Definition of “Employer” Under Section 3(5) of ERISA-Association Health Plans

Federal RegisterJun 21, 2018

Ask Donna

What actually matters in this document.

Text

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.

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.”

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.

See Executive Order 13813 at 82 FR 48385 (Oct. 17, 2017).

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-à-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.

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.

Under current federal law and regulations, health insurance coverage offered or provided through an employer trade association, chamber of commerce, or similar organization, to individuals and small employers is generally regulated under the same federal standards that apply to insurance coverage sold by health

insurance issuers

directly to these individuals and small employers, unless the coverage sponsored by the 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.

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.

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.

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).

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.

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.

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.

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.

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

Iowa State Bd.

of Public Instruction,

804 F.2d 1059, 1063-1064 (8th Cir. 1986);

see also MD Physicians & Associates, Inc.

State Bd. of Ins.,

957 F.2d 178, 183-186 (5th Cir. 1992);

National Business Assn. Trust

Morgan,

770 F. Supp. 1169 (W.D. Ky. 1991).

Brief of the Secretary of Labor as amicus curiae,

MD Physicians & Associates, Inc.

State Bd. of Ins.,

957 F.2d 178 (5th Cir. 1992) (No. CA-2-90-0054), 1991 WL 11248117.

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

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);

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.

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.”

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.

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).

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).

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.

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.

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.

See, e.g.

Advisory Opinion Nos. 94-07A, 2003-13A, and 2007-06A.

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.

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.

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.

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.

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

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

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.

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.

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.

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

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.

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

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.

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

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.

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

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.

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

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.

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.

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.