United States: Association Health Plan Perspectives (Part 3): Handicapping The Legal Challenge By State Attorneys General To The Final U.S. Department Of Labor AHP Regulations

Last Updated: December 10 2018
Article by Alden J. Bianchi

In the last post in this series, we examined the regulatory response by certain states to the final regulations governing association health plans, which were issued by the U.S. Department of Labor (DOL) in June 2018. As we explained previously, the final regulations carried out a Trump Administration Executive Order intended to make it easier for a collection of small groups to associate for the purpose of gaining access to health insurance coverage as a single, large group health plan—i.e., an "association health plan" or "AHP." AHPs enable small groups to collectively access the more favorable underwriting, plan design and other rules that are available only to plans sponsored by large employers. The insurance regulators in a handful of states (about a half dozen of which we are aware) have issued guidance intended to stymie AHPs to varying degrees.

On July 26, 2018, 11 states (New York, Massachusetts, California, Delaware, Kentucky, Maryland, New Jersey, Oregon, Pennsylvania, Virginia, and Washington) and the District of Columbia filed a complaint in the U.S. Federal District Court for the District of Columbia seeking to invalidate the final regulations. The case is State of New York et al. v. United States Department of Labor et al, Civ. Action 18-1747. This post scrutinizes the arguments set out in the states' complaint and their brief filed this past August in support of their Motion for Summary Judgment, which lays out their legal arguments. In a subsequent post, we will examine the DOL's legal position in the case, as detailed in its Summary Judgment reply brief, which was filed October 31, 2018.  


The states' complaint makes the following claims (among others):  

The Final Rule's purpose and effect are simple: To shift, through manipulation of the Employment Retirement Income Security Act (ERISA), a large number of small employers and individuals into the large group market because the ACA's [the Affordable Care Act's] core protections do not apply to that market (emphasis added). Worse yet, health plans created under the Final Rule would lack basic market incentives and statutory protections under federal law that apply to plans from true large employers. The results will be adults and children with less coverage and fewer benefits than Congress intended in all three markets (individual, small group, and large group), and a destabilized individual and small group market with premiums that may be unaffordable for people with pre-existing conditions who need the ACA's core protections.

While the states' disdain for the final regulations is clear, the states' argument paradoxically captures some of what the final regulations endeavor to accomplish. While the Administration and the DOL would agree that the final regulations will allow small groups to band together so as to be regulated as large groups, they would most certainly disagree with the states' conclusion that the purpose of the final regulations is to enable small employers to evade the ACA's core protections or their prediction that the final regulations' implementation would result in "adults and children with less coverage and fewer benefits than Congress intended." On the matter of statutory protections, the DOL might point to the remaining consumer protections under the ACA, including the prohibition against denying coverage based on a pre-existing condition and the prohibition against imposing annual and lifetime limits on essential health benefits covered under a plan. But these disagreements obscure the real and only question before the District Court: does prior law – or the Public Health Service Act, as amended by the ACA (PHS Act) – stand in the way of AHPs?

The dispute underlying the states' challenge to the final regulations deals principally with fully-insured AHPs. While states have near plenary power to regulate self-funded AHPs, their ability to regulate fully-insured AHPs is constrained. (The differences in the way fully-insured and self-funded AHPs may be regulated by the states are explored at length in our prior post.) The balance of this post focuses on fully-insured AHPs unless otherwise specified.

The question of whether an association made up of unrelated small employers and independent contractors should be regulated at the association level (as a single, large group) or at the small-employer or individual level is not new. Under prior law, an AHP consisting of small employers and self-employed individual was generally treated and regulated at the small employer/individual-level under the so-called "look-through" rule – one looks through the association to individual members to discern which insurance market rules apply (The Department of Health and Human Services (HHS) first announced the look-through rule in 2002, and it was later refined and restated to take account of the ACA in 2011.) For example, in the case of an association plan offered by a Chamber of Commerce to its members, the size of each member would control, not the size of the members in the aggregate. Where an association is regulated at the small-employer or individual level, an insurance carrier underwriting AHP coverage must apply the ACA's small group market requirements to the small employer association-members, and correspondingly to the ACA's individual market requirements on association-members who are self-employed.

Prior law also included an exception to the look-through rule that applied in the case of bona fide associations. If a health plan is sponsored by a "bona fide group or association of employers" – which is considered an "employer" under ERISA – the health plan will be considered a large group plan if all of the employer members of the "bona fide group" employ 51 or more employees. Where a health plan is sponsored by a bona fide group or association, all employees employed by the employer members of the group are aggregated together for determining whether the health plan should be regulated as a small group plan or large group plan.

The final regulations did not change the "look-through" rule. Rather, they expanded the universe of associations that may qualify as a "bona fide group or association of employers" as defined by ERISA, thereby increasing the number of AHPs that may qualify as large group plans under the PHS Act. The final regulations accomplish this goal by amending the definition of "employer" in ERISA section 3(5).

The states' pending lawsuit seeks to invalidate the final regulations based on their alleged inconsistency with prior law. The states also claim that the final regulations conflict with the market segmentation rules set forth under the PHS Act, and, in the case of "working owners," the foundational definitions of "employer" and "employee" contained in ERISA.

The States' Claims

The states' complaint alleges the five separate causes of action, which are summarized below. We address each count in turn.

(1) The final regulations violate the Administrative Procedures Act since they are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."

(a) Conflict with prior DOL law

ERISA defines the term "employee welfare benefit plan" to mean:

"any plan, fund, or program...established or maintained by an employer...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..." [ERISA § 3(1)]

And an "employer" is defined 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." (Emphasis added). [ERISA § 3(5)]

The term "a group or association of employers" is not further defined in the statute. For purposes of the states' claims, the term is ambiguous. The U.S. Supreme Court, in Chevron U.S.A. v. National Resources Defense Council, 468 U.S. 837 (1984), made abundantly clear that in instances where a statutory term is ambiguous, including instances where a particular statutory term has no corresponding statutory definition, the federal department or agency with jurisdiction in the matter (here, the DOL) has wide latitude to interpret and further define the ambiguous statutory term, as long as its interpretation is neither arbitrary nor capricious.

The states assert that the final regulations are inconsistent with prior DOL advisory opinions and case law. True. Prior law interpreted the term "group or association of employers" narrowly. But the DOL's prior legal position was fashioned entirely from advisory opinions, which are generically referred to as "sub-regulatory" guidance. Advisory opinions merely advise the public of the DOL's views regarding the meaning and construction of the statutes and rules which it administers – here, ERISA section 3(5). Sub-regulatory guidance does not have the force of law, despite that the regulated community and the courts often treat it as authoritative. A federal department or agency has ample authority to modify its interpretive rules at will.

The DOL clearly has the authority to issue a new interpretation of the term "a group or association of employers" that deviates from the old definition. The final regulations do just that. Most importantly, the DOL developed this new interpretation within the Administrative Procedure Act's (APA) requirement of a notice-and-comment process (i.e., proposed regulations, a 60-day public comment period, and final regulations). Accordingly, we are of the view that the states' argument that the final regulations violate the APA – and prior law – fall short. 

(b) The final regulations conflict with the PHS Act and the ACA

The states claim that the final regulations should be rejected because they are inconsistent with the PHS Act's market segmentation rules and the ACA's insurance market reforms. The states' claim starts with the following observation:

In ACA provisions that Congress incorporated into ERISA, PHS Act, and elsewