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Association Health Plans: Recent Developments, Key Issues, and Best Practices for ERISA CounselERISA and ACA Contradictions, State Law Challenges, Small vs. Large Group Requirements and Exemptions
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Timothy S. Klimpl, Attorney, Norris McLaughlin, New York
Ryan C. Temme, Attorney, Groom Law Group, Washington, D.C.
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T U E S D A Y , S E P T E M B E R 2 4 , 2 0 1 9
Association Health Plans: Recent Developments, Key Issues, and Best
Practices for ERISA Counsel
Ryan C. Temme Timothy S. Klimpl
Groom Law GroupWashington, DC
202.861.6659rtemme@groom.com
Norris McLaughlin, P.A.New York
917.369.8895tsklimpl@norris-law.com
Outline
I. Overview of final DOL rules regarding AHPs
II. Meeting federal requirements
A. Commonality of interest
B. Substantial business purpose
C. ACA mandates and exemptions
III. State of New York, et al. v. DOL
I. DOL Policy Statement following District Court decision
IV. MEWA regulations and other state challenges
V. Best practices for AHPs to ensure compliance with federal and state law
6
I. Overview of final DOL rules regarding AHPs
Legal Background
Pre-AHP Rule Associations
Changes Made by the AHP Rule
7
Background
8
⚫ ERISA applies to “employee benefit plans”
⚫ To have an “employee benefit plan,” you need an “employer” sponsor
⚫ An “employer” is defined in ERISA section 3(5) 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.”
Background Rules
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Single Employer Plan
Plan MEWA
Other MEWAs
Background Rules
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Plan MEWAs can take several forms. The most common type of “Plan MEWA” is where the plan is sponsored by a bona fide employer association
Single Employer Plan
Plan MEWA
Other MEWAs
Background Rules
11
Single Employer Plan
Plan MEWA
Other MEWAs
Whether large group treatment applies depends on whether a “Plan MEWA” and whether sponsored by an association per 2011 CMS guidance
Background Rules
12
Single Employer Plan
Plan MEWA
Other MEWAs
AHPs are MEWAs. Unless the AHP constitutes a bona fide employer association for purposes of ERISA, the carrier must look through for federal law purposes and apply the market reform requirements to the participating entity
2011 CMS Guidance
Implications of Pre-AHP Rule Law
13
If eligible for large group plan treatment, then excepted from ACA’s small group market reform requirements, including:
Community rating
Premium rating restrictions of 3:1
Requirement to provide full suite of essential health benefits (“EHBs”)
Implications of Pre-AHP Rule Law
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If subject to look-through treatment, then must apply ACA’s individual or small group market reform rules to each participant based on the participant’s own status as an individual (e.g., in case of sole proprietor with no common law employee) or small group (e.g., in the case of a participating small employer)
Implications of Current Law
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Small Employer Choices
Self-funding with stop-
loss
Off-Exchange
Small Group Insured
Coverage
SHOP Insured
Coverage
Large Group Plan MEWA
(e.g., BFEA) If State Law Permits
Traditional “Look Through” AHP Coverage
President’s Executive Order
16
On October 12th, 2017, President Trump issued an executive order, entitled “Promoting Healthcare Choice and Competition Across the United States” (the “Executive Order”).
The Executive Order directed the DOL, within 60 days, to consider proposing rules or revising guidance to permit more employers, including small businesses, to participate in AHPs.
Specifically, the Executive Order directed the Secretary to “consider expanding the conditions that satisfy the commonality-of-interest requirements under current Department of Labor advisory opinions. . . .” It also noted that the DOL should consider ways to promote AHP formation on the basis of common geography or industry.
AHP Rule
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Issued on June 19, 2018
Creates class of AHPs that are entitled to large group plan status at the federal level
Does so by reinterpreting the ERISA section 3(5) definition of “employer” to include a qualifying group or association of employers
Compared to past guidance on what constitutes a “bona fide employer association,” materially RELAXES the rules for purposes of when an association can sponsor the new qualifying AHP and obtain large group treatment
The Final Rule
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Single Employer Plan
Plan MEWA
Other MEWAs
AHP Rule
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Qualifying AHPs
• CAN be offered (i) to employers within a geographically limited area across industries, or (ii) to employers in the same industry without geographic restrictions
• CAN include small or large employers
• CAN include (or even be limited to) sole proprietors, including those without any common law employees. (The Final Rule refers to these individuals as “working owners”)
• CAN be self-funded or fully insured
AHP Rule
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• MUST be sponsored by a qualifying group of employers or associations
• MUST meet organizational requirements
• MUST meet control requirements
• MUST comply with certain nondiscrimination requirements
Qualifying AHPs
AHP Rule
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Qualifying AHPs
If the AHP meets all ofthe rules...
Qualifying AHPs
Implications of AHP Rule
22
Qualifying AHPs
If the AHP meets all of the rules... Then it is treated as a large group plan at the federal level
Qualifying AHPs
II. Meeting federal requirements
A. Commonality of interest
B. Substantial business purpose
C. ACA mandates and exemptions
23
AHP Rule – The Association
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Q: To whom can an AHP be offered?
A: An AHP can be offered either to –
Employers (including working employers) across industries so long as the AHP is geographically limited (no larger than a state, except for multi-state metropolitan areas)
Employers (including working employers) within a specific industry without geographic limitation
OR
AHP Rule – The Association
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Q: What type of associations can sponsor a qualifying AHP?
A: The association must be an employer association rather than merely a membership organization (such as a Costco or AARP).
NOTE: The AHP Rule left in place the old DOL guidance on commonality of interest, so there is a separate regulatory track (at the federal level) for bona fide associations.
AHP Rule – The Association
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Q: What organizational and control requirements apply?
A: The AHP must a formal organizational structure and must be controlled by the association’s or group’s employer members
AHP Rule – The Association
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Q: What size employers can participate?
A: There is no limit on the size of employers that can participate (large and small employers, and working owners).
AHP Rule – The Association
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Q: What sole proprietors can participate?
A: Even sole proprietors who lack a common law employee can participate; however to be eligible to participate, the “working owner” must:
Have an ownership right of any nature in the trade or business;
Earning wages or self-employment income from the trade or business; AND
Work at least 20 hours per or at least 80 per month providing personal services to the trade or business.
AHP Rule – The Association
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Q: What other purpose must the Association have?
A: In the Proposed Rule, DOL had proposed that the offer of health coverage could be the sole purpose of the association. The AHP Rule, as finalized, continues to provide that the primary purpose may be the offer of health coverage, but it does require at least one “substantial business purpose” unrelated to offering and providing health coverage.
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 AHP, including the promotion of common business interests.
AHP Rule – The Coverage
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Q: What nondiscrimination requirements apply?
A: The AHP Rule applies the HIPAA/ACA health nondiscrimination rules at the AHP-level. Specifically:
Membership in the group or association cannot be based on any health factor
The group or association cannot establish eligibility rules that discriminate on the basis of a health factor
The group or association cannot discriminate with regard to premiums based on health factors
Prohibits eligibility distinctions and premium differences between individual employers based on health status (including claims experience, for example)
However, associations can set rates based on bona fide employment-based classifications (such as part-time or full-time), or based on geography or industry type.
Non-Health Factors include age and gender.
HIPAA/ACA Nondiscrimination Rules
31
Health factors include health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability
Prohibits discrimination in rules for eligibility, including rules for enrollment, effective dates, waiting periods, late and special enrollment, eligibility for benefit packages, benefits, continued eligibility and terminating coverage
Prohibits discrimination in premiums or contributions
Permits treating participants as two or more distinct groups of similarly situated individuals if distinction is based on a bona fide employment-based classification consistent with employer's usual business practice Based on facts and circumstances, including whether employer uses
classification for purposes independent of qualification for health coverage (e.g., determining eligibility for other employee benefits or other terms of employment)
AHP Rule – The Coverage
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Example of permissible pricing variance:
Example 5. Association J sponsors a group health plan that is available to all members. According to the bylaws, membership is open to any entity whose principal place of business is in State K, which has one metropolitan area, the capitol of State K. Members whose principal place of business is in the capitol city of State K are charged more for their premiums.
AHP Rule – The Coverage
33
Example of prohibited discrimination:
Example 4. Association G sponsors a group health plan, available to all employers doing business in Town H. Association G charges Business X more for premiums than it charges other businesses because Business X employs several individuals with chronic illnesses.
AHP Rule – The Coverage
34
AHPs are subject to the following provisions of ERISA: Disclosure: SPD, SMM, and SBC requirements
Reporting: Form M-1 and Form 5500 filing
Claims procedure requirements
Consumer health protections, like MHPAEA, HIPAA, GINA, the ACA, Newborns’ and Mothers’ Health Protection Act, and the Women’s Health and Cancer Rights Act.
Fiduciary Duties, including the prohibition on self-dealing.
DOL did not specify whether COBRA applies at the association or employer level, Future guidance on this point is likely
ACA Rules include: Pre-existing conditions limitations and Maximum Out of Pocket payments.
III. MEWA regulations and other state challenges
State law and the Final Rule
ERISA preemption and state regulation of AHPs/MEWAs
State laws on AHPs/MEWAs
State health coverage mandates
State legal challenge to DOL/Administration
35
State regulation: AHP Final Rule
Position of the original executive order re states AHPs can allow employers to form groups across state lines
“lines around the states”
Interstate insurance market
Allow small employers to access large group market
Avoid some rules increasing costs, such as Essential Health Benefits
State policymakers influence the EHBs in their states
Limits discrimination
EO included AHPs alongside STLDI and HRA expansion
Executive Order 13813, October 12, 2017: “Promoting Healthcare Choice and Competition Across the United
States”
36
State regulation: AHP Final Rule
Final Rule targets state regulations
AHPs intended to allow sidestepping of some state regulations
Promote interstate competition
Facilitate purchase of insurance across state lines
Also targets ACA
Limits ACA market reforms by giving access to large group market
Presented with STLDI and HRAs as an answer to ACA
Released in October as repeal-and-replace efforts fizzled
37
State regulation: Preemption
State regulation of MEWAs and Preemption:
Fully insured MEWAs are subject to only financial regulation
States regulate MEWAs on reserves, contribution and funding levels by licensing, registration, certification, reporting, examination, audit, etc.
States also regulate the insurers selling policies to MEWAs
Self-insured MEWAs may be regulated by state laws that are not inconsistent with ERISA – broader regulation than fully insured
Preemption works the same before and after the Final Rule
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State regulation: Preemption
DOL Final Rule does not modify ERISA §514 preemption
Many commenters wanted preemption to smooth the way for multistate AHPs
Cumbersome, inconsistent, or contradictory state laws
Commenters suggested DOL exemption, coupled with consumer protections
DOL repeatedly says preemption changes are beyond the scope of the Final Rule; Final Rule leaves ERISA §514 unchanged for AHPs
39
State regulation: Preemption
DOL: states may “go too far” regulating self-insured AHPs If excessive state regulation interferes with policy goals of Final Rule
DOL suggests existing ERISA §514 might then permit preemption
ERISA §514(b)(6)(B) exemption Allows DOL to issue exemptions from state insurance regulation
May be class exemption or individual exemption
Cannot exempt from laws applied to fully insured MEWAs & AHPs
i.e. reserve and contribution requirements, and enforcement of same
Some tension from DOL, but preemption currently left as is
40
State regulation: Preemption
Fully insured AHPs & MEWAs State regulation limited to
funding, contribution, and reserve requirements
Less direct regulation by states
Policies from insurers still governed by state law
States can dictate coverage rules through insurers
Self-insured AHPs &
MEWAs More direct state regulation
Except if inconsistent with ERISA
States can directly dictate coverage rules
States can require self-funded AHP to register as insurer
Regulate contribution/reserves
States can entirely prohibit AHP from self-insuring
41
State regulation: Preemption
Fully insured status
Other than reserve and contribution requirements, and enforcement of same, fully insured AHPs avoid much state regulation
Underlying insurance products regulated by state law
42
State regulation: Preemption
Fully insured
ERISA §514(b)(6)(D) – DOL must determine that all of the benefits are to be paid under contract or policy with insurer
AHP without such a determination is not a ‘fully insured’ MEWA
Process
There is no formal determination process; prior plans sought DOL advisory opinions to make the determination
Previously little interest in formal determination
Now more important; demand for determinations may rise
43
State regulation: State laws
Predating the proposed and final rules on AHPs, states have long regulated MEWAs differently
Some states substantially restrict MEWAs, some encourage
AHP efforts could run into state law stumbling blocks
Laws in some states may change to accept MEWAs
Laws in some states already changed to push MEWAs away from reducing coverage, and more may soon follow
44
State regulation: State laws
Specific state restrictions
State-specific definition of ‘bona fide association’
Requirement that AHP or MEWA be limited to employers of the same industry, trade, or profession; i.e. not just same geographic area
Maximum/minimum level of employees for employers to participate
Minimum time since association was founded
45
State regulation: State laws
State prohibitions
Prohibit AHP/MEWA from self-funding coverage
Prohibit AHP/MEWA if sole purpose is health coverage
Prohibit self-employed individuals from AHP/MEWA coverage
46
State regulation: State laws
DOL Final Rule on state laws Fully insured AHPs
‘DOL interpretations and federal court rulings generally have upheld such state laws when they have been challenged as preempted’
Final Rule declined to entertain new exemptions from state laws
State laws restricting or prohibiting MEWAs and AHPs are often not preempted under existing precedent; Final Rule does not change that
Final Rule not intended to modify preemption and ERISA §514
DOL willing to consider new exemption if states “go too far”
47
State regulation: State laws
Different state approaches
Restrictive states versus non-restrictive states
Law changing over time
Unpredictability of state legislative direction
Without preemption, AHPs vulnerable to law changes
48
State regulation: State laws
Administrative/procedural
Current law generally requires filing in each states separately
Discretionary filings may extend time for approval
No existing process to streamline filing requirement
State law in this area likely to change among AHP-friendly states
49
State regulation: State Coverage Mandates
Some states pursuing individual mandates
Massachusetts – predates ACA
New Jersey (2019) – specifically contemplates AHP coverage
DC (2019) –specifically contemplates AHP coverage
Vermont (2020)
Others pending or proposed (e.g. CT, MD)
50
State regulation: State Coverage Mandates
Defining MEC to exclude certain AHPs/MEWAs
NJ: MEWA coverage without NJ coverage requirements is not MEC
DC: MEWA must have existed before 12/15/2017 or must comply with federal regulations applicable to MEWAs before 12/15/2017
State legislators and authorities trying to restrain AHPs from providing narrower coverage
Essential health benefits
51
State regulation: State of New York, et al. v. U.S. DOL
AHP Final Rule invalidated on March 28, 2019 by the U.S. District Court for the District of Columbia
U.S. DOL was sued by – 11 states and DC:
NY, MA, CA, DE, KY, MD, NJ, OR, PA, VA, WA, & DC
States sought rule to be vacated or held inapplicable re ACA market-size
52
State regulation: State of New York, et al. v. DOL
March 28, 2019: U.S. District Court concluded that the AHP Final Rule’s bona fide association and working owner provisions are “unreasonable interpretations” of ERISA
Court determined that the Final Rule “was intended and designed to end run the requirements of the ACA, but it does so only by ignoring the language and purpose of both ERISA and the ACA”
53
State regulation: State of New York, et al. v. DOL
54
DOL failed to reasonably interpret ERISA
Final Rule’s “bona fide association” standard fails to establish “meaningful limits” on the types of associations that may qualify to sponsor an ERISA plan
“Working owner” provision similarly seeks to extend ERISA’s coverage to plans arising outside of any employment relationship
ERISA contemplates a focus on employment-based arrangements, rather than merely commercial insurance-type arrangements that lack the requisite connection to the employment relationship
State regulation: New York, et al. v. DOL55
Due to severability provision in the AHP Final Rule (by contrast with the ACA), the U.S. District Court remanded the Final Rule to DOL for consideration of how the severability provisions affects the remaining portions of the Final Rule
On April 26, 2019, the U.S. DOJ filed an appeal to the U.S. Court of Appeals for the District of Columbia
Oral argument at the D.C. Court of Appeals is scheduled on November 14, 2019
State regulation: State of New York, et al. v. DOL
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April 29, 2019 Policy Statement from DOL in Response to the District Court’s decision
Set forth DOL’s policy towards existing AHPs until their current plan year or contract term expires
DOL will not pursue enforcement actions relating to actions taken in good faith reliance on the Final Rule before District Court’s decision
AHPs must pay health benefit claims as previously promised
No action against existing AHPs that continue to provide benefits to members who enrolled in good faith before the District Court’s order, but only through the remainder of the applicable plan year or contract term
State regulation: New York, et al. v. DOL
Arguments:
Final rule seeks to override ACA market structure
Final rule unlawfully expands definition of employer in ACA & ERISA
Final rule is arbitrary and capricious
State goal is to preserve state authority over insurance market
Arbitrary & capricious (Chevron deference)
57
State regulation: New York, et al. v. DOL
State strategy focuses on ACA, ERISA and administrative law
States: DOL exceeds statutory authority
ERISA & ACA: definition of “employer” to include working owner
ERISA: definition of “bona fide association”
ACA: definition of “employer”
58
State regulation: New York, et al. v. DOL
States argue DOL Final Rule override ACA market structure
States: ACA requires market size counted at individual employer level
States: DOL not authorized to redefine “Large Employer” in ACA
States: Congress did not authorize DOL to weaken market reforms
59
State regulation: New York, et al. v. DOL
States: DOL Final Rule arbitrary & capricious
Substantial departure from precedent; rule is counter to the evidence; relied on factors Congress did not intend; rule relies on inconsistent interpretations
Arguments arguing against Chevron deference
Arguing DOL lacked the authority to interpret
Arguing there was no ambiguity to interpret
And arguing DOL was arbitrary & capricious in the interpretation
60
State regulation: New York, et al. v. DOL
Employer size
States want employer size to be determined at individual employer level, not association level
Want small employers in the small market; more regulatory power
States argue there is no DOL authority to:
define “large employer” this way
make these changes to insurance market
61
State regulation: New York, et al. v. DOL
States argue that under ACA & ERISA working owners with no other employees are not employers
States argue the Final Rule definition of bona fide association is in violation of ERISA
Rule would allow all employers in 1 state to join the same AHP
States argue Congress intended to incorporate the prior DOL definition of association into ACA
62
IV. Best practices for AHPs to ensure compliance with federal and state law
AHP fiduciaries & Title I
DOL investigation
Fully insured MEWA determination
ERISA formalities and procedures
ERISA Part 7
State mandates
State law uncertainty
Cost containment & nondiscrimination
63
Best practices
Fiduciary rules apply
ERISA Title I applies
MEWA/AHP funds are plan assets managed by fiduciary
Assets must be placed in a trust; trust is reported on M-1
Name specific fiduciaries with control over plan assets
Trust will need to meet state law requirements
Historical abuses of similar plans may attract financial scrutiny
Both self-insured and fully insured AHPs subject to state regulatory control over reserves, contribution and funding levels
64
Best practices
DOL investigation DOL continues to share joint investigative authority with states
Since 1985, there have been 968 DOL civil enforcement MEWA cases: 338 with alleged fiduciary violations; 215 with alleged prohibited
transactions 301 yielded monetary restitution totaling $235M in civil penalties
317 criminal MEWA cases 118 convictions/guilty pleas and a total of $173M in court-ordered
restitution
Typical issues: Failure to follow plan terms; reporting and disclosure failures; failure to provide benefits; financial conflicts of interest (prohibited transactions)
Final Rule identifies need to ramp up DOL enforcement efforts
TIP: Prepare AHP to withstand DOL investigation TIP: Review financial arrangements for conflicts of interest (&
PTs)
65
Best practices
Fully insured MEWA determination DOL has no formal determination letter process for fully
insured AHPs
Secretary’s determination necessary to be fully insured MEWA/AHP
Old system was to issue advisory opinions as requested
New systems have been discussed, none yet implemented
Many observers expect looming backlog of advisory opinion requests
Through 2016: Nearly 3/4 of reporting MEWAs fully insured
TIP: Get moving fast on opinion request for fully insured AHP
66
Best practices
ERISA applies typical plan rules Plan document
SPDs, SBCs, Notices
Form M-1 reporting – MEWAs, including AHPs (administrator files)
Form 5500 reporting – all M-1 filers must file 5500
Claims, appeals, procedures
Each employer member needs to adopt its own IRC §125 cafeteria plan for employees to purchase AHP coverage on pre-tax basis
TIP: Remember ERISA plan formalities, procedures, reporting
67
Best practices
Other coverage and design rules apply through ERISA Part 7
COBRA, MHPAEA, Newborns, WHCRA, etc.
ACA – preexisting, dollar limits (EHBs), age 26, rescission
Coverage requirements
Notice requirements
HIPAA – No discrimination based on health factors
Wellness programs provisions of HIPAA apply
HIPAA privacy & security
TIP: Design cautiously around discrimination issues
68
Best practices
Individual and employer health coverage mandates
State individual mandates and ACA employer mandate
AHPs may not satisfy coverage mandates
Either AHPs specifically excluded or coverage must match ACA small market
To satisfy these mandates, may have to offer coverage substantially similar to the pre-Final Rule coverage (e.g. same as if small market)
69
Best practices
State law uncertainty
State laws still in flux
Likely to change as a result of the Final Rule
Some states moving to adopt AHPs
Other states moving to restrict AHPs
Court challenge still up in the air
50-state self-insured plans may be difficult at this stage
Procedural hurdles right now in state insurance filings
70
Best practices
State coverage requirements Fully insured AHPs indirectly and self-insured AHPs directly
AHP Final Rule allows coverage beyond ACA small market strictures
But state law can replicate those same requirements
State mandates
Mandated treatments, mandatory disease coverage
State individual health coverage mandates
AHP coverage may be insufficient in coverage or specifically targeted in mandate
Crossing state lines
i.e. laws of one state apply to AHP coverage offered into others
71
Best practices
Association structure and design Sufficient to qualify under the new Final Rule?
Or preemptively designed to satisfy more restrictive regimes?
Which states?
Regulatory concerns – both burden and predictability of regulations
What employers?
Employer size, industry, location
Effect on plan costs?
Control, governing body, by-laws – control in substance and in form
TIP: Find the non-EBEC purposes of the association and let those purposes influence the design of AHP governance
72
Best practices
Cost containment HIPAA nondiscrimination – may not discriminate on health factors
May discriminate on other factors, such as:
Industry; Occupation; Location; Job classification; Full-time/part-time
HIPAA rules on bona fide classification: used for other purposes? other plans?
May be bona fide: full-time versus part-time; geographic location; union; hire date; length of service; current employee versus former employee; occupation
Gender discrimination allowed (ACA prohibited); Age discrimination allowed
Beneficiary discrimination allowed: relationship, marital status, age, student
73
Best practices
Cost containment
Discrimination broadly allowable except for health status
Subterfuge disallowed – distinctions nominally based on permissible factors but in substance target health status are disallowed
May not discriminate between employers
Too similar to private insurance marketing to wider public
TIP: No need to discriminate against employers if you can treat job classifications, industry subsectors, and geographic locations as independent groups
74
Best practices
Observe current DOL Policy Statement, which applies through the end of current plan year or contract term
Monitor U.S. Court of Appeals action on appeal of U.S. District Court’s decision
75