) for AHP-affiliated small groups than for community-rated 
small groups. However, the report notes that this difference is 
``consistent'' with the larger average size of AHP-affiliated small 
groups. For similarly sized small groups, issuers' loss ratios were 
similar for the AHP and community-rated segments. It is difficult to 
infer from this data point whether Washington State AHPs enjoy true 
administrative efficiencies relative to traditional individual and 
small group issuers. On one hand, the same report indicates that AHP 
premiums were substantially lower than the premiums that issuers 
charged small businesses outside of AHPs. If AHPs' premiums are lower 
and loss ratios are the same, then all else equal, AHPs' administrative 
costs are likely to be lower, if measured in dollars per member. Lower 
administrative costs might be evidence of greater administrative 
efficiency, but alternatively might be explained by the lighter 
regulatory load on AHPs, or by a difference in the administrative 
demands associated with insuring the AHPs' population (which might use 
less healthcare) or providing AHP benefits (which might be less 
comprehensive). In addition, it is unclear whether these loss ratios 
take into account administrative costs that may reside with the group 
or association rather than with the issuer.
---------------------------------------------------------------------------

    \85\ Chollet, D., Mathematica Policy Research, ``Association 
Health Plans and Community-Rated Small Group Health Insurance in 
Washington State-Final Report,'' (September 30, 2011), https://www.statecoverage.org/files/Mathematica_assoc_healthplans_WA.pdf.
    \86\ Washington State generally requires AHPs to be insured, 
rather than self-insured.
---------------------------------------------------------------------------

    Large AHPs sometimes may achieve 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, AHPs sometimes 
may avoid the transaction cost associated with buying large group 
insurance from an issuer and the cost associated with the issuer's 
profit margin. They sometimes may avoid the potentially significant 
cost to comply with State rules that apply to large group issuers, 
including for example premium taxes, benefit mandates, market conduct 
rules, and solvency standards. Under this final rule, however, States 
retain authority to extend such rules to self-insured AHPs, and AHPs 
will be subject to ERISA requirements that demand sound financial 
management.\87\
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    \87\ Self-insurance entails operational risk. Self-insured AHPs 
sometimes may face more operational risk than self-insured large 
employers, for two reasons. First, for a given size, an AHP's claims 
may be more volatile than a large employers' insofar as the AHP is 
more exposed to unanticipated favorable or adverse selection. 
Second, while premiums generally represent the totality of an AHP's 
available revenue, a large employer may be able to tap other revenue 
sources to cover claims volatility, as it would any other unexpected 
business expense. AHPs' efforts to manage these operational risks 
will limit the savings available from self-insurance.
---------------------------------------------------------------------------

    While some AHPs may achieve significant administrative efficiencies 
for their small business members from economies of scale, the magnitude 
of such savings is likely to be smaller than the savings AHPs can 
deliver by offering more tailored, less comprehensive benefits, 
offering actuarially fair price discounts to low-risk groups, and 
assembling favorable risk pools. Some AHPs will successfully deliver 
economic value to their members even if these AHPs have relatively high 
administrative costs. Consequently, while some AHPs may deliver 
significant savings for their members from economies of scale, other 
AHPs may not deliver such savings or may even increase administrative 
costs.

6. Risk Segmentation

    As noted above, AHPs established under this final rule will enjoy 
regulatory flexibility to design more tailored, less comprehensive 
health

[[Page 28944]]

coverage and price it in a more actuarially fair manner than health 
insurance issuers can in the ACA-compliant individual and small group 
markets. Thus, AHPs will be able to offer lower premiums to many small 
businesses by offering actuarially fair price discounts to lower risk 
groups, consistent with applicable nondiscrimination provisions.
    AHPs' exercise of their relative flexibility will lead to some 
degree of favorable risk selection toward AHPs and adverse selection 
against individual and small group markets. This risk segmentation will 
increase premiums somewhat in ACA-compliant individual and small group 
markets. The Department's Proposed Rule identified these 
considerations, reviewed mixed evidence on the likelihood and extent of 
risk segmentation, and predicted that the proposal's nondiscrimination 
rules together with AHPs' potential to deliver savings from scale 
advantages would substantially limit, but not entirely eliminate, such 
risk segmentation. Some commenters, however, asserted that even with 
the benefit mandates that apply in the large group market and the 
nondiscrimination rules included in this final rule, many AHPs, by 
design and/or in response to market forces, unless prevented by State 
regulation, will assemble disproportionately favorable risk pools and 
thereby subject local individual and small group markets to adverse 
selection and premium increases. After evaluating these comments, the 
Department believes that AHPs' scale advantages generally will be 
insufficient to limit risk segmentation. This final rule's 
nondiscrimination provisions will reduce, but not eliminate, AHPs' 
risk-segmentation effects.
    Under this final rule, AHPs' ability to segment risks will be 
limited by a number of forces. An AHP that forms under this final rule, 
and that may enroll otherwise unrelated small businesses and working 
owners, cannot adjust employer members' premiums based on their 
respective employees' health status. States may take additional steps 
to limit AHPs' risk segmentation effects, which would limit the ability 
to set actuarially fair prices and might limit AHP formation. AHPs are 
controlled by their members and, therefore, in some cases, AHPs' belief 
that their members are better off and their reputation is enhanced by 
offering broader benefit packages with more community-rated prices, may 
weigh against the competitive pressure to calibrate benefits and prices 
to avoid bad risks. Likewise, very large AHPs' size sometimes may 
itself blunt this pressure. Finally, risk selection efforts are subject 
to increasing costs and diminishing returns.
    Nevertheless, AHPs established under the final rule will, within 
the general rules applying to large group plans and the specific 
nondiscrimination provisions in this final rule, by escaping some ACA 
pricing restrictions and forced cross-subsidies, will tend to segment 
risks. Relative to ACA-compliant issuers in the individual and small 
group markets, AHPs can offer more actuarially fair (and potentially 
much lower) prices to lower risk groups based, for example, on age, 
gender, or industry. Moreover, AHPs additionally can design health 
coverage to attract lower risk groups. At the same time, the Department 
finds that risk segmentation will be limited for reasons discussed 
above and further in this section. While under this final rule AHPs and 
large employer plans will have a similar federal regulatory 
environment, their economic incentives will be different. Large 
employers design and price health benefit offers to recruit and retain 
productive workers and to maximize those workers' productivity. 
Consequently, large employers typically offer heavily subsidized 
comprehensive health coverage for employees and their families. In 
contrast, AHPs will design and price offers for their members in 
competition with more heavily regulated individual and small group 
issuers, and possibly with one another. This favors actuarial pricing 
that accurately reflects risk differences between, for example, 
genders, age groups, and industries, and more tailored, often less 
comprehensive benefits, insofar as such pricing and benefits will 
attract favorable risk pools and facilitate lower premiums.
    Some groups or associations may prefer to provide comprehensive 
benefits at community rates that do not discriminate among members by 
age or gender. Such groups or associations might be motivated by a 
sense of obligation toward or solidarity among members, such as workers 
with a common trade. Trade unions historically have negotiated 
comprehensive multiemployer benefit arrangements with large numbers of 
small and medium sized companies, with costs allocated based on hours 
worked rather than on actuarial factors. On the other hand, AHPs may be 
more vulnerable than union-negotiated arrangements to competition from 
other groups or associations more willing to use actuarial pricing and/
or benefit limitations to provide potential savings for many of the 
same members. Such competitive pressure may force groups or 
associations to adopt actuarial pricing reflecting risk and limited 
benefits as defenses against adverse selection. Groups or associations 
that naturally comprise relatively favorable and homogenous risk pools 
may be best able to sustain nondiscrimination in rate setting, because 
they will enjoy savings that can be shared widely, and can spread 
thinly across young and healthy members the costs attributable to the 
few needing expensive care. Such AHPs, however, while refraining from 
discrimination internally, could increase adverse selection against 
local individual and small group markets.
    AHPs historically have utilized actuarial pricing. According to 
comments, existing AHPs often rate employer members based on health 
factors such as claims, and need flexibility to do so to ensure their 
success. Nearly all AHPs in Washington State experience rate.\88\ AHPs 
operating under this new rule may not adjust prices actuarially for 
health status, but only for non-health factors such as age, gender, and 
industry. AHPs that under this rule extend eligibility to working 
owners may face even greater competitive pressure to limit benefits, 
because individual markets generally are more susceptible than small 
group markets to adverse selection.
---------------------------------------------------------------------------

    \88\ Chollet, D., Mathematica Policy Research, ``Association 
Health Plans and Community-Rated Small Group Health Insurance in 
Washington State-Final Report,'' (September 30, 2011), https://www.statecoverage.org/files/Mathematica_assoc_healthplans_WA.pdf.
---------------------------------------------------------------------------

    One comment \89\ provided a conceptual framework for assessing the 
implications of AHPs' relative pricing flexibility and predicted that 
AHPs would segment risks under the Proposed Rule. The comment calls 
attention to certain factors related to

[[Page 28945]]

rating,\90\ plan design,\91\ and other considerations.\92\ One comment 
points out that the flexibility AHPs will have to, for example, cover 
certain trade groups, will result in the ability to offer more 
affordable care to those groups than individual and small group 
issuers. AHPs also may offer substantially lower premiums to younger 
men and substantially higher premiums for younger women.\93\ One 
comment points to market experience as evidence that AHPs could 
threaten risk pools. The comment argues that AHPs' scale advantages 
will be insufficient to offset their large incentives to avoid worse 
health risks. The comment cites a market collapse in Kentucky in the 
1990s to illustrate concerns about market dynamics and regulation.\94\
---------------------------------------------------------------------------

    \89\ See comment letter from the American Academy of Actuaries, 
February 9, 2018, (Comment #106 on EBSA web page last accessed at 
https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00106.pdf).
    \90\ With respect to rating, the comment identifies six factors: 
(1) Age, (2) industry/occupation, (3) geography, (4) gender, (5) 
group size, and (6) separateness of the risk pool. The comment 
indicates that relative to individual and small group issuers, AHPs 
``could offer lower premiums to younger adults and higher, less 
attractive premiums to older people,'' but also might set premiums 
for newborns substantially higher than for older children (the ACA 
requires all children under 14 to be rated together). The comment 
continues that AHPs' unique ability to vary rates by industry or 
occupation will advantage them over issuers. Geographically, health 
insurance issuers must all rate evenly within the same state-
specified zones, but AHPs could use different zones and might, for 
example, split a state zone into smaller segments to reflect cost 
differences. AHPs might additionally set higher rates for smaller 
groups (of say, fewer than 10), and for women of child-bearing age.
    \91\ With respect to plan design, the comment notes that AHPs 
might limit covered services, network size or composition, or impose 
higher cost sharing (which, if the plan is not grandfathered, would 
still be subject to the limitations on out-of-pocket costs imposed 
by PHS Act 2707), all of which could contribute to favorable risk 
selection.
    \92\ The comment emphasizes that AHPs' success and effects could 
vary widely depending on the local regulatory environment, and on 
the AHP's ability to compete with local issuers on dimensions 
including reputation, provider networks (and associated provider 
discounts), care management, and administration.
    \93\ See comment letter from BlueCross BlueShield, March 6, 2018 
(Comment #549 on EBSA web page last accessed at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00549.pdf). According to the comment, all 
else equal, AHPs may rate the engineering services industry 9 
percent lower than issuers operating under individual and small 
group market rules, and may rate the taxicab industry 15 percent 
higher. AHPs may rate men in their 20s more than 40 percent lower 
than would be consistent with individual and small group market 
rules, and may rate women in their late 20s and 30s more than 30 
percent higher. This suggests, for example, that AHPs are likely to 
enroll more male than female working owners, disproportionately 
leaving women (and their maternity-related costs) in local 
individual markets.
    \94\ See comment letter from Mark A. Hall, Professor of Law and 
Public Health, Wake Forest University School of Law, Feb 16, 2018, 
(Comment #146 on EBSA web page last accessed at https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85). According to the comment, Kentucky implemented 
market reforms but exempted AHPs from these reforms, including 
rating reforms. This resulted in healthy people seeking coverage 
through associations, which were not community rated. This left 
unhealthy people to seek coverage in the regulated markets. Carriers 
began canceling health insurance policies and fleeing the state, 
leaving a decimated market. The same commenter expressed concerns 
that AHPs cannot duplicate large employers' advantages with respect 
to the composition and stability of risk pools, because each small 
business will select insurance options based on its own anticipated 
medical needs and premium offers.
---------------------------------------------------------------------------

    A publicly available report estimated that under the Department's 
proposal, nationwide by 2022 AHPs would increase overall premiums in 
individual markets by between 2.7 percent and 4.0 percent, and in small 
group markets by between 0.1 percent and 1.9 percent.\95\ (A more 
recent report estimated that AHPs, together with the separate proposal 
to expand short-term, limited duration insurance policies, would 
increase premiums in individual and small group markets by from 2 
percent to 3 percent.\96\) A separate estimate predicted that AHPs 
available to all Washington, DC employers would increase premiums in 
the local individual market by 5 percent and small group market by 10 
percent, or possibly by more if high cost employers do not consider 
joining AHPs.\97\ Yet another predicts that premiums in Massachusetts' 
combined individual and small group markets could increase by more than 
10 percent in the first year.\98\ If the first of these sets of 
estimates is correct, individuals remaining in the individual and small 
group markets could see a combined premium increase of between $7.7 
billion and $14.1 billion, due to the reduction in cross subsidization. 
This would also be the amount of the cross-subsidization those leaving 
to join an AHP were providing in those markets and they will now be 
able to retain.\99\
---------------------------------------------------------------------------

    \95\ Avalere Health, Association Health Plans: Projecting the 
Impact of the Proposed Rule at 3, 5-7 (Feb. 28, 2018), available at 
https://go.avalere.com/acton/attachment/12909/f-052f/1/-/-/-/-/Association%20Health%20Plans%20White%20Paper.pdf.
    \96\ U.S. Congressional Budget Office, ``Federal Subsidies for 
Health Insurance Coverage for People Under Age 65: 2018 to 2028.'' 
https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53826-healthinsurancecoverage.pdf. The Department did not rely on 
the information contained in the CBO report, which was released 
after the comment period had closed, to reach its conclusions 
regarding the effects of the final rule on premiums, but notes that 
the CBO's findings are consistent with other evidence available to 
the Department.
    \97\ See letter from Oliver Wyman to Mila Kofman, February 21, 
2018 regarding ``the potential impact of association health plans in 
the District of Columbia.'' The Department notes that the DC market 
is unusual and might not be an appropriate reference to understand 
national implications. The DC Exchange covers approximately 17,000 
people of whom 80 percent of are unsubsidized (almost the opposite 
of the rest of the country). Consequently AHPs' effects may be less 
acute on a national level than in DC.
    \98\ See comment letter from the Massachusetts Division of 
Insurance and Massachusetts's State-Based Marketplace, March 6, 2018 
(Comment #600 on EBSA web page last accessed at: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00600.pdf.
    \99\ These estimates use the Avalere Health report for estimates 
of the 2022 changes in premiums, and the number of individuals 
leaving the individual and small group markets to join an AHP. The 
Department estimates that there are about 25 million individuals 
with coverage in the individual market and 25 million individuals in 
the small group markets. The CBO estimates that by 2022 there will 
be 5 million fewer individuals in the individual market and 2 
million few individuals in the employer-based market due to the 
repeal of the individual mandate. As not all individuals leaving the 
employer market place are in the small group market an estimate of 
one million is used for the number of individuals no longer being 
covered in the small group market due to the repeal of the 
individual mandate. The following calculations where used to obtain 
the estimates. For the individual market: Low estimate, (25,000,000-
5,000,000-710,000) * ($14,900 * (1-(1/1.027))); high estimate, 
(25,000,000-5,000,000-1,110,000)* ($15,000 * (1-(1/1.04))). For the 
small group market: low estimate, (25,000,000-1,000,000-
1,650,000,000) * ($8,100 * (1-(1/1.001))); high estimate, 
(25,000,000-1,000,000-3,200,000) * ($8,300 * (1-(1/1.019))).
---------------------------------------------------------------------------

    Some analysts examining federal AHP legislation considered in the 
early 2000s likewise pointed to the potential for risk segmentation, 
but disagreed over the likely magnitude. One report concluded that 
premiums for firms in State-regulated markets would increase by 23 
percent.\100\ A different study of separate but largely similar 
legislation predicted that these premiums would increase by just 2 
percent.\101\ It is unclear whether the disagreement is attributable to 
differences in AHPs' expected size or expected degree of favorable 
selection, or other factors. However, the relevance of the reports is 
diminished by the fact that they were written well before the passage 
of legislation such as the ACA and the substantial changes to the 
health markets that have occurred in the interim.
---------------------------------------------------------------------------

    \100\ Karen Bender and Beth Fritchen, ``Impact of Association 
Health Plan Legislation on Premiums and Coverage for Small 
Employers,'' Mercer Risk, Finance and Insurance report prepared for 
the National Small Business Association, 2003.
    \101\ 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.
---------------------------------------------------------------------------

    A more recent report \102\ discussing the impact of AHPs on the 
individual

[[Page 28946]]

and small group market notes that States may require AHPs to comply 
with ``key insurance market standards and practices'' that limit risk 
segmentation, such as State individual and small group market rules. 
The report notes that such steps could protect local markets from 
adverse selection, but would also diminish AHPs' ability to deliver 
choice and savings for their local members.
---------------------------------------------------------------------------

    \102\ Georgetown University Health Policy Institute, Center on 
Health Insurance Reforms,'' State Options to Protect Consumers and 
Stabilize the Market: Responding to President Trump's Executive 
Order on Association Health Plans,'' December 2017.
---------------------------------------------------------------------------

    While some comments and other evidence support the conclusion that 
AHPs' flexibility under this rule will lead to risk segmentation, the 
comments do not allow the Department to predict its extent. 
Furthermore, many comments also affirm that this rule's application of 
nondiscrimination rules to AHPs established under this final rule will 
reduce its degree. Experience in Oregon under the ACA suggests that 
AHPs operating under the Department's pre-rule guidance have taken 
advantage of available flexibility to vary individual small businesses' 
premiums to reflect their respective expected costs more widely and 
based on more factors than permitted in individual and small group 
markets.\103\ However, AHPs that gain large group status only under 
this final rule will not retain flexibility to adjust individual member 
employers' rates based on health status.
---------------------------------------------------------------------------

    \103\ Kevin Lucia, Sandy Ahn, and Sabrina Corlette, ``Federal 
and State Policy Toward Association Health Plans in Oregon,'' Robert 
Wood Johnson Foundation and Urban Institute, October 2014.
---------------------------------------------------------------------------

    AHPs' potential to attract a favorable risk pool is limited by a 
number of factors, and AHPs themselves sometimes may suffer some degree 
of adverse selection. The nondiscrimination provisions of this final 
rule limit AHPs' ability to set actuarially appropriate prices. In 
addition, AHPs' efforts to select favorable risks generally would yield 
diminishing returns; that is, there is a point beyond which additional 
selection efforts would themselves cost more than could be justified by 
any savings from attendant selection results. AHPs under this final 
rule generally may not condition employer members' eligibility, 
benefits, or premiums on their employees' health factors. AHPs 
generally can condition these things on many other factors, including 
for example age, gender, industry, occupation, and geographic location. 
These factors do not fully correlate with health status, however, and 
there may be declining returns and/or increasing administrative costs 
associated with more aggressive and granular use of these factors to 
select risk. A similar argument may apply with respect to AHPs' use of 
benefit design or tailored marketing to select risks.
    AHPs that are barred from adjusting employer members' rates based 
on health status (namely, those that qualify as large group plans under 
this final rule but not under the Department's pre-rule guidance) are 
likely to face some potential for adverse selection, particularly where 
competing with other AHPs and/or other non ACA-compliant plans for some 
of the same enrollees. At least one comment notes that AHPs, while 
vulnerable to adverse selection, would be without applicable 
``offsetting stabilization mechanisms'' such as the ``subsidies, risk 
adjustment, reinsurance, open enrollment provisions, and coverage 
mandate'' that the ACA provided in individual and small group 
markets.\104\ To limit AHPs' vulnerability to adverse selection, this 
final rule allows them to exclude working owners and to limit annual 
open enrollment opportunities \105\ as suggested by some commenters. 
AHPs also may pursue a strategy of limiting benefits in order to 
protect against adverse selection.
---------------------------------------------------------------------------

    \104\ See comment letter from Aetna, March 6, 2018 (Comment # 
472 on EBSA web page last accessed at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00472.pdf).
    \105\ The Department notes that, of course, AHPs must provide 
special enrollment periods under certain circumstances. For example, 
current employees and their dependents that have experienced a loss 
of coverage must have an opportunity to enroll in the plan under a 
special enrollment period if they are otherwise eligible to enroll 
and the coverage was previously offered at a time when the employee 
had other health coverage. Additionally, special enrollment periods 
must be provided for certain dependent beneficiaries who experience 
a qualifying life event such as marriage, birth, or adoption. See 
ERISA section 701(f) and 29 CFR 2590.701-6. In addition, a group 
health plan, and health insurance issuer offering group health 
insurance coverage, must not apply any waiting period that exceeds 
90 days. See PHS Act section 2708 and ERISA section 715. See also 29 
CFR 2590.715-2708.
---------------------------------------------------------------------------

    Comments also demonstrate that successful AHPs can coexist with 
stable and viable individual and small group markets, even if those 
AHPs operate under looser rules, are able to set more actuarially fair 
prices, and realize some degree of favorable selection relative to 
local small group markets. Comments and other public evidence suggest 
that such conditions now prevail in some form in Oregon and Washington 
State, for example.\106\
---------------------------------------------------------------------------

    \106\ See comment letter from State of Washington, Office of 
Insurance Commissioner, March 6, 2018 (Comment # 531 on EBSA web 
page last accessed at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00531.pdf; See also comment letter from Forterra Inc., on 
behalf of its parent company, the Association of Washington 
Business, March 6, 2018 (Comment #577 on EBSA web page last accessed 
at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00577.pdf; See also Chollet, D,. Mathematica Policy Research, 
``Association Health Plans and Community-Rated Small Group Health 
Insurance in Washington State-Final Report,'' at p. 20 (September 
30, 2011), https://www.statecoverage.org/files/Mathematica_assoc_healthplans_WA.pdf; See also comment letter from 
the Robert Wood Johnson Foundation, March 3, 2018 (Comment #334 on 
EBSA web page last accessed at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00334.pdf; See also Kevin Lucia, Sandy Ahn, and 
Sabrina Corlette, ``Federal and State Policy Toward Association 
Health Plans in Oregon,'' Robert Wood Johnson Foundation and Urban 
Institute, October 2014.
---------------------------------------------------------------------------

    A 2014 report examines Oregon's AHP market.\107\ Before the ACA, 
Oregon exempted AHP coverage from individual and small group market 
rules. Oregon later eliminated this exemption, but AHPs that qualify as 
single, large group plans under ERISA remained outside the relevant 
rules, and many Oregon AHPs claimed this status, the report says. These 
AHPs tended to rate employer members on health status or claims 
experience, and other factors not allowed in individual or small group 
markets, and such pricing flexibility gave AHPs ``a competitive edge . 
. . particularly with healthy small groups.'' The report predicted that 
AHPs would grow.
---------------------------------------------------------------------------

    \107\ Kevin Lucia, Sandy Ahn, and Sabrina Corlette, ``Federal 
and State Policy Toward Association Health Plans in Oregon,'' Robert 
Wood Johnson Foundation and Urban Institute, October 2014.
---------------------------------------------------------------------------

    A 2011 report \108\ documented AHPs' ``robust'' role in 
Washington's markets in the years leading up to the passage of the 
federal ACA. Washington, unlike many other States (and notwithstanding 
the Department's contrary past guidance with respect to MEWA's status 
under ERISA \109\), historically had recognized AHPs sponsored by 
associations formed for the purpose of providing insurance. It required 
AHPs to be insured (rather than self-insured), but exempted issuer 
sales through AHPs from small group rating rules, allowing them to rate 
on claims experience, health status, gender, non-standard age factors, 
and other

[[Page 28947]]

variables that were prohibited in the community-rated small group 
market. AHPs operated both within and across industries, and covered 
both large and small employers. In 2008 AHPs claimed approximately one-
half of Washington's small group market and more than one-third of its 
combined small and large group market. For small groups, the report 
found that AHP premiums ($246 per member per month) were lower than 
community rated premiums ($316 per member per month). This difference 
``likely'' is attributable mostly to risk segmentation favoring AHPs 
over community-rated small group markets and ``the larger size of AHP 
small groups relative to community rated small groups,'' \110\ and 
partly to less comprehensive benefits, the report says. The medical 
loss ratio was a bit higher (and administrative costs therefore likely 
lower) for AHP small groups than for community rated small groups, but 
the report notes that this difference is ``consistent'' with (and so 
might be attributable to) the larger average size of AHP small groups. 
This suggests that AHPs enjoyed either no or little administrative cost 
advantage over unaffiliated small groups. AHPs tended to rate based on 
health status (60 percent of enrollees) and/or claims experience (87 
percent of enrollees). AHP growth in Washington was more than offset by 
contraction of other group coverage.\111\ AHPs' historically 
substantial market share in Washington State stands as evidence that 
they delivered economic advantage to many small businesses there 
relative to choices available in community rated small group markets. 
However, it is likely that some or much of this advantage came at the 
expense of other small businesses that paid higher prices in community-
rated markets, or went without insurance.
---------------------------------------------------------------------------

    \108\ Chollet, D., Mathematica Policy Research, ``Association 
Health Plans and Community-Rated Small Group Health Insurance in 
Washington State-Final Report,'' (September 30, 2011), https://www.statecoverage.org/files/Mathematica_assoc_healthplans_WA.pdf.
    \109\ Under that guidance, AHPs sponsored by associations formed 
for the purpose of providing health coverage generally did not 
constitute single, large group plans under ERISA. Instead under 
ERISA such arrangements generally constituted MEWA encompassing 
multiple separate plans sponsored by the MEWAs participating 
employers. Prior to the implementation of the ACA, this status under 
ERISA did not prevent states from recognizing such AHPs as large 
groups under state law or otherwise excepting them from state rules 
that governed small group insurers.
    \110\ This may affect premiums in two ways. First, per-member 
administrative costs may decrease with (small) group size. Second, 
very small groups generally subject insurers to more adverse 
selection than somewhat larger groups.
    \111\ From 2005 to 2008, enrollment in AHPs increased 11 
percent, while enrollment in the large group and community rated 
small group market decreased nearly 12 percent resulting in an 
overall decline in group coverage during this period. As a result, 
87,000 fewer workers and dependents (-5.2 percent) were enrolled in 
any insured group coverage in 2008 than in 2005. Source: Chollet, 
D., Mathematica Policy Research, ``Association Health Plans and 
Community-Rated Small Group Health Insurance in Washington State-
Final Report,'' (September 30, 2011), https://www.statecoverage.org/files/Mathematica_assoc_healthplans_WA.pdf. For reference, at the 
same time nationally, the number of private employees enrolled in 
their employers' insurance plans grew from 61 million to 63 million. 
See Medical Expenditure Panel Survey, Insurance Component, 2016 
Chartbook, U.S. Agency for Healthcare Quality and Research, 
September 2017, https://meps.ahrq.gov/data_files/publications/cb21/cb21.pdf.
---------------------------------------------------------------------------

    Washington AHPs' experience may differ from new AHPs' experience 
under this final rule, for many reasons. For example, Washington's 
experience generally is limited to the small group market, while new 
AHPs can offer coverage to working owners who may now be purchasing in 
individual markets, where the potential both for savings for AHP 
enrollees and adverse selection against other risk pools will be 
different and possibly greater. In addition, while Washington AHPs have 
rated members based on health status, AHPs operating under this final 
rule cannot, so such AHPs' potential to offer targeted savings and 
select risk relative to small group markets are more limited.
    The impact of this final rule on State individual and small group 
risk pools is highly dependent on State regulatory practices. States 
under this final rule retain broad authority to pursue steps to 
optimize AHPs' role in their local markets.
    In response to requests in comments on the Proposed Rule, this 
final rule makes clear that AHPs can attach rewards and penalties to 
individual enrollees' participation in wellness programs. These rewards 
and penalties are separate from (and may add to or offset) pricing 
differences based on risk factors such as age, gender or industry. 
Under federal rules, financial rewards or penalties can be as much as 
30 percent of an enrollee's total premium, or 50 percent where the 
additional 20 percentage points are associated with tobacco use. 
Wellness programs must be designed to promote health, and not to 
penalize or screen out individuals in poor health. Their rewards must 
be reasonably available to all. In practice, however, some permissible 
program designs and practices nonetheless may tend to deliver fewer 
rewards or more penalties to less healthy individuals, who, relative to 
healthier individuals, may on average find participation to be more 
costly or less appealing. Consequently, while AHPs operating under this 
new rule may not condition premiums on health status, some AHPs' 
wellness programs in practice may have a disparate negative impact on 
those in poorer health. Such wellness programs sometimes could yield 
additional favorable selection toward AHPs.
    The Department believes that the provisions of this rule and 
States' broad authority to adjust local rules, combined with the 
attendant benefits of extending insurance to small businesses and 
working owners, strike the right balance to both limit and justify 
consequent adverse selection against local markets.

7. Individual and Small Group Markets

    The Department separately considered AHPs' potential impacts on 
both the individual and small group markets. With respect to individual 
markets, many of those insured there now might become eligible for 
AHPs.\112\ AHPs operating under this final rule could enroll both 
working owners and the employees of small businesses that do not 
currently offer insurance but elect to join AHPs and begin offering 
insurance. The latter group has grown as small firms' propensity to 
offer health coverage for employees has declined substantially from 47 
percent of establishments in 2000 to 29 percent in 2016.\113\ Of the 25 
million U.S. individuals under age 65 who were insured in individual 
markets in 2015, approximately 3 million were working owners or 
dependents thereof, and an additional 12 million were employees of 
small businesses 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 25 million 
workers and dependents.\114\

[[Page 28948]]

While all of these individuals could become eligible for AHPs under 
this final rule, some are more likely than others to become eligible, 
and among those who do become eligible, some are more likely than 
others to enroll.
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    \112\ Under the rule, working owners must earn wages or self-
employment income from the trade or business for providing personal 
services to the trade or business and either (1) work at least 20 
hours per week or at least 80 hours per month providing personal 
services to the trade or business, or (2) earn income from the trade 
or business that at least equals the working owner's cost of 
coverage for the working owner and any covered beneficiaries in the 
group health plan sponsored by the group or association in which the 
individual is participating.
    \113\ 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. The Department's calculations are 
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.
    \114\ These estimates were derived from the Abstract of 
Auxiliary Data for the March 2016 Annual Social and Economic 
Supplement to the Current Population Survey, U.S. Department of 
Labor. The Department revised its methodology in estimating the 
universe of potential individuals affected by the regulation between 
the proposed and final rule. The initial estimates did not restrict 
the definition of working owners to those working at least 20 hours 
per week, and so this restriction was added, which reduced the 
number of working owners and their dependents from 20 million in the 
proposal to 15 million in the final. Additionally, in the Proposed 
Rule, current source of insurance for dependents of working owners 
and employees at small firms not offered insurance were only counted 
if they were the same as family member identified as having 
potential AHP access. For the final rule, dependents' source of 
insurance is counted whether or not their insurance matches.
---------------------------------------------------------------------------

    The Proposed Rule described some relevant features of individual 
and small group markets under the ACA and existing State rules. Here 
the Department presents considerations raised by subsequent 
developments, comments on the Proposed Rule, and other newly identified 
information. Importantly, it considers the role of individual market 
subsidies, the reduction of the individual shared responsibility 
payment to $0 for those who do not have minimum essential coverage and 
do not have an exemption beginning in 2019, and the role of other (non-
AHP) non ACA-compliant plans in individual and small group markets.
    AHPs' impact on local individual markets is likely to differ based 
on market sub-segments and the effect of State regulation. To the 
extent not prevented by State rules, AHPs are likely to result in some 
adverse selection and associated premium increases in the individual 
and small group markets. States' approaches are likely to vary widely 
and to range from steps that maximize AHPs' flexibility \115\ and 
impacts to those that minimize them.\116\
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    \115\ For example, Iowa recently enacted legislation lowering 
barriers for certain AHPs. See Iowa SF2349--An Act Relating to 
Health Plans Established by Associations of Employers or Sponsored 
by Certain Agricultural Organizations, enacted on April 2, 2018.
    \116\ For example, Massachusetts historically has limited AHPs 
flexibility. See comment letter from the Massachusetts Division of 
Insurance and Massachusetts's State-Based Marketplace, March 6, 2018 
(Comment # 600 on EBSA web page last accessed at: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00600.pdf.
---------------------------------------------------------------------------

    With respect to individual markets, as discussed earlier, 
consequent to this final rule premiums are likely to increase modestly 
on average. The increases might vary widely across local markets. As 
noted above, in 2015, approximately 3 million individual market 
enrollees were working owners or their dependents. It is likely that 
under this final rule AHPs will offer insurance to many of these 
individuals. AHP coverage offers generally are likely to be most 
affordable and attractive to categories of individuals with lower 
expected claims, such as young single men, and for the 1 million of the 
3 million working owners with incomes too high to qualify for subsidies 
on the Exchanges (more than four times the poverty threshold).
    Also as noted above, about 12 million people insured in individual 
markets were employees of small private businesses or dependents 
thereof. Among those, some strong candidates for AHP enrollment are 
those with incomes too high to qualify for premium tax credit subsidies 
whose small employers already offer them insurance, who number 800,000. 
Another 1.4 million have offers from small employers but lower incomes. 
To the extent that their offers are affordable and provide minimum 
value, such individuals are ineligible for ACA subsidies on Exchanges 
and therefore likely to be strong candidates for AHP enrollment. The 
remaining 9 million are currently without offers from their small 
employers, and consequently would gain AHP eligibility if their small 
employers join an AHP to begin offering health coverage to these 
employees. However, a majority of these 9 million are eligible for 
subsidies on exchanges.\117\ Small employers generally are less likely 
to begin offering coverage to employees whose demand for such an offer 
is weak because they currently have access to subsidized comprehensive 
coverage. Because of this, AHPs will likely enroll only a portion of 
all current individual market enrollees with connections to small 
businesses. Notwithstanding these limitations, in light of the very 
large numbers of Americans who work for small employers, who are 
working owners, or who are dependents of employees of small employers 
or working owners, the Department expects AHPs to deliver health 
insurance to millions of people.
---------------------------------------------------------------------------

    \117\ 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.
---------------------------------------------------------------------------

    Recent economic research shows that small businesses with 49 or 
fewer employees have a high after-tax price elasticity for offering 
employer-sponsored health insurance to their employees. For small 
businesses, a one percent reduction in the after-tax price would cause 
a 0.82 percent increase in the likelihood of offering employer-
sponsored health insurance, the research found. For medium-sized 
business with 50 to 499 employees, a one percent reduction in the 
after-tax price would cause a 0.35 percent increase in the likelihood 
of offering employer-sponsored health insurance. For large businesses 
with 500 or more employees, however, the after-tax price elasticity for 
offering employer-sponsored health coverage is not statistically 
different from zero. The high after-tax price elasticity for small 
businesses cannot be directly applied to project a potential net 
increase in offers under the final rule, for two reasons. First, AHP 
coverage is likely to differ from ACA-compliant small group coverage 
not only with respect to price but also with respect to benefit design 
and comprehensiveness. Second, AHPs will set different premiums for 
different members conditional on cost related factors such as age, 
gender, and industry, so it is unclear whether the employers most 
inclined to respond to price decreases will see large or small 
decreases, or no decreases. Nonetheless, this research does corroborate 
the proposition that lower premiums from the expansion of AHP plans 
under the final rule will cause some small businesses that do not 
currently offer employer-sponsored health coverage through the ACA-
compliant small-group market to begin offering employer-sponsored 
health coverage to their employees through AHPs. The Department did not 
rely on this research to reach any conclusions regarding the effects of 
the final rule on the likelihood that small businesses would begin 
offering health coverage through AHPs. Instead, the Department includes 
this information as a supplement to corroborate its findings.
    A publicly available report estimated that between 2.4 million and 
4.3 million individuals would move from the individual and small group 
markets combined, and enroll in AHPs by 2022 under a moderate 
enrollment scenario, between 710,000 and 1.1 million of which would 
move from the individual market.\118\ This estimate also projected 
significant premium decreases by moving to AHPs (between $1,900 to 
$4,100 lower than the yearly premiums in the small group market and 
$8,700 to $10,800 lower than the yearly premiums in the individual 
market by 2022,

[[Page 28949]]

depending on the generosity of AHP coverage offered). This translates 
into aggregate premium decreases of between $9.3 billion and $25.1 
billion, with the former corresponding to more generous AHP benefits. 
The Department does not have sufficient data to assess the accuracy of 
these estimates.
---------------------------------------------------------------------------

    \118\ The report estimates that the Proposed Rule will result in 
a projected to shift of between 710,000 and 1.1 million individuals 
out of the individual market, and 1.7 million to 3.2 million out of 
the small group market by 2022. It estimates that 2.4 million 
individuals would move from the individual and small group markets 
combined and enroll in AHPs under a low enrollment scenario, while 
4.3 million would move to AHPs under a high enrollment scenario. See 
Avalere Health, Association Health Plans: Projecting the Impact of 
the Proposed Rule at 3, 5-7 (Feb. 28, 2018), available at https://go.avalere.com/acton/attachment/12909/f-052f/1/-/-/-/-/Association%20Health%20Plans%20White%20Paper.pdf. These figures do 
not appear to include otherwise uninsured individuals but are 
estimates of movement to AHPs from both the individual and small 
group markets.
---------------------------------------------------------------------------

    A large majority of individuals insured on Exchanges will have some 
insulation from any premium increases resulting from the exit of 
individuals to AHPs, because the ACA provides a tax credit that in 
effect caps the premiums that those eligible taxpayers with household 
incomes at or below 400 percent of the federal poverty level must pay 
on Exchanges for coverage in a benchmark ``silver'' plan with an 
actuarial value of approximately 70 percent. That cap rises with 
income, to about $9,400 for a family of 4 at 400 percent of the federal 
poverty level. Consequently such a family enrolling in the benchmark 
plan and facing a potential premium increase from a base of $9,400 or 
more would be largely insulated from that increase.
    Not all exchange participants will be fully insulated from 
increases in individual market premiums. This includes individuals with 
household incomes above 400 percent of the federal poverty level (for a 
family of four, with an annual household income of approximately 
$100,000 or more), individuals whose current premiums are below the 
applicable cap (they are exposed to premium increases up to the cap), 
and individuals who elect plans that cost more than the benchmark plan. 
Further, those insured in the small group and individual markets 
outside the Exchanges might also have premium increases. The Department 
estimates that 6 million individuals insured in individual markets in 
2015 have household incomes above 400 percent of the federal poverty 
level and either have no connection to a small business or work for a 
small employer that does not offer them insurance. These individuals 
could be exposed to premium increases as a result of the implementation 
of AHPs, and generally are unlikely to qualify for AHP enrollment. The 
Department estimates that an additional 2 million insured in individual 
markets in 2015 have household incomes above 400 percent of the federal 
poverty level and either connection to working ownership or offers from 
small employers. These individuals are relatively likely to qualify for 
AHP enrollment but could be exposed to premium increases if they remain 
in the individual market.\119\
---------------------------------------------------------------------------

    \119\ It is likely that many (but not all) of these, especially 
working owners with low expected claims, will gain access to 
affordable, attractive offers from AHPs.
---------------------------------------------------------------------------

    Some individuals facing premium increases may elect to go without 
insurance. This is especially true because Public Law 115-97, enacted 
December 22, 2017, will reduce to 0 percent the individual shared 
responsibility payment for failure to maintain minimum essential 
coverage or have an exemption effective beginning in 2019.\120\ AHPs 
under this rule are likely to extend coverage to some individuals who 
otherwise would have dropped coverage in response to the reduction of 
the individual shared responsibility payment. On the other hand, some 
individuals who face premium increases as a result of this final rule 
and who might have retained coverage to avoid the individual shared 
responsibility payment might instead drop coverage. At the same time, 
the reduction of the individual shared responsibility payment to $0 
might prompt some individuals who would have joined AHPs to remain 
uninsured instead.
---------------------------------------------------------------------------

    \120\ The reduction to $0 of the individual shared 
responsibility payment in 2019 is projected to decrease individual 
market insurance coverage by 3 million in 2019 and 5 million by 
2027. See Congressional Budget Office, ``Repealing the Individual 
Health Insurance Mandate: An Updated Estimate'' (November 2017), 
www.cbo.gov/publication/53300.
---------------------------------------------------------------------------

    With respect to small group markets, as with individual markets, 
this rule can be expected to increase premiums modestly on average, and 
those increases will vary across local markets. One estimate finds that 
between 1.7 million and 3.2 million enrollees will migrate from small 
group markets to AHPs by 2022.\121\
---------------------------------------------------------------------------

    \121\ Avalere Health, Association Health Plans: Projecting the 
Impact of the Proposed Rule at 3, 5-7 (Feb. 28, 2018), available at 
https://go.avalere.com/acton/attachment/12909/f-052f/1/-/-/-/-/Association%20Health%20Plans%20White%20Paper.pdf.
---------------------------------------------------------------------------

    A recent report examined small group market experience under the 
ACA.\122\ The report identified movement between the small group and 
individual markets, as small employers begin to offer or stop offering 
insurance to their employees in response to changing government 
policies and local individual and small group market conditions. 
Overall offer rates have declined, but less than stakeholders 
predicted. Premium increases on average (3.1 percent annually between 
2011 and 2015) have been moderate and in-line with large employer 
markets and Medicare. Relative to individual markets, where the ACA 
compressed rates substantially, forcibly reducing premiums for many 
high-risk families and thereby increasing premiums for many lower-risk 
ones, rates in small group markets changed little, for several reasons. 
First, risk itself generally varies less among small groups (or at 
least among larger small groups) than among individuals and families. 
Second, the report asserts that in many places the ACA's small group 
rules have not been fully implemented as scheduled. Issuers and small 
employers in many locations so far have been allowed and have opted to 
retain non ACA-compliant, so-called ``grandmothered'' policies \123\ 
whose prices are lower for low-risk groups than would be the case in 
the ACA-regulated small group market. Third, even under the ACA and 
other laws, small employers have more access than individuals to 
options outside of ACA regulated markets, and some have pursued these 
options. The options include ``level funded'' arrangements where the 
plan or employer self-insures expected claims but purchases stop-loss 
insurance for most large claims; qualified small employer health 
reimbursement arrangements, which may provide reimbursement for any 
qualified medical expense, including premiums for individual market 
coverage, so long as certain requirements are met; purchase of 
insurance that constitutes excepted benefits such as indemnity 
coverage; and sometimes AHPs that qualified under the Department's pre-
rule guidance as single, large group plans. For these reasons, in many 
small group markets, AHPs under this rule may be unlikely to increase 
significantly the degree of risk segmentation and premium dispersion 
that currently exists--though they may preserve segmentation that 
otherwise would have waned as ACA implementation continued. AHPs' 
effects might be larger where States more tightly regulate small

[[Page 28950]]

group markets (unless such States also tightly regulate AHPs).
---------------------------------------------------------------------------

    \122\ See Sabrina Corlette, Jack Hoadley, Kevin Lucia, and Dania 
Palanker, ``Small Business Health Insurance and the ACA: Views from 
the Market 2017,'' Robert Wood Johnson Foundation and Urban 
Institute, July 2017. For additional perspectives on small group 
markets under the ACA see Amy B. Monahan and Daniel Schwarcz, 
``Saving Small Employer Health Insurance,'' Iowa Law Review Vol. 
98:1935, 2013; and Deborah Chollet, ``Self-Insurance and Stop Loss 
for Small Employers,'' Mathematica Policy Research, June 30, 2012.
    \123\ Issuers and small employers in many locations so far have 
been allowed to retain plans that, under certain circumstances, 
under a transitional policy, are not considered to be out of 
compliance with certain ACA market reforms, whose prices are lower 
for low-risk groups than would be the case for plans that comply 
with those ACA market reforms.
---------------------------------------------------------------------------

    On May 23, 2018 after the comment period for the proposed rule had 
closed, the U.S. Congressional Budget Office (CBO) issued a report 
titled ``Federal Subsidies for Health Insurance Coverage for People 
under Age 65: 2018 to 2028.'' \124\ In this report, the CBO analyzed 
the effects of the proposed rule for Association Health Plans issued on 
January 5, 2018 and the proposed rule for Short-Term, Limited Duration 
Insurance issued on February 21, 2018. The report states that ``[i]n 
2023 and later years, about 90 percent of the 4 million people 
purchasing AHPs and 65 percent of the 2 million people purchasing STLDI 
plans would have been insured in the absence of the proposed rules, CBO 
and JCT estimate. Because the people newly enrolled in AHPs or STLDI 
plans are projected to be healthier than those enrolled in small-group 
or nongroup plans that comply with the current regulations governing 
those markets, their departure would increase average premiums for 
those remaining in other small-group or nongroup plans. As a result, 
premiums are projected to be 2 percent to 3 percent higher in most 
years.'' The Department did not rely on the information contained in 
the CBO report to reach its conclusions regarding the effects of the 
final rule on the insured persons, but notes that the CBO's findings 
are consistent with the Department's own findings.
---------------------------------------------------------------------------

    \124\ U.S. Congressional Budget Office, ``Federal Subsidies for 
Health Insurance Coverage for People Under Age 65: 2018 to 2028.'' 
https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53826-healthinsurancecoverage.pdf Estimates include the impacts of 
both the proposed AHP rule and the proposed Short-term, limited 
duration rule.
---------------------------------------------------------------------------

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 final rule. Among 42 million individuals under age 65 
enrolled in Medicaid or CHIP in 2015, 2 million were working owners or 
dependents thereof, and 13 million were employees of small businesses 
or dependents thereof.\125\ It is unclear how many Medicaid enrollees 
will gain AHP eligibility, or how many of those that do might elect to 
enroll in AHPs. Many will face strong economic incentives to continue 
relying exclusively on Medicaid, which generally charges no premium, 
imposes little or no cost sharing, and is comprehensive.
---------------------------------------------------------------------------

    \125\ 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.
---------------------------------------------------------------------------

9. The Uninsured

    Twenty-eight million individuals in the U.S. lacked health 
insurance coverage in 2015.\126\ Of the 28 million uninsured, 
approximately 3 million are working owners or dependents thereof and an 
additional 12 million are employees of small businesses or dependents 
thereof.\127\ The reduction to $0 beginning in 2019 of the individual 
shared responsibility payment is projected to increase the uninsured 
population by 4 million in 2019 and 13 million by 2027.\128\ Because 
AHPs often can offer more affordable alternatives to individual and 
small group insurance policies, this rule is expected to extend 
insurance coverage to some otherwise uninsured individual families and 
small groups. On the other hand, some who face premium increases as a 
result of this final rule might choose to drop insurance coverage 
altogether.
---------------------------------------------------------------------------

    \126\ 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.
    \127\ 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.
    \128\ Congressional Budget Office, ``Repealing the Individual 
Health Insurance Mandate: An Updated Estimate'' (November 2017), 
www.cbo.gov/publication/53300.
---------------------------------------------------------------------------

    The Department lacks data to quantify the effect of the final rule 
on the uninsured population. Publicly available estimates shed only 
limited light on the question. By one publicly available estimate, AHPs 
under the Proposed Rule by 2022 on net would add 130,000 individuals to 
the uninsured population.\129\ However, it appears that this estimate 
may have neglected AHPs' potential to enroll individuals who would 
otherwise have been uninsured, focusing only on those who might drop 
insurance because of individual or small group market premium increases 
stemming from risk segmentation. Moreover, it is unclear whether this 
estimate took full account of the interactions among the proposed AHP 
rule, the ACA's continuing premium tax credit subsidies, and the 
reduction to $0 of the ACA's individual shared responsibility payment 
in 2019. If the estimate did not fully account for these interactions, 
it is likely to be too pessimistic. Some individuals and small 
businesses whose premiums will increase because of AHPs' risk 
segmentation effects might drop insurance, but ACA subsidies could 
limit this potential. Likewise, AHPs are likely to enroll many 
individuals who otherwise would have dropped insurance in response to 
the reduction to $0 of the individual shared responsibility payment in 
2019. By another publicly available estimate, non ACA-compliant 
policies that resemble AHPs in some relevant respects might reduce the 
number of uninsured by 1.7 million.\130\ This facially more optimistic 
estimate may more fully reflect the interactions between expanded 
availability of AHP-like policies on the one hand, and subsidies and 
the individual shared responsibility payment reduction on the other. On 
the other hand, because this estimate pertains not to AHPs but to 
certain other non ACA-compliant policies, it is unclear whether or how 
it can be compared with the first estimate. In light of these 
uncertainties, the Department is unable to predict with confidence 
whether this final rule on net will reduce or increase the number of 
Americans without any health coverage.
---------------------------------------------------------------------------

    \129\ See Avalere Health, ``Association Health Plans: Projecting 
the Impact of the Proposed Rule'' at 3, 5-7 (Feb. 28, 2018), 
available at: https://go.avalere.com/acton/attachment/12909/f-052f/1/-/-/-/-/Association%20Health%20Plans%20White%20Paper.pdf.
    \130\ See Linda J. Blumberg, Matthew Buettgens, and Robin Wang, 
``Updated: The Potential Impact of Short-Term Limited-Duration 
Policies on Insurance Coverage, Premiums, and Federal Spending,'' 
Urban Institute, March 2018, available at https://www.urban.org/sites/default/files/publication/96781/2001727_updated_finalized.pdf.
---------------------------------------------------------------------------

    AHPs are likely to influence the composition of the uninsured 
population such that it includes, for example, proportionately fewer 
working owners and individuals from low-risk demographics, and 
proportionately more individuals from high-risk demographics, than 
would otherwise be the case. Individuals who themselves expect to incur 
high health costs would be less likely to drop insurance, however. 
Moreover, states may pursue steps to more generously subsidize high 
risk individuals.
    Various studies of past federal and State reforms that tightened or 
loosened individual and small group market rules confronted a 
substantially different health insurance marketplace and hence are of 
only modest value in predicting the final rule's effects. The studies 
show that the changes may 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.\131\

[[Page 28951]]

AHPs' potential to expand coverage may be greater than this experience 
suggests, however. The final rule differs markedly from previous policy 
reforms that past studies examined. Furthermore, market conditions and 
the size and composition of the uninsured population are different 
today and may continue to be different. Generally it is likely that 
relative to past decades, fewer lower-income individuals are 
uninsured.\132\ Also as noted earlier, small firms' propensity to offer 
insurance to their employees has fallen, suggesting potential 
opportunities for AHPs to expand coverage.
---------------------------------------------------------------------------

    \131\ The regulatory impact analysis of the Proposed Rule cites 
evidence to this effect.
    \132\ ACA Medicaid expansions and subsidies extended coverage to 
many more low income individuals. See Michael E. Martinez, Emily P. 
Zammitti, and Robin A. Cohen, ``Health Insurance Coverage: Early 
Release of Estimates From the National Health Interview Survey, 
January-September 2017,'' U.S. Department of Health and Human 
Services, Centers for Disease Control and Prevention, National 
Center for Health Statistics, February 2018, https://www.cdc.gov/nchs/data/nhis/earlyrelease/insur201802.pdf; and Sara R. Collins, 
Munira Z. Gunja, Michelle M. Doty and Herman K. Bhupal, ``First Look 
at Health Insurance Coverage in 2018 Finds ACA Gains Beginning to 
Reverse: Findings from the Commonwealth Fund Affordable Care Act 
Tracking Survey, February-March 2018,'' May 1 2018, http://www.commonwealthfund.org/publications/blog/2018/apr/[email protected]com.
---------------------------------------------------------------------------

    As previously noted, CBO recently analyzed the effects for the 
proposed rule for Association Health Plans issued on January 5, 2018 
and the proposed rule for Short-Term, Limited Duration Insurance 
(STLDI) issued on February 21, 2018. CBO stated that ``[i]n 2023 and 
later years, about 90 percent of the 4 million people purchasing AHPs 
and 65 percent of the 2 million people purchasing STLDI plans would 
have insured in the absence of the proposed rules, CBO and JCT 
estimate.'' Thus, about 400,000, or 10 percent of the 4 million people 
purchasing AHPs, would come from the ranks of the uninsured. (It is 
unclear whether this latter estimate would have been higher or lower in 
the absence of the STLDI proposal, which is not part of this final rule 
but remains under consideration. Absent STLDI, some otherwise uninsured 
individuals who would have gained STLDI coverage might gain AHP 
coverage instead. On the other hand, some individuals facing premium 
increases or losing small employer offers consequent to AHPs who would 
have signed up for STLDI policies, absent such policies might drop 
insurance and become uninsured.) The Department did not rely on the 
information contained in the CBO report to reach its conclusions 
regarding the effects of the final rule on uninsured persons, but notes 
that the CBO's findings are consistent with the Department's own 
findings.

10. Operational Risks

    A number of comments on the Proposed Rule expressed concern that 
AHPs will be vulnerable to the same sorts of mismanagement and abuse 
that historically afflicted a large number of MEWAs.\133\ They argued 
that the Proposed Rule, by relaxing the criteria for groups or 
associations to sponsor plan MEWAs/AHPs, would contribute to such 
vulnerability, and questioned whether the Department and the States 
could sufficiently police AHPs. They questioned, for example, whether 
employer members can be expected to meaningfully control AHPs in cases 
where MEWA promoters pursuing profit launch new associations and, as 
founding association members, assume initial control of new AHPs. They 
contended that insurance markets that offer few affordable options for 
small businesses are fertile ground for problem MEWAs. They called on 
the Department to more closely examine its own experience policing 
MEWAs, and to factor that experience into its assessment of AHPs' 
potential impacts and into its deliberations about a possible final 
rule. Accordingly, this final rule reflects additional examination of 
the Department's experience policing MEWAs, and includes revised 
provisions that address many of the commenters' concerns.
---------------------------------------------------------------------------

    \133\ See for example comment 680 from Marc I. Machiz, available 
at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00680.pdf.
---------------------------------------------------------------------------

    ERISA generally classifies AHPs as MEWAs. Historically, some MEWAs 
have suffered from financial mismanagement or abuse, leaving 
participants and providers with unpaid benefits and bills.\134\ Both 
the Department 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 the Department expanded 
authority to monitor MEWAs and intervene when MEWAs are at financial or 
operational risk, and both the Department's and the States' enforcement 
efforts are ongoing.
---------------------------------------------------------------------------

    \134\ 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 https://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 https://www.gao.gov/new.items/d04312.pdf; 
and (3) 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.
---------------------------------------------------------------------------

    The Department stresses that AHPs are also subject to existing 
federal regulatory standards governing MEWAs, and sponsors of AHPs 
would need to exercise care to ensure compliance with those standards. 
The ACA's additional enforcement tools and improvements in the MEWA 
registration and reporting requirements were designed to reduce MEWA 
fraud and abuse. Under ERISA section 521, the Secretary may issue an ex 
parte cease and desist order if it appears to the Secretary that the 
alleged conduct of a MEWA 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. 
As an example, a MEWA can be found to create an immediate danger ``for 
failure to establish and implement a policy or method to determine that 
the MEWA is actuarially sound with appropriate reserves and adequate 
underwriting.'' 29 CFR 2560.521-1(b)(3). 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. Generally, any 
conduct by a fiduciary that meets the requirements for the issuance of 
a cease and desist or summary seizure is a violation of his fiduciary 
duties.
    The ACA also expanded reporting and required registration for MEWAs 
with the Department. MEWA registration requirements require plan and 
non-plan MEWAs to file Form M-1 under ERISA section 101(g) and 29 CFR 
2520.101-2 prior to operating in a State. Further, all employee welfare 
benefit plans that are MEWAs subject to the Form M-1 requirements are 
required to file the Form 5500, regardless of the plan size or type of 
funding.\135\ In addition, the

[[Page 28952]]

ACA added new criminal penalties under ERISA section 519 for any person 
who knowingly submits false statements or makes false representations 
of fact about the MEWA's financial condition, the benefits it provides, 
or its regulatory status as a MEWA in the marketing of a MEWA. The ACA 
also amended ERISA section 501(b) to impose criminal penalties on any 
person who is convicted of violating the prohibition in ERISA section 
519.
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    \135\ 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. The Department has verified receipt of the required 
Form 5500 from approximately two-thirds of plan MEWAs filing Forms 
M-1. While more than 90 percent of 2012 Form M-1 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.
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    The Department recently examined the universe of these reports for 
MEWAs (including AHPs) operating in each year from 2012 through 2016. 
According to this examination, in 2016, 536 MEWAs covered approximately 
1.9 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 small fraction 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 final rule, 
which is intended to facilitate the establishment of more new plan-
MEWAs/AHPs, all of which would be required to report annually to the 
Department.
    A little more than one-half of reporting MEWAs operate in just one 
State, while a handful operate in all 50 States. In 2016, 58 MEWAs 
reported expanding operations into one or more new States. States with 
the most plan-MEWAs/AHPs in 2016 included California (122), Texas (98), 
Washington (95), New York (94), and Ohio (91). Only one had fewer than 
20 (Hawaii had 17). Self-insured MEWAs generally are more vulnerable to 
financial mismanagement and abuse than fully-insured ones. MEWAs were 
most likely to be entirely or partly self-insured in certain western 
States including North Dakota (42 percent), Wyoming (41 percent), and 
Montana (37 percent). About one-fourth of reporting MEWAs are entirely 
or partly self-insured in all the States in which they operate, and 
another 4 percent are entirely or partly self-insured in some States. 
The remaining majority does not self-insure and instead is fully 
insured by issuers in all States in which they operate. Nearly all 
reporting MEWAs offered health coverage, and many offered other 
additional welfare benefits (such as dental, vision, life insurance, 
and/or disability insurance).
    While plan MEWAs generally are required to file both Form M-1 and 
Form 5500, many fail to file both or report potentially inconsistent 
information across the two forms. Among plan MEWAs filing Form M-1 for 
2015, approximately two-thirds can be linked readily with a 
corresponding Form 5500, suggesting that many either fail to file one 
or both forms, or file inconsistent identifying information that 
inhibits linking the two. Among those that can be linked, information 
provided sometimes is not consistent across the two forms. In addition, 
among self-insured MEWAs, 41 percent indicated that they had not 
obtained actuarial opinions about their financial stability. MEWAs must 
indicate on Form M-1 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. As of 2016 nearly none 
reported lack of compliance with the former, but 14 percent reported 
that they did not comply with the trust requirement. These apparent 
reporting and operational deficiencies underscore the need for the 
Department and States to allocate resources to effectively oversee AHP 
operations and prevent mismanagement and abuse.
    Since 1985, the Department's records indicate that it has pursued a 
total of 968 civil enforcement cases involving MEWAs, affecting more 
than 3 million participants. Among these cases, 338 involved 
allegations of fiduciary violations, 215 involved allegations of 
prohibited transactions (generally involving financial conflicts of 
interest), and 301 yielded monetary restitution of more than $235 
million from the violations. (Many of these and other related cases 
involved other types of violations such as failure to follow plan terms 
or healthcare laws, provide plan benefits, or reporting and disclosure 
deficiencies.) The Department's enforcement efforts often were too late 
to prevent or fully recover major financial losses. The Department 
generally does not consistently measure or record those associated 
unpaid claims or their financial impacts on patients and healthcare 
providers. The Department additionally has pursued 317 criminal MEWA-
related cases, resulting in 118 convictions and guilty pleas, and $173 
million in ordered restitution.\136\
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    \136\ Since 1985 EBSA's case information database system has 
experienced various upgrades and enhancements, impacting the 
collection of data on MEWA cases. Due to these changes over the more 
than 30 years, the reported number of MEWA cases may be slightly 
under or over estimated.
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    This rule includes provisions intended to protect AHPs against 
mismanagement and abuse. It requires the group or association to have a 
formal organizational structure with a governing body and by-laws or 
other similar indications of formality appropriate for the legal form 
in which the group or association is operated. This requirement is 
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 rule also requires employer members to control the 
functions and activities of the group or association and the employer 
members that participate in the plan to control the plan. This 
requirement is necessary both to satisfy ERISA's requirement that the 
group or association must act directly or indirectly in the interest of 
employers in relation to the employee benefit plan to meet the 
definition of employer, 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 that may be 
vulnerable to abuse. In addition, the final rule allows only employer 
members to participate in the AHP, and health coverage must only be 
available to or in connection with a member of the group or 
association, in order for the group or association to qualify as bona 
fide. Together, these criteria are intended to ensure that groups or 
associations sponsoring AHPs are bona fide employment-based groups or 
associations and more likely to be resistant to abuse.
    An AHP sponsored by a bona fide group or association under this 
final rule is a group health plan under ERISA. Accordingly, AHPs are 
subject to all of the provisions of Title I of ERISA applicable to 
group health plans. Therefore, participants and beneficiaries receiving 
their health coverage through AHPs are entitled to the same protections 
under ERISA that are available to participants in single employer group 
health plans. For example, AHPs may not exclude coverage for 
preexisting conditions, impose lifetime and annual dollar limits on 
essential health benefits, or discriminate based on health factors. 
AHPs that provide dependent coverage must permit dependents to remain

[[Page 28953]]

enrolled until they reach the age of 26. AHPs may not rescind a 
participant's or beneficiary's coverage except in the event of fraud or 
intentional misrepresentation of a material fact.
    Nevertheless, the Department anticipates that the increased 
flexibility afforded AHPs under this rule will introduce increased 
opportunities for mismanagement or abuse, in turn increasing oversight 
demands on the Department and State regulators. A report responding to 
Executive Order 13813 notes that States can require self-insured AHPs 
to meet the same solvency and governance standards as issuers and to 
participate in guaranty funds that protect policyholders when issuers 
fail. States also can clarify or enact laws allowing their insurance 
departments to place AHPs into receivership if needed.\137\ In this 
regard, the Department affirms above in this preamble that the final 
rule does not modify or otherwise limit existing State authority as 
established under section 514 of ERISA. Section 514(b)(6) of ERISA 
gives the Department and State insurance regulators joint authority 
over MEWAs, including AHPs (which are a type of MEWA), to ensure 
appropriate consumer protections for employers and employees relying on 
an AHP for healthcare coverage. Nothing in the final rule changes this 
joint structure, or is meant to reduce the historically broad role of 
the States when it comes to regulating MEWAs.
---------------------------------------------------------------------------

    \137\ Georgetown University Health Policy Institute, Center on 
Health Insurance Reforms, ``State Options to Protect Consumers and 
Stabilize the Market: Responding to President Trump's Executive 
Order on Association Health Plans,'' December 2017.
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11. Federal Budget Impacts

    The rule is likely to have both positive and negative effects on 
the budget, with some increasing and others reducing the deficit. On 
balance, the final rule's net impact on the federal budget is likely to 
be negative, increasing the deficit.
    In 2005, the Congressional Budget Office (CBO) estimated the 
potential budget impacts of a 2005 legislative proposal to expand AHPs. 
As noted earlier, that legislative proposal predated the ACA and 
differed from this final rule, and the impacts of that proposal likely 
would differ from the impacts of this final rule in the market in 2018 
and 2019. Under the 2005 legislation and contemporaneous law, many 
individuals joining AHPs previously would have been uninsured or 
purchased individual policies without the 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 the Department to hire 150 additional 
employees and spend an additional $136 million over 10 years to 
properly oversee AHPs.\138\ Together these budget impacts would have 
increased the federal deficit by $317 million over 10 years.
---------------------------------------------------------------------------

    \138\ 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, many individuals who might have been uninsured in 2005 
instead are enrolled in Medicaid or insured and receiving subsidies on 
Exchanges. When joining AHPs, these individuals in effect would trade 
existing subsidies for tax exclusions. Market forces generally favor 
individuals capturing the larger available subsidy, so it is more 
likely that higher income individuals will have an incentive to enroll 
in AHPs. To the extent that AHPs may increase premiums in Exchanges, 
subsidies paid there may also increase. This arguably could improve 
equity, insofar as transfers from taxpayers are likely to be more 
progressive than the cross-subsidies from low-risk individuals such 
transfers would replace. In 2017 approximately 8 million individuals 
insured on Exchanges received $34 billion in tax credit subsidies.\139\ 
If, however, AHPs enroll some Medicaid enrollees or some individuals 
otherwise receiving large subsidies on individual Exchanges, savings 
from these impacts might offset a portion of these deficit increases.
---------------------------------------------------------------------------

    \139\ U.S. Congressional Budget Office, ``Federal Subsidies for 
Health Insurance Coverage for People Under Age 65: 2017 to 2027,'' 
September 2017.
---------------------------------------------------------------------------

12. Applicability Date

    As discussed later in the preamble, the final rule includes a 
phased or staged applicability date that provides prompt expansion of 
AHP availability while addressing certain concerns raised by 
commenters. The final rule allows fully insured plans to begin 
operating under the new rule on September 1, 2018. Existing self-
insured AHPs can begin operating under the new rule on January 1, 2019, 
and new self-insured AHPs can begin on April 1, 2019. This phased 
approach will provide prompt relief to individuals seeking affordable 
health coverage through AHPs while allotting some additional time for 
the Department and State authorities to address concerns about self-
insured AHPs' vulnerability to financial mismanagement and abuse.
    Some comments urge quick action to make AHPs available. Many 
express impatience for more affordable alternatives to ACA-compliant 
small group and especially individual policies. These comments appear 
to be motivated by both the sharp premium increases and scarcity of 
choices that characterize certain local markets. Absent more affordable 
alternatives, many small businesses have opted to go without insurance. 
It is likely that, absent alternatives, more would drop insurance in 
2019 as premiums continue to increase and the individual shared 
responsibility payment is reduced to $0. Many of those who did not drop 
insurance would be forced to make other economic sacrifices to maintain 
coverage.
    Other comments call for delay. Some comments say delay is needed to 
accommodate the annual cycle for insurance policy premium approvals by 
State insurance regulators. The cycle for calendar year 2019 in many 
States is already underway (March through May, according to one 
comment),\140\ and the uncertain impact of the final rule on the 
individual market and small group market may or may not be factored 
into individual and small group ACA-compliant issuers' 2019 premiums 
for those markets. If AHPs enter markets in 2019 and ACA compliant 
issuers' rates for the individual and small group markets fail to 
account for associated adverse selection, those rates may be 
insufficient to cover the issuers' expenses. Some comments accordingly 
call for applicability of the final rule to be delayed until at least 
2020.
---------------------------------------------------------------------------

    \140\ See comment letter from BlueCross BlueShield, March 6, 
2018 (Comment #549 on EBSA web page last accessed at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB85/00549.pdf).
---------------------------------------------------------------------------

    Some comments urge delay to reduce risks of mismanagement and 
abuse. Effective AHPs need time to establish robust governance 
structures, financial arrangements, and businesses practices. Comments 
claim that any AHP that rushes to begin or expand operations in 2019 
could pose risks. The Department and State authorities both need time 
to build and implement adequate supervision and possible infrastructure 
to prevent fraud and abuse and possibly

[[Page 28954]]

to revise other relevant rules to optimize AHPs' role in local 
markets.\141\
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    \141\ As noted above, the Department intends to reexamine 
existing reporting requirements for AHPs/MEWAs, including the Form 
M-1 and possibly the Form 5500, and may be asked to propose class or 
individual prohibited transaction exemptions for AHPs that want to 
use affiliates to serve as their administrative service providers or 
act as issuers providing benefits under the AHP.
---------------------------------------------------------------------------

    Commenters pointed out that State insurance regulators actively 
provide oversight and enforcement in the MEWA area to, among other 
things, prevent fraud, abuse, incompetence and mismanagement, and avoid 
unpaid health claims. Many States say they will need time for new AHP 
specific legislation and/or modification of existing regulations and 
expanded funding for enforcement programs. Commenters also said time 
will be needed for State regulators to coordinate with the Department 
on the scope of State authority to regulate, especially with respect to 
inter-state AHP operations.
    Commenters also called for the Department to increase its 
enforcement activities. This increase would require Congress to 
appropriate additional funding for the Department's oversight of 
expanded AHPs and for the Department to expand staff and related 
enforcement support resources to meet that broader enforcement/
oversight mission.
    This final rule's phased applicability dates aim to balance the 
prompt promotion of more affordable health coverage options with 
caution about market and operational risks. Expanded AHP operations 
beginning on or after September 1, 2018 will be limited to fully 
insured AHPs because these AHPs are best positioned to take advantage 
of this earliest opportunity to offer coverage to individuals and small 
business and likely to be less susceptible to problems and more 
prepared to deliver reliable coverage in an orderly fashion. First, 
such AHPs must be fully insured and therefore protected by already 
established State oversight of large group issuers' financial stability 
and market conduct. Second, it is likely that many or most of the 
earliest AHP growth will build upon existing AHP or group and 
association operations. This might include for example: (1) An existing 
plan MEWA/AHP expanding availability to more industries and/or to 
working owners; (2) an existing non-plan MEWA that currently 
distributes small group policies to small businesses in multiple 
industries converting itself into a plan MEWA/AHP that offers large 
group polices covering the same and possibly additional businesses; and 
(3) an existing local group or association, such as a local chamber of 
commerce, that currently does not offer members health insurance 
partnering with a local large-group issuer to establish an AHP for its 
members.
    Additional expanded AHP operations under this final rule will be 
limited to currently existing self-insured AHPs beginning on or after 
January 1, 2019. Starting then, such AHPs could, for example, expand 
availability to additional industries within a geographic location and/
or to working owners without employees, subject to the provisions of 
this final rule. Existing self-insured AHPs already have been subject 
to ERISA's fiduciary standards of loyalty and care, and barred from 
engaging in financial conflicts of interest (except where permitted 
under an applicable prohibited transaction exemption). Moreover, this 
final rule leaves intact States' broad authority to oversee these AHPs. 
Therefore, self-insured AHPs that expand operations pursuant to this 
final rule's January 1, 2019 applicability date will be the same 
entities, overseen by the same federal and State authorities, as in the 
recent past. Extending these entities' ability to offer more affordable 
health insurance to additional small businesses and working owners 
justifies any attendant extension of their operational risks.\142\
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    \142\ Some self-insured AHPs historically have subjected 
consumers to fraud, mismanagement, and abuse. Six in ten MEWAs that 
self-insure in all or some States in which they operated in 2016 
reported obtaining opinions about their financial stability from 
independent actuaries.
---------------------------------------------------------------------------

    The last expansion of AHP operations under this final rule applies 
to new self-insured AHPs' operations beginning on or after April 1, 
2019. This modest delay of the applicability date for such AHPs is 
intended to enable and encourage them to fully prepare for sound 
operations and provide sufficient time for the Department and the 
States to implement a robust supervisory infrastructure and program. 
The Department intends to immediately increase its focus on compliance 
guidance and enforcement in collaboration with the States.
    As noted later in this preamble, this final rule's prompt but 
phased applicability dates aim to balance quick access to affordable 
insurance with due caution about adverse market impacts and operational 
risks. Market forces may favor AHPs that grow fastest in areas where 
needs are greatest, but such needs magnify AHPs' potential to do both 
good and harm. The sequencing of applicability dates--fully insured 
AHPs first, existing self-insured AHPs second, new self-insured AHPs 
last--responds to this tension by opening the door soonest for earlier 
growth by lower risk arrangements. Early availability of more 
affordable insurance for small businesses, especially for those who 
otherwise would forgo coverage, justifies any possible disruption to 
individual and small group issuers who have already begun setting 2019 
rates and the markets in which they operate.
    Further, consistent with EBSA's longstanding commitment to 
providing compliance assistance to employers, plan sponsors, plan 
fiduciaries, other employee benefit plan officials and service 
providers in understanding and complying with the requirements of 
ERISA, the Department intends to provide affected parties with 
significant assistance and support during the transition period and 
thereafter with the aim of helping to ensure the important benefits of 
the final rule are implemented in an efficient and effective manner.
    AHPs' growth and impacts are likely to be more gradual than the 
phased applicability dates alone would allow. Some comments suggest 
that many of the most substantial and fully insured AHPs are expected 
to choose to delay modifying their programs to reflect the new AHP rule 
and new enrollment activity until calendar year 2020 (the next rating 
cycle), when the rate environment is more settled and certain.

13. Regulatory Alternatives

    As required by E.O. 12866, the Department considered various 
alternative approaches in developing this final rule that are discussed 
below.
    Retain the Department's existing AHP sub-regulatory guidance. As 
discussed above, in response to the Proposed Rule, several commenters 
requested the Department allow entities meeting the Department's 
previous sub-regulatory guidance defining the term ``bona fide group or 
association of employers'' to continue to rely on such guidance without 
meeting the criteria set forth in the new rule. They argued that 
existing AHPs that relied on the Department's pre-rule guidance on 
``bona fide group or association of employers'' did not design their 
operations with the new requirements in mind. As a consequence, they 
may not be able to comply with the new conditions without reducing 
existing options for affordable healthcare. A primary rationale for the 
commenters was that some type of grandfathering would accommodate AHPs 
that have used experience-rating for each employer member in the past 
to prevent undue disruption and burdens associated with

[[Page 28955]]

coming into compliance with new rules that are inconsistent with long-
standing business practices.
    Other commenters asserted that allowing new entities to satisfy the 
Department's prior guidance under a grandfathering approach potentially 
would result in more choice for small businesses by allowing them to 
choose from providing coverage in plans in the traditional health 
insurance market, the grandfathered AHP market, and the newly expanded 
AHP market under the final rule.
    On the other hand, some commenters were opposed to the Department 
adding a grandfathering provision, because exempting groups or 
associations from the nondiscrimination requirements and allowing them 
to experience rate member employers would result in some entities 
offering coverage in ways that are inconsistent with the final rule and 
put new AHPs at a competitive disadvantage compared to grandfathered 
AHPs.
    After considering these comments, the Department has determined 
that the requirements of the final rule do not supplant the 
Department's previously issued guidance. As stated above, the final 
rule expands the opportunities for employer groups or associations to 
form AHPs by establishing an alternative mechanism for meeting the 
``employer'' requirements specifically by relaxing the commonality 
requirement, allowing the employer group or association to exist for a 
principal purpose of offering health coverage, and providing coverage 
to working owners without employees.
    The Department intends for the criteria set forth in this final 
rule to provide an alternative basis for groups or associations to meet 
the definition of an ``employer'' under ERISA section 3(5). 
Accordingly, the final rule does not require employer groups and 
associations meeting the criteria under the Department's prior AHP 
guidance to comply with the nondiscrimination provision of the final 
rule (although, of course, the HIPAA health nondiscrimination rules 
continue to apply to the AHP, as a group health plan). Therefore, such 
AHPs may treat each employer-member as a distinct group of similarly 
situated individuals to the extent permissible under current HIPAA 
health nondiscrimination rules based on the facts and circumstances of 
the particular situation. Allowing new AHPs to operate pursuant to 
either this new rule or the Department's pre-rule guidance, rather than 
simply grandfathering existing AHPs to continue operating as before, 
ensures that new AHPs can compete with existing ones on equal footing.
    Modifying the control requirement. The proposal generally required 
that groups or association members control the AHP's functions and 
activities, including the establishment and maintenance of the group 
health plan in order for the group or association to qualify as bona 
fide. Such control under the proposal could be direct or indirect 
through the regular election of directors, officers, or other similar 
representatives that control the group or association and the 
establishment and maintenance of the plan.
    A number of commenters supporting the Proposed Rule acknowledged 
that a control test is necessary to ensure that groups or associations 
act ``in the interest'' of participating employers in relation to the 
group health plan, as required by section 3(5) of ERISA. A number of 
commenters who generally opposed the proposal were skeptical that the 
proposed control test could adequately protect against fraudulent MEWAs 
and other entities that may not act in the best interest of the 
employer members. A few commenters opposed the proposed control test 
entirely. These commenters generally expressed apprehension about the 
logistics of requiring participating employer members to control the 
functions and activities of a large group or association.
    After careful consideration of these comments, the Department has 
determined that the control test is necessary to satisfy the statutory 
requirement in ERISA section 3(5) that the group or association must 
act ``in the interest of'' the employer members in relation to the 
employee benefit plan in order to qualify as an employer. The control 
test is also necessary 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.
    The Department, however, slightly modified the language in the 
final rule to better align the control test with the Department's 
existing sub-regulatory guidance. Specifically, as revised, the control 
test provides that the functions and activities of the group or 
association must be controlled by its employer members in order for it 
to qualify as bona fide. The control test also requires the group or 
association's employer members that participate in the group health 
plan to control the plan. Control must be present both in form and in 
substance. The determination of whether control exists is based on a 
facts and circumstances test.
    Subjecting AHPs to ACA individual and small group market rules. A 
number of public comments raised the risk that AHPs would exercise 
their flexibility in ways that harm local individual and small group 
markets. Some advocated a level playing field where AHPs compete with 
issuers under the same rules. However, AHPs' flexibility to offer 
products and premiums that more closely align with their members' 
preferences is a significant benefit for those members. That 
flexibility also frees AHPs from some regulatory overhead, and may 
enable some AHPs to achieve the scale necessary for administrative 
efficiency and market power. States retain discretion to regulate AHPs. 
For these reasons, this final rule does not subject AHPs to the ACA's 
individual and small group market rules.
    Allowing new AHPs to exist for the sole purpose of providing 
insurance. The Proposed Rule stated that a bona fide group or 
association of employers may act as an employer sponsoring a group 
health plan if it exists for the purpose, in whole or in part, of 
sponsoring a group health plan that it offers to its employer members. 
This represents a departure from previously issued sub-regulatory 
guidance, which required a group or association to exist for purposes 
other than providing health benefits in order to act as an employer for 
purposes of sponsoring a group health plan.
    As discussed earlier in this preamble, many commenters, including 
some who were otherwise supportive of the Proposed Rule, objected to 
this provision. Several commenters believed that, because most small 
businesses already have the opportunity to belong to a chamber of 
commerce or other professional group or association, allowing a group 
or association to be formed solely for the purpose of sponsoring a 
group health plan is unnecessary to achieve the Department's goals. 
Commenters believed that a proliferation of associations established 
for the exclusive purpose of sponsoring an AHP could diminish the value 
of existing trade and professional groups. Similarly, a proliferation 
of groups or associations could also diminish the market power of 
existing AHPs and those that may be formed by groups and associations 
that exist for other purposes. In particular, a proliferation of groups 
or associations could limit these entities' opportunities to achieve 
the economies of scale that make AHPs an attractive vehicle for 
providing affordable coverage in the first place. Commenters also 
argued that allowing groups and associations formed for the sole 
purpose of offering an AHP could invite unscrupulous promoters to enter

[[Page 28956]]

the market with mismanaged and thinly funded AHPs that could engage in 
fraudulent and abusive practices.
    Commenters offered numerous suggestions for alternative criteria 
determining a bona fide group or association of employers for purposes 
of the new rule with the aim that those eligible be limited to 
legitimate, well-managed, and well-intended organizations with the 
ability to properly operate an AHP. Some commenters supported retaining 
the requirement in the Department's prior guidance that the group or 
association exist for other purposes unrelated to the provision of 
benefits in order for the group or association to qualify as bona fide. 
Some suggested requiring a group or association to exist for a 
specified minimum length of time before it could sponsor an AHP. Others 
suggested requiring the group or association to meet certain criteria 
for tax-exempt organizations, have minimum revenues unrelated to AHP 
operations, or demonstrate by other means the capacity to oversee the 
administrative requirements associated with managing the complexities 
of an AHP.
    After consideration of the public comments, the Department 
determined that some modification of this provision is appropriate, 
because the intent of this final rule is to expand access to AHP 
coverage options, while protecting plan participants and beneficiaries 
from imprudent, abusive, or fraudulent arrangements. Removing undue 
restrictions for existing groups and associations as well as for newly-
formed groups and associations of employers and working owners is 
critical to achieving the Department's goal of expanding choice in 
health coverage options. But the Department shares concerns regarding 
operational risks such as fraud and insolvency that commenters believed 
would be more likely with respect to AHPs offered by newly-formed 
groups and associations that exist solely for the purpose of sponsoring 
an AHP. In addition, the Department's revisions of the final rule are 
responsive to concerns that, in the absence of some purpose other than 
providing health benefits, there may be insufficient basis for treating 
the group or association as the sort of employment-based group or 
association contemplated by ERISA section 3(5). Accordingly, the 
Department is modifying this provision in the final rule to establish a 
general legal standard requiring a group or association of employers to 
have at least one substantial business purpose unrelated to offering 
and providing health care coverage or other employee benefits to its 
employer members and their employees, even if the primary purpose of 
the group or association is to offer such coverage to its members. 
Although the final rule does not define the term ``substantial business 
purpose,'' the rule contains an explicit safe harbor under which a 
substantial business purpose is considered to exist in cases where the 
group or association can establish that it would be a viable entity 
even in the absence of sponsoring an employee benefit plan and states 
that a business purposes does not require a for-profit purpose. The 
Department believes these modifications assist substantially in drawing 
a clean line between entities that might exist only to underwrite and 
sell insurance, on the one hand, and those that qualify as an 
``employer'' under section 3(5) of ERISA, on the other, because of 
their other substantial business purpose.
    Determining Effective and Applicability Date. As discussed above, 
the Proposed Rule did not include a discussion of the effective and 
applicability date for the rule and exemptions. Nevertheless, the 
Department received a significant number of comments regarding the 
importance of properly timing implementation of the final rule. Some 
commenters suggested that the effective date of the final rule should 
be no less than a year after it is published in the Federal Register. 
Others suggested an effective date of January 1st of the first full 
calendar year to fall at least 12 months from the date of publication 
of the final rule. Still others urged an effective date of January 1, 
2020, or later. Still others argued that the effective date should be 
no less than three years after publication of the final rule for self-
insured AHPs with a grandfathering exemption date of December 31, 2017 
that will allow existing bona fide AHPs to remain operational.
    After careful consideration of the public comments, the Department 
has determined that it is important for the final rule to become 
effective on the earliest possible date to provide plans, plan 
fiduciaries, plan participants and beneficiaries, and other 
stakeholders with certainty that will allow them to allocate capital 
and other resources and make decisions to prepare to implement AHPs 
pursuant to the final rule.
    The Department considered providing the same applicability date for 
fully insured and self-insured AHPs, but instead chose the following 
trifurcated applicability dates: September 1, 2018 for new fully 
insured arrangements; January 1, 2019, for existing self-insured plan 
MEWAs that meet the employer definition by satisfying the Department's 
existing sub-regulatory guidance and want to comply with the final 
rule; and April 1, 2019 for new self-insured AHPs. The Department 
believes that this approach will allow AHPs in each category to become 
operational as soon as possible while providing adequate time for plans 
and their affected service providers to adjust to the final rule. The 
Department has concluded that a phased or staged compliance date would 
address the concerns raised in the comments while also facilitating an 
immediate expansion of AHP availability in the marketplace.
    Omitting Working Owners from AHP Eligibility. The Department 
considered whether to omit from AHP eligibility working owners with no 
employees. Some commenters questioned whether their inclusion was 
consistent with ERISA's application to employers only. Some saw their 
inclusion as likely to produce too much adverse selection against local 
individual markets. Other commenters, however, argued that working 
owners currently are particularly disadvantaged by the limited choices 
and high prices that afflict many local individual markets, and 
consequently can gain much from AHP eligibility.
    Under this final rule, AHPs can extend eligibility to both 
employers and working owners without employees. The Department 
separately considered eligibility for each, together with the 
respective separate implications for local small group and individual 
markets, and concluded that each was separately justified. The 
expansion of AHP opportunities for small employers under this rule will 
make more affordable choices available to many, including choices 
provided by geographically-based AHPs that benefit from large local 
market shares. This justifies any attendant adverse selection against 
local small group markets. Likewise, the extension of AHP eligibility 
and choices to working owners will make more affordable choices 
available to many, including some who otherwise would have dropped 
insurance altogether. Relative to small employers, the stakes for many 
working owners are likely to be higher. Working owners without 
employees currently are confined to local individual markets, many of 
which are beset by very limited choices and/or very high or rapidly 
increasing premiums. AHPs can offer many such working owners far more 
affordable alternatives. Relative to small group markets, such affected 
individual markets may be both more fragile and more susceptible to 
adverse selection,

[[Page 28957]]

but the attendant risks for most individuals insured there are limited 
by the availability of subsidies for most individuals who purchase 
coverage on Exchanges. The availability of more affordable options for 
working owners justifies consequent cost increases for taxpayers and 
for affected individuals.
    The final rule does not disturb states' authority to regulate AHPs 
in order to optimize their benefits for working owners and/or 
ameliorate any attendant negative consequences for local ACA-compliant 
individual markets.
    Expanding or Omitting the Proposed Rule's Paragraph (d)(4) 
Nondiscrimination Provision. As stated earlier in this preamble, the 
Proposed Rule included certain nondiscrimination requirements that 
built on the existing health nondiscrimination provisions applicable to 
group health plans under HIPAA, as amended by the ACA, referred to as 
the HIPAA health nondiscrimination rules.\143\ The proposal prohibited 
the group or association from treating member employers as distinct 
groups of similarly-situated individuals when applying the HIPAA health 
nondiscrimination rules for defining similarly-situated individuals if 
the group or association wishes to qualify as bona fide. Therefore, 
groups or associations that conditioned individual employer members' 
eligibility for benefits or premiums on their respective employees' 
health status could not qualify as bona fide.
---------------------------------------------------------------------------

    \143\ 29 CFR 2590.702(d)(3). See also 29 CFR 2590.702(d)(4) 
Example 5.
---------------------------------------------------------------------------

    The Department considered expanding or omitting this provision from 
the final rule. Some commenters criticized this provision as an undue 
obstacle to AHPs' proliferation and growth. Some expressed concern that 
the provision would expose AHPs to adverse selection, while some noted 
that some existing AHPs currently do condition employer members' 
eligibility for benefits and/or premiums on their employees' health 
status. Other commenters praised the provision as a necessary and 
justified check against AHPs' ability to segment good risks from ACA-
compliant individual and small group markets. Some generally criticized 
discrimination based on health status as contrary to fairness and an 
obstacle to access and affordability to individuals with health 
problems who need insurance most. Some argued that this provision alone 
was inadequate to protect ACA-compliant markets from adverse selection 
and to preserve fairness, access, and affordability for people with 
health problems, and that AHPs additionally should be subject to some 
or all of the ACA and state rules applicable to the individual and 
small group markets in which they operate.
    After careful consideration of the comments, the Department agrees 
that it is unnecessary and would be counterproductive to outlaw 
currently existing lawful and successful AHP practices. Therefore, AHPs 
established under pre-rule guidance will retain the same flexibility as 
in the past to condition individual employer members' premiums on their 
respective employees' health status, to the extent permissible under 
the current HIPAA nondiscrimination rules based on the facts and 
circumstances of the particular situation.\144\
---------------------------------------------------------------------------

    \144\ See discussion in section B.2.g. of the preamble, above, 
under the heading Nondiscrimination.
---------------------------------------------------------------------------

    The Department notes that this final rule's nondiscrimination 
provisions will limit AHPs' flexibility to set actuarially fair prices, 
and will reduce risk segmentation that favors AHPs over individual and 
small group markets. This final rule newly authorizes multi-industry, 
geographically-based AHPs, and AHPs that include working owners. In 
combination, the flexibility to condition employer members' premiums on 
health status and the ability to claim a large local market share would 
pose a greater potential for adverse selection against ACA-compliant 
markets than that presented by existing AHPs. The Department further 
notes that this final rule's nondiscrimination provision will increase 
AHPs' exposure to adverse selection, and with it their propensity to 
defend against adverse selection by limiting some benefits.
    However, after careful consideration of the comments, the 
Department decided the nondiscrimination provision in paragraph (d)(4) 
should be retained. As discussed in section B.2.g. of the preamble, 
above, under the heading Nondiscrimination, because the final rule 
relaxes the Department's pre-rule guidance on the groups or 
associations that may sponsor a single ERISA-covered group health plan, 
it is especially important to maintain paragraph (d)(4) as proposed. In 
the context of these new, broader arrangements, paragraph (d)(4) helps 
ensure that the group or association is distinguishable from 
commercial-insurance-type arrangements.

14. Conclusion

    The expansion of AHPs under this final rule will provide small 
businesses, including working owners, with additional and more 
affordable health insurance options that will more closely match their 
preferences. Many employees of small businesses will appreciate the 
more affordable health insurance provided through AHPs. Relative to 
ACA-regulated health insurance issuers in individual and small group 
markets, AHPs will be able to offer more affordable options by pursuing 
economies of scale and offering more tailored, often less comprehensive 
benefit packages that are priced in a more actuarially fair manner.
    Increased regulatory flexibility will necessarily result in some 
segmentation of risk that favors AHPs over individual and small group 
markets. However, practical considerations and federal 
nondiscrimination rules will limit such segmentation. States may 
further limit risk segmentation. Favorable selection toward AHPs will 
help reduce premiums for many small businesses, but will increase 
premiums somewhat for individuals and other small business remaining in 
the ACA-compliant individual and small group markets. Subsidy-eligible 
taxpayers with household incomes at or below 400 percent of poverty 
purchasing coverage on Exchanges generally will be protected from these 
premium increases.
    Operational risks demand increased federal and state oversight. 
Overall, this rule delivers social benefits that justify any attendant 
social costs.

15. Paperwork Reduction Act

    The final 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).

