In late March, a federal judge struck down the Labor Department’s 2018 rule expanding access to association health plans.
While in place, the rule allows small businesses and self-employed workers to band together to either buy large-group health insurance or self-insure. The rule has faced criticism, however, as association health plans aren’t subject to various Affordable Care Act protections.
Between 30 and 35 association health plans were created after the rule’s release, and currently insure thousands of workers. Now, businesses using these plans are left in limbo as the Labor Department considers whether to appeal the ruling.
In this post, we’ll examine what association health plans are, why the ruling against them was issued, and what businesses with association health plans can do now. We’ll also explore other small business alternatives to group health insurance, including the qualified small employer health reimbursement arrangement (QSEHRA).
What are association health plans?
Association health plans are arrangements in which small businesses and self-employed workers band together within industries, professions, or geographic regions to either buy large-group health coverage or self-insure.
Association health plans work much like traditional group policies or self-funded insurance. However, these plans aren’t subject to certain Affordable Care Act (ACA) protections, including the law’s rating rule, which prevents insurers from charging more based on sex, age, and health status. Association health plans also don’t need to cover the essential health benefits stipulated by the ACA.
Small businesses that choose an association health plan often save between $1,900 and $4,100 per employee per year in health insurance costs. However, this is a direct result of the fact that many association health plans don’t cover essential health benefits. Depending on the plan, workers may not have coverage for prescription drugs, maternity care, or mental health services.
Critics also claim the presence of association health plans encourages healthy workers to withdraw from the individual health insurance market, creating a negative effect on the risk pool.
Why were association health plans struck down?
In June 2018, the Department of Labor expanded access to association health plans by broadening the definition of “employer” under the Employee Retirement Income Security Act of 1974 (ERISA). The effect was to allow many more groups to bypass ACA rules and form these plans.
In March 2019, however, U.S. District Judge John Bates rejected the rule as an “end run” around the ACA.
In his ruling, Bates said the Labor Department overstepped its authority by “ignoring the language and purpose” of both the ACA and ERISA. He called the Department’s interpretation of ERISA allowing an association to be formed out of two working owners without employees “a magic trick” that creates “absurd results” under the ACA.
Ultimately, the Department’s rule ran counter to “Congress’s clear intent that ERISA cover benefits rising out of employment relationships,” Bates ruled.
With the Department’s interpretation of the “employer” definition invalidated, the bulk of the association health plans rule was rendered ineffective.
What should businesses with an association health plan do now?
Many small businesses are currently covered by an association health plan. However, this doesn’t mean their benefit is automatically invalid.
In responding to the ruling, the Department of Labor has three options: rescind the rule entirely, revise it to be compatible with the ruling, or appeal the ruling.
In the meantime, the Department released a Q&A in April stressing that while the structure or operation of association health plans may change, participants currently have a right to the benefits promised by their plan or policy.
The Department also said it would be communicating with plan administrators as they decide whether to roll back or revise the rule, or to appeal the ruling.
There’s also a good likelihood that if the Department appeals, Judge Bates will grant a stay of his ruling and association health plans won’t be immediately invalidated.
What other options do small businesses have for health benefits in 2019?
Regardless of the ultimate fate of association health plans, the ruling has created a chilling effect on further formation of these plans.
Luckily, small businesses have many other options when it comes to health benefits—even among alternatives to traditional group health insurance.
If a business can’t afford or doesn’t want to offer a group policy, the best solution is to offer a qualified small employer health reimbursement arrangement (QSEHRA) instead.
With a QSEHRA, businesses offer employees a monthly allowance of tax-free money. Employees then purchase the health care they want, potentially including health insurance. The employee submits proof they incurred an eligible expense, and the business reimburses them up to their allowance amount.
QSEHRA reimbursements are free of payroll tax to both the employer and its employees. They can also be free of income tax, provided the employee has minimum essential coverage (MEC).
In this way, the QSEHRA provides many of the same benefits an association health plan does: it cuts costs, decreases administration time, and delivers a formal health benefit to employees. But because employees are free to purchase the health insurance they want, including individual insurance from the local exchange, the QSEHRA also avoids many of association health plans’ drawbacks.
To learn more about the QSEHRA and whether it will work for your business, check out our comprehensive QSEHRA education page.
You can also check out more information on small business health insurance options by downloading our free eBook, The Small Business’s Guide to Health Benefits in 2019.