A new federal rule gives small employers and the self-employed an additional avenue for obtaining group health coverage.

The final rule, released by the U.S. Department of Labor (DOL) June 19 and published June 21, broadens the definition of “employer” for purposes of determining who can establish multiple employer group health plans under section 3(5) of the Employee Retirement Income Security Act of 1974 (ERISA).

The rule will give small employers and the self-employed greater access to affordable coverage by extending regulatory and economic advantages enjoyed by larger employers and remove restrictions that are imposed on small employers.

Specifically, the rule provides additional opportunities for groups of small employers or associations to meet the definition of “employer” and sponsor an ERISA-governed group health plan. In doing so, the individual employers can be covered under a single plan. Such a plan would not be subject to small group and individual commercial health insurance requirements, such as the requirement to provide essential health benefits or to rate the plan based on the local community.

While expanding the ability of employers to join together more broadly for the purpose of sponsoring a group health plan, DOL left intact existing guidance under ERISA section 3(5). As a result, existing groups and associations are not forced to comply with the new rule’s requirements. Instead, they have a choice of complying under the old or new requirements.

The definition of “employer” under ERISA section 3(5) includes any person acting indirectly in the interest of an employer for the purpose of establishing or maintaining an employee welfare benefit plan. The final rule clarifies the criteria a bona fide group or association must meet in order to be deemed able to act in the interest of an employer:

• The primary purpose of the group or association may be to offer and provide health coverage to its employer members and their employees, but the group or association also must have at least one substantial business purpose other than providing coverage to its members. The rule clarifies that this standard will be met if the group or association would be a viable entity in the absence of sponsoring an employee benefit plan.
• 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.
• The group or association has a formal organizational structure with a governing body and has by-laws or other similar indications of formality.
• The functions and activities of the group or association are controlled by its employer members, and the participating member employers in the group health plan control the plan in both form and substance.
• The employer members have a commonality of interest. This standard is met if the employer members are in the same trade, industry, line of business or profession, or the members exist within the same geographic area, as defined in the rule.
• The group coverage available through the group or association is available only to:
  • An employee of a current member.
  • A former employee of a current member who became eligible for coverage when an employee of the member.
  • A spouse or child of an employee of a member.
• The group or association and the health coverage offered by it comply with specified nondiscrimination provisions of the rule, which prevent conditioning employer membership based on health factors, and the association cannot treat each employer member as distinct with respect to nondiscrimination rules.
• The group or association must not be a health insurance issuer under 733(b)(2) (i.e., a state-licensed health insurer), or be owned or controlled by a health insurance issuer or by a subsidiary or affiliate of a health insurance issuer, other than to the extent the health insurance issuer or controlled entity or subsidiary or affiliate participates in the group or association as an employer member.
• The rule does not change the applicability of state law with respect to regulation of multiple employer welfare arrangements.

The rule will provide a substantial shift in how small businesses offer health insurance to their employees. The rule will allow another avenue for self-employed individuals to band with other employers to receive more affordable insurance. However, with this substantial shift come many requirements that must be satisfied under the rule.

Husch Blackwell attorneys have already been advising employers, associations, health insurance brokers/consultants and insurance companies with respect to the new rule. In particular, we have been analyzing association governance structure, health plan documentation required under ERISA, nondiscrimination issues, insurance policies and existing association structures to determine whether it is advantageous to be subject to the old or new rules.