16. 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 certifies that a final rule is not 
likely to have a significant economic impact on a substantial number of 
small entities, section 604 of the RFA requires the agency to present a 
final regulatory flexibility analysis (FRFA) of the final rule. The 
Department has determined that this final rule, which would broaden the 
criteria for determining when employers may join together in a

[[Page 28958]]

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 FRFA of the final 
rule, below.
Need for and Objectives of the Rule
    This final rule is intended and expected to deliver benefits 
primarily to the employees of many small businesses and their families 
including many working owners, as well as many small businesses 
themselves. As discussed in more detail in section 2 of the RIA, this 
final rule would encourage the establishment and growth of AHPs. AHPs 
may offer many small businesses and working owners additional and more 
affordable health benefit options than otherwise are available to them 
in the individual and small group markets.
Affected Small Entities
    The Small Business Administration estimates that 99.7 percent of 
employer firms meet its definition of a small business.\145\ The 
applicability of these final rules does not depend on the size of the 
firm as defined by the Small Business Administration. Small businesses, 
including sole proprietors can join AHPs as long as they are eligible 
to do so and the AHP sponsor meets the requirements of the final rule. 
The Department believes that the smallest firms, those with less than 
50 employees, are most likely to benefit from the savings and increased 
choice derived from AHP coverage under the final rule and include some 
subset of:
---------------------------------------------------------------------------

    \145\ SBA Office of Advocacy Frequently Asked Questions. https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf.
---------------------------------------------------------------------------

     The 25 million individuals under age 65 who currently are 
covered in individual markets, including approximately three million 
who are sole proprietors or dependents thereof, and an additional 12 
million who are employees of small businesses or dependents thereof; 
\146\
---------------------------------------------------------------------------

    \146\ 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.
---------------------------------------------------------------------------

     The 28 million individuals under age 65 who currently lack 
insurance, including three million who are sole proprietors or 
dependents thereof, and an additional 12 million who are employees of 
small businesses or dependents thereof; \147\ and
---------------------------------------------------------------------------

    \147\ 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.
---------------------------------------------------------------------------

     The 1.6 million private, small-firm establishments (those 
with fewer than 50 employees) that currently offer insurance and the 
four million that do not.\148\
---------------------------------------------------------------------------

    \148\ DOL calculations based on the Agency for Healthcare 
Research and Quality, Center for Financing, Access and Cost Trends. 
Medical Expenditure Panel Survey-Insurance Component, 2016. Medical 
Expenditure Panel Survey Private Sector Insurance Component, Table 
I.A.1 and Table I.A.2.
---------------------------------------------------------------------------

Impact of the Rule
    As stated above, by expanding AHPs, this final rule would provide 
additional and more affordable health coverage options for many small 
businesses, thereby potentially yielding economic benefits for 
participating small businesses and their employees. The rule may impact 
individual and small group issuers whose enrollees might switch to 
AHPs; many of these issuers would likely be small entities. Some small 
businesses obtaining coverage in the small group health insurance 
market will experience an increase in premiums. Some of those will not 
receive attractive alternative offers from AHPs. Some of those may see 
decreased choice and may even stop offering insurance to their 
employees due to the premium increases or to issuers withdrawing some 
offers. The final rule allows states to continue to regulate AHPs, 
which can serve to mitigate any adverse impacts on small businesses due 
to the expansion of AHPs.
    The RIA and preamble to the final rule includes a discussion of the 
changes to the Proposed Rule in response to comments. These changes 
include applying phased applicability dates, modifying the ``control'' 
requirement, allowing continued reliance on previous AHP rules so 
existing AHPs can continue to operate as they do today and new AHPs can 
form under the Department's previously issued guidance, lowering the 
hours worked threshold for working owners without employees to 20 hours 
per week, and requiring AHPs to be established and maintained for at 
least one substantial business purpose that is not sponsoring a group 
health plan. The ``Regulatory Alternatives'' section of the RIA above 
discusses significant regulatory alternatives considered by the 
Department.
Duplication, Overlap, and Conflict With Other Rules and Regulations
    The final rule would not conflict with any relevant federal rules. 
As discussed above, the final rule would merely broaden the conditions 
under which a group or 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. In the final rule, the Department affirms that the rule does 
not modify existing State authority as established under ERISA section 
514(b)(6), which gives the Department and state insurance regulators 
joint authority over MEWAs, including AHPs, to ensure appropriate 
consumer protections for employers and employees relying on an AHP for 
health coverage. Nothing in the final rule changes this joint 
structure, or is meant to reduce the historically broad role of the 
States when it comes to regulating MEWAs.

17. Congressional Review Act

    The final 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 will be transmitted to Congress and 
the Comptroller General for review.
    The final rule is a ``major rule'' as that term is defined in 5 
U.S.C 804, because it is likely to result in an annual effect on the 
economy of $100 million or more.

18. 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 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 rule 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. The rule 
merely broadens the conditions under which AHPs will be treated as 
large group health benefit plans under ERISA, the ACA and state law.

19. 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

[[Page 28959]]

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, this final rule 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 final rule 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 ERISA section 514(b)(6)(A)(ii) 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, ERISA section 514(b)(6)(A)(i) 
provides that only those state insurance laws that regulate the 
maintenance of specified contribution and reserve levels may apply to 
the AHP, although the States, of course, retain regulatory authority 
over the insurance company itself and any policies it issues. The 
Department notes that state rules vary widely in practice, and many 
States regulate AHPs less stringently than individual or small group 
insurance.
    In the course of developing this final rule, the Department 
consulted directly with a number of state officials, including state 
insurance department representatives and state-based Exchange 
representatives, as well as with the National Association of Insurance 
Commissioners.
    The Department received many comments, including from several state 
insurance regulators, asserting that it is very important for the 
Department not to draft or implement the final rule in a manner that 
undermines or impairs the current ERISA preemption provisions that 
broadly permit states to regulate AHPs. They maintained that if the 
final rule prevents states from applying their insurance laws to AHPs, 
market fragmentation could result, because AHPs could be established in 
a state with less restrictive issuer and rating rules relative to other 
states. These commenters argued that AHPs operating in multiple states 
should be required to abide by the regulations of each of the states in 
which the plan operates, and not just the state in which the group or 
association or their AHP is deemed to be domiciled. Another commenter 
suggested that the final rule should distinguish self-insured AHPs, 
which have historically presented problems in the market, from fully-
insured AHPs, which are backed by licensed insurance companies and 
subject to oversight by state insurance commissioners and HHS. A few 
commenters asked that DOL promulgate a rule under ERISA section 520 
which authorizes the Department to make persons operating AHPs subject 
to otherwise preempted state insurance laws to prevent fraud and abuse.
    The main point of these commenters is that the Department should 
make a clear and unequivocal statement in the final rule that States 
retain full authority to set and enforce solvency standards for all 
AHPs, and comprehensive licensure requirements and oversight for non-
fully-insured AHPs including benefit, rating and consumer protection 
standards, and laws specifying who is eligible to apply for licensure. 
The Department agrees that the final rule does not modify existing 
state authority. ERISA section 514(b)(6) gives the Department and state 
insurance regulators joint authority over MEWAs, including AHPs (which 
are a type of MEWA), to ensure appropriate regulatory and consumer 
protections for employers and employees relying on an AHP for 
healthcare coverage. The Department therefore states in this final rule 
that nothing in the rule changes this joint structure, or is meant to 
reduce the historically broad role of the States when it comes to 
regulating MEWAs, including AHPs.
    Thus, under this framework, if an AHP established pursuant to this 
final rule is not fully insured, any state law that regulates insurance 
may apply to the MEWA to the extent that such state law is ``not 
inconsistent'' with ERISA. If an AHP is fully insured, state laws that 
regulate the maintenance of specified contribution and reserve levels 
(and that enforce those standards) may apply to the MEWA, and state 
insurance laws are generally saved from preemption when applied to 
insurance companies that sell policies to AHPs and to insurance 
policies that AHPs purchase to provide benefits. In addition, with 
respect to fully-insured AHPs, the Department's view is that ERISA 
section 514(b)(6) clearly enables states to subject such AHPs to 
licensing, registration, certification, financial reporting, 
examination, audit and any other requirement of State insurance law 
necessary to ensure compliance with the State insurance reserves, 
contributions and funding requirements.

20. 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 rule is expected 
to be an E.O. 13771 deregulatory action, because it will 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.

D. Effective Date, Applicability Dates and Severability

    Although the Proposed Rule did not contain a separate discussion of 
an effective date or applicability date for the final rule, the 
Department received a significant number of comments regarding the 
importance of properly timing implementation of the final rule. The 
comments supporting delay pointed to a number of challenges in moving 
forward with new AHPs on an expedited schedule. For example, some 
asserted that early applicability dates would be poor matches for state 
timelines for setting premium rates. According to some commenters, the 
annual cycle for insurance policy premium approvals supports an 
applicability date after January 1, 2019. According to one commenter, 
in many states, the critical period for 2019 pricing is March through 
May of 2018. As a result, the impact of this rule may or may not be 
factored into 2019 premiums. Similarly, some commenters suggested that 
many fully-insured AHPs and the largest self-insured AHPs are expected 
to choose to delay modifying their programs until calendar year 2020, 
when the implications of the rule and the rate environment is more 
settled and certain. Commenters supporting delay also argued that the 
effect of an immediate effective date may be to encourage the 
establishment of AHPs that enter the market (both self- and fully-
insured arrangements) prematurely without the proper administrative 
processes necessary to avoid consumer harm (e.g., adequate reserves and 
appropriate premium structures). They expressed concern that this could 
result in an initial AHP implementation marked by a higher 
concentration of riskier, or even fraudulent, structures capturing the 
market.
    Many commenters also noted that regulators, as well as AHPs, need 
time to prepare for change. For example, there will be a need to modify 
existing reporting requirements for AHPs and other MEWAs, including at 
least the

[[Page 28960]]

Form M-1 and possibly the Form 5500. That will require APA rulemaking 
and/or Paperwork Reduction Act notice and comment processes that 
optimally would need to be completed in advance of the applicability 
date of the new AHP rule. Similarly, there may be a need for class or 
individual prohibited transaction exemptions in the case of AHPs that 
want to use affiliates to be administrative service providers to the 
AHP or to act as issuers providing benefits under the AHP. ERISA 
requires a notice and comment process for issuance of prohibited 
transaction exemptions, which necessarily takes time. Similarly, the 
final rule importantly depends on state insurance regulators for 
oversight and enforcement to, among other things, prevent fraud, abuse, 
incompetence and mismanagement, and avoid unpaid health claims. Some 
states say they will need time for new AHP-specific legislation and/or 
modification of existing regulations and enforcement programs.
    The comments also included specific suggestions. For example, some 
said the applicability date of the new rule needs to be delayed for no 
less than a year after it is published in the Federal Register. Others 
suggested an applicability date of January 1 of the first full calendar 
year to fall at least 12 months from the date of publication of the 
final rule. Still others urged an applicability date of January 1, 
2020, or later. Others argued that the applicability date should be 
delayed no fewer than three years for self-insured AHPs with a 
grandfathering exemption date of December 31, 2017 that will allow 
existing bona fide AHPs to remain operational. Some said the final rule 
should not become applicable until Congress has appropriated funding 
for DOL oversight of an expanded universe of AHPs. Some commenters 
expressed skepticism about the Department's ability to effectively 
police AHPs for abuse at current resource levels and stressed the need 
for increased resources and coordination between the States and the 
Department.
    The Department has determined that a prolonged delay in 
applicability of the final rule is not in the public interest. As noted 
above, the Department received many comments from individuals in 
immediate distress due to the unavailability of affordable healthcare 
coverage and expressing the challenges they have faced since the 
enactment of the ACA. A significant number of commenters expressed 
serious concerns regarding the rising cost of health insurance. Many of 
them were small business owners that currently do not offer health 
insurance to their employees and who cited ever-increasing costs as the 
primary reason for their inability to provide their employees and their 
families with affordable health coverage. Even business owners that do 
provide health coverage stressed that the premiums are exceedingly 
costly, and the increases in premiums are frequent and unsustainable. 
Many self-employed individuals, for example real estate agents, stated 
that they are forced to purchase insurance in a volatile individual 
insurance market, which tends to offer fewer choices at much higher 
costs. These business owners said they wanted access to AHPs at the 
earliest possible date to obtain more affordable healthcare coverage 
for themselves and their employees.
    These concerns were also important in the Department's 
consideration of the request for a public hearing by some commenters 
who opposed the proposal. The Department was not persuaded that a 
public hearing is necessary or appropriate in connection with this 
rulemaking. A substantial and comprehensive public record has already 
been established through the comment process, which generated over 900 
comment letters, many of which included substantial attachments and 
citations to reports and other data. The Department does not believe 
that a public hearing would meaningfully add data and information 
germane to the examination of the merits of the proposal or would 
provide substantive factual information that would assist the 
Department in improving the rule in material ways. Furthermore, the 
Department believes that it has made changes to the rule and included 
clarifications in this preamble that address the important issues 
raised by parties who requested a hearing. The Department believes that 
the scope and depth of the public record that has been developed also 
belies arguments by some that a 60 day comment period was not a 
sufficient period of time to provide the data needed to support their 
arguments against the proposal.
    After careful consideration of the public comments, the Department 
has determined that it is important for the final rule to become 
effective on the earliest possible date to provide certainty regarding 
the Department's interpretation for affected entities, with a staged 
series of applicability dates for pre-existing and new AHPs to respond 
to implementation issues. Accordingly, the final rule is effective 
August 20, 2018, however see below for a discussion of the staggered 
applicability dates.
    The Department acknowledges the issues raised about insurance rate 
setting processes, state regulator and DOL preparedness for oversight 
roles, and steps other stakeholders may need to take to revise 
governing structures, memberships, and benefit offerings. At the same 
time, the Department needs to balance these concerns against the 
immediate need for improved options for healthcare coverage. The 
Department believes that a staged applicability process is an 
appropriate way to respond to those concerns in light of the public 
demand for help. Specifically, September 1, 2018 is the applicability 
date for fully-insured AHPs; January 1, 2019 is the applicability date 
for existing self-insured AHPs that are in compliance with the 
Department's previous sub-regulatory guidance on bona fide groups or 
associations, and that choose to expand the group or association and 
its plan pursuant to the terms of the final rule (e.g., in order to 
expand to a broader group of individuals, such as working owners 
without employees); and April 1, 2019 is the applicability date for new 
self-insured AHPs formed pursuant to the final rule.
    The Department expects fewer oversight and operational issues for 
fully-insured AHPs. This is, in part, because many fully-insured AHPs 
already exist. Issuers have already developed products and services 
tailored to those plans. Application of state insurance regulations 
presents fewer issues because of the existing state rules that govern 
insurance companies and the policies they sell to employment-based 
group health plans. And fully-insured AHPs have traditionally been 
least likely to experience fraud. Allowing existing self-insured AHPs 
formed under the Department's pre-rule guidance next to expand 
consistent with the final rule similarly involves employment-based 
group health plans that currently exist and with respect to which state 
insurance regulators have had regulatory authority for many years. The 
Department does not believe that changes to those existing and already 
regulated AHPs should present immediate or acute new challenges for 
state regulators. Delaying the applicability of the final rule for new 
self-insured AHPs until nearly a year after publication of the final 
rule in the Federal Register is consistent with and adequate to the 
objective of managing implementation of the final rule in a way that 
allows stakeholders, including states and state insurance regulators, 
an appropriate amount of time to tailor

[[Page 28961]]

their groups or associations, plans, and regulations. This is true 
especially because self-insured AHPs, while offering very important 
benefits when properly managed, have historically been at greater risk 
of fraud, and are also less common than fully-insured AHPs at this 
time. Thus, State regulators may benefit from extra time to strengthen 
their enforcement programs where self-insured AHPs are concerned. 
Furthermore, a special applicability date is not needed for existing 
AHPs operating as multiple employer plans pursuant to pre-rule advisory 
opinions issued by the Department because this rule is an alternative 
to, and does not preclude employer groups or associations from relying 
on, the Department's pre-rule advisory opinions either before or after 
the effective date of this final rule. This final rule also does not 
incorporate the Department's pre-rule advisory opinions into this 
regulation, and, accordingly, does not change the legal force of any 
advisory opinions issued by the Department under ERISA.\149\ The 
Department has procedures to answer inquiries from individuals or 
organizations regarding other circumstances in which the Department 
will view a person as an employer under ERISA section 3(5) that is able 
to sponsor a group health plan. We invite individuals who seek 
clarification regarding whether a group or association is an employer 
under previously-issued subregulatory guidance (e.g., whether there is 
a sufficiently close nexus between the employers to maintain a multiple 
employer plan) to seek informal compliance assistance or request a 
formal advisory opinion.\150\
---------------------------------------------------------------------------

    \149\ ERISA Advisory Opinion Procedure 76-1, Section 10. 
(available at FR Doc. 76-25168 and www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/filing-requests-for-erisa-aos).
    \150\ Id.
---------------------------------------------------------------------------

    The Department has a longstanding practice of providing compliance 
assistance to employers, plan sponsors, plan fiduciaries, other 
employee benefit plan officials and service providers to foster 
understanding and compliance with the requirements of ERISA. Consistent 
with that practice, the Department intends to provide affected parties 
with significant assistance and support to promote the efficient and 
effective implementation of the final rule. The Department also intends 
to examine the current Form M-1 for appropriate changes to address 
reporting and disclosure issues and other general improvements in 
information collection related to AHPs under the final rule. As 
discussed earlier in this preamble, MEWA registration requirements 
require plan and non-plan MEWAs to file the Form M-1 under ERISA 
section 101(g) and 29 CFR 2520.101-2. All AHPs under the final rule 
will be required to file the Form M-1 regardless of the plan size or 
type of funding. The Department will also be working with other federal 
and state regulators to prepare for the new plan structures. Groups or 
associations should also seek qualified legal counsel to determine 
whether any proposed structure or operations may create potential 
prohibited transactions. In that case, the group or association may 
apply to the Department under ERISA section 408(a) for an exemption 
from the prohibited transaction provisions to avoid ERISA personal 
liability for the prohibited transaction and civil penalty assessments.
    The Department acknowledges commenters' concerns about whether it 
has the tools and capacity to adequately oversee an expanded AHP 
marketplace and protect the public from harms that have materialized in 
the past from fraudulent and poorly operated MEWAs, including many that 
were not AHPs and some that were or claimed to be AHPs. However, the 
Department has a long history of regulating ERISA-covered group health 
plans, including plan-MEWAs, and AHPs under the final rule will be in 
that category. Significantly, recent changes in federal law equipped 
the Department with new ``cease and desist'' authority to quickly 
intervene in cases when MEWAs (including AHPs) pose a risk the public. 
This new authority augments the criminal penalties for healthcare fraud 
enacted as part of HIPAA. Further, as noted elsewhere in this preamble, 
the States' traditional oversight and police authority over MEWAs (and 
AHPs) is not diminished by or because of this final rule. This decision 
was deliberate, in recognition by the Department of the vast expertise 
of the States in combating MEWA fraud and mismanagement, and is 
supported by the majority of public commenters. Even more so than in 
the past, the Department intends to coordinate and work with the States 
in exercising the joint oversight responsibilities conferred by section 
514 of ERISA. The Department presently has written agreements in place 
with 34 States to foster cooperative enforcement efforts. The 
Department will review these agreements to make sure they continue to 
serve their purpose under the final rule. Further, as necessary and 
feasible, more agreements with other States will be put into place in 
concert with the delayed applicability dates in the final rule. In 
addition, the Department intends to review existing reporting 
requirements for AHPs to enhance the oversight capability of federal 
and State regulators. New reporting requirements would focus on 
capturing data to minimize the risk of unpaid claims. In concert with 
any new reporting requirements, the Department, if necessary, will 
consider imposing AHP-specific audit requirements with conditions that 
are designed to identify and minimize potential risks for AHP's failing 
to pay health claims when due.
    Finally, the final rule includes a severability provision that 
provides that if any of the provisions in the final rule are found to 
be invalid or stayed pending further agency action, the remaining 
portions of the rule would remain operative and available for 
qualifying employer groups or associations. For example, a ruling by a 
federal court that the ``working owners'' provision in section 2510.3-
5(e) is void will not impact the ability of an employer group or 
association to meet the ``commonality of interest'' requirement in 
section 2510.3-5(c) by being located in the same geographic locale.

List of Subjects in 29 CFR Part 2510

    Employee benefit plans, Pensions.

    For the reasons stated in the preamble, the Department of Labor 
amends 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

[[Page 28962]]

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 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. A bona fide group or association 
shall be deemed to be able to act in the interest of an employer within 
the meaning of section 3(5) of the Act by satisfying the criteria set 
forth in paragraphs (b) through (e) of this section. This section does 
not invalidate any existing advisory opinions, or preclude future 
advisory opinions, from the Department under section 3(5) of the Act 
that address other circumstances in which the Department will view a 
person as able to act directly or indirectly in the interest of direct 
employers in sponsoring an employee welfare benefit plan that is a 
group health 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 primary purpose of the group or association may be to offer 
and provide health coverage to its employer members and their 
employees; however, the group or association also must have at least 
one substantial business purpose unrelated to offering and providing 
health coverage or other employee benefits to its employer members and 
their employees. For purposes of satisfying the standard of this 
paragraph (b)(1), as a safe harbor, a substantial business purpose is 
considered to exist if the group or association would be a viable 
entity in the absence of sponsoring an employee benefit plan. For 
purposes of this paragraph (b)(1), a business purpose includes 
promoting common business interests of its members or the common 
economic interests in a given trade or employer community, and is not 
required to be a for-profit activity;
    (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 are 
controlled by its employer members, and the group's or association's 
employer members that participate in the group health plan control the 
plan. Control must be present both in form and in substance,
    (5) The employer members have a commonality of interest as 
described in paragraph (c) of this section,
    (6)(i) The group or association does not make health coverage 
through the group's or association's group health plan available other 
than to:
    (A) An employee of a current employer member of the group or 
association;
    (B) A former employee of a current employer member of the group or 
association who became eligible for coverage under the group health 
plan when the former employee was an employee of the employer; and
    (C) A beneficiary of an individual described in paragraph 
(b)(6)(i)(A) or (b)(6)(i)(B) of this section (e.g., spouses and 
dependent children).
    (ii) Notwithstanding paragraph (b)(6)(i)(B) of this section, 
coverage may not be made available to any individual (or beneficiaries 
of the individual) for any plan year following the plan year in which 
the plan determines pursuant to reasonable monitoring procedures that 
the individual ceases to meet the conditions in paragraph (e)(2) of 
this section (unless the individual again meets those conditions), 
except as may be required by section 601 of the Act.
    (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.
    (8) The group or association is not a health insurance issuer 
described in section 733(b)(2) of the Act, or owned or controlled by 
such a health insurance issuer or by a subsidiary or affiliate of such 
a health insurance issuer, other than to the extent such entities 
participate in the group or association in their capacity as employer 
members of the group or association.
    (c) Commonality of interest--(1) Employer members of a group or 
association will be treated as having a commonality of interest if the 
standards of either paragraph (c)(1)(i) or (c)(1)(ii) of this section 
are met, provided these standards are not implemented in a manner that 
is subterfuge for discrimination as is prohibited under paragraph (d) 
of this section:
    (i) The employers are in the same trade, industry, line of business 
or profession; or
    (ii) Each employer has a principal place of business in the same 
region that does not exceed the boundaries of a single State or a 
metropolitan area (even if the metropolitan area includes more than one 
State).
    (2) In the case of a group or association that is sponsoring a 
group health plan under this section and that is itself an employer 
member of the group or association, the group or association will be 
deemed for purposes of paragraph (c)(1)(i) of this section to be in the 
same trade, industry, line of business, or profession, as applicable, 
as the other employer members of the group or association.
    (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 on any health factor, as defined in Sec.  
2590.702(a) of this chapter, of any individual who is or may become 
eligible to participate in the group health plan sponsored by the group 
or association.
    (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)

[[Page 28963]]

of this section, the group or association may not treat the employees 
of different employer members of the group or association as distinct 
groups of similarly-situated individuals based on a health factor of 
one or more individuals, as defined in Sec.  2590.702(a) of this 
chapter.
    (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 does not satisfy 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 
does not satisfy 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, 
if the plumbing company employer chooses to join the association. 
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) and, as a consequence, satisfies 
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, the employees of Business I 
cannot be treated as a separate group of similarly-situated 
individuals from other members based on a health factor of one or 
more individuals under paragraph (d)(4) of this section. Therefore, 
charging Business I more for premiums based on one or more health 
factors of the employees of Business I does not satisfy the 
requirements in paragraph (d)(4) 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 satisfies paragraph (d)(3) and 
(d)(4) of this section.
    Example 6.  (i) Facts. Association L sponsors a group health 
plan, available to all its 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 
between groups of otherwise similarly situated individuals that on 
its face is based on geography (which is not a health factor), but 
that is directed at one or more individuals based on a health factor 
(cancer), 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, the conditions 
of paragraphs (d)(3) and (d)(4) of this section are not satisfied.
    Example 7.  (i) Facts. Association P is an agriculture industry 
association. It sponsors a group health plan that charges employers 
different premiums based on their primary agriculture subsector, 
defined under the terms of the plan as: Crop farming, livestock, 
fishing and aquaculture, and forestry. The distinction is not 
directed at individual participants or beneficiaries based on a 
health factor.
    (ii) Conclusion. In this Example 7, the premium distinction 
between members is permitted under paragraphs (d)(3) and (d)(4) 
because it is not based on a health factor and is not directed at 
individual participants and beneficiaries based on a health factor.
    Example 8.  (i) Facts. Association Q is a retail industry 
association. It sponsors a group health plan that charges employees 
of employers different premiums based on their occupation: Cashier, 
stockers, and sales associates. The distinction is not directed at 
individual participants or beneficiaries based on a health factor.
    (ii) Conclusion. In this Example 8, the premium distinction is 
permitted under paragraph (d)(3) and (d)(4) of this section because 
it is not based on a health factor and is not directed at individual 
participants and beneficiaries based on a health factor.
    Example 9.  (i) Facts. Association R sponsors a group health 
plan that is available to all employers with a principal place of 
business in State S. Employers are charged different premiums based 
on their industry subsector, defined under the terms of the plan as: 
Construction, education, health, financial services, information 
services, leisure and hospitality, manufacturing, transportation, 
natural resources, and other. In addition, within any employer, 
employees are charged different premiums based on part-time versus 
full-time status (part time status is defined, under the terms of 
the plan, as regularly working at least 40 hours, but less than 120 
hours, per month). These distinctions are not directed at individual 
participants or beneficiaries based on a health factor.
    (ii) Conclusion. In this Example 9, the premium distinctions 
between employer members of a State AHP based on industry, and 
between employees of employer members who are working part-time 
versus full-time, are permitted under paragraphs (d)(3) and (d)(4) 
of this section because these distinctions are not based on a health 
factor or directed at individual participants and beneficiaries 
based on a health factor.
    Example 10.  (i) Facts. Association T sponsors a group health 
plan that offers a premium discount to participants who

[[Page 28964]]

participate in a wellness program that complies with section 
2590.702(f) of this chapter.
    (ii) Conclusion. In this Example 10, providing a reward (such as 
a premium discount or rebate, a waiver of all or part of a cost-
sharing mechanism, an additional benefit, or any financial or other 
incentive, as well as avoiding a penalty such as the absence of a 
premium surcharge or other financial or nonfinancial disincentive) 
in return for adherence to a wellness program that satisfies 
conditions of Sec.  2590.702(f) of this chapter is permissible under 
this paragraph (d).

    (e) Dual treatment of working owners as employers and employees--
(1) A working owner of a trade or business without common law employees 
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 the requirement in 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 the 
requirement in paragraph (b)(6) that the group or association does not 
make health coverage offered to employer members through the 
association available other than to certain employees and former 
employees and their beneficiaries.
    (2) The term ``working owner'' as used in this paragraph (e) of 
this section means any person who a responsible plan fiduciary 
reasonably determines is an individual:
    (i) Who has an ownership right of any nature in a trade or 
business, whether incorporated or unincorporated, including a partner 
and other self-employed individual;
    (ii) Who is earning wages or self-employment income from the trade 
or business for providing personal services to the trade or business; 
and
    (iii) Who either:
    (A) Works on average at least 20 hours per week or at least 80 
hours per month providing personal services to the working owner's 
trade or business, or
    (B) Has wages or self-employment 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) The determination under this paragraph must be made when the 
working owner first becomes eligible for coverage under the group 
health plan and continued eligibility must be periodically confirmed 
pursuant to reasonable monitoring procedures.
    (f) Applicability dates--(1) This section is applicable on 
September 1, 2018, for employee welfare benefit plans that are fully 
insured and that meet the requirements for being an association health 
plan sponsored by a bona fide group or association of employers 
pursuant to paragraphs (b) through (e) of this section.
    (2) This section is applicable on January 1, 2019, for any employee 
welfare benefit plan that is not fully insured, is in existence on June 
21, 2018, meets the requirements that applied before June 21, 2018, and 
chooses to become an association health plan sponsored by a bona fide 
group or association of employers pursuant to paragraphs (b) through 
(e) of this section (e.g., in order to expand to a broader group of 
individuals, such as working owners without employees).
    (3) This section is applicable on April 1, 2019, for any other 
employee welfare benefit plan established to be and operated as an 
association health plan sponsored by a bona fide group or association 
of employers pursuant to pursuant to paragraphs (b) through (e) of this 
section.
    (g) Severability. If any provision of this section is held to be 
invalid or unenforceable by its terms, or as applied to any person or 
circumstance, or stayed pending further agency action, the provision 
shall be construed so as to continue to give the maximum effect to the 
provision permitted by law, unless such holding shall be one of utter 
invalidity or unenforceability, in which event the provision shall be 
severable from this section and shall not affect the remainder thereof.

Preston Rutledge,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2018-12992 Filed 6-20-18; 8:45 am]
 BILLING CODE 4510-29-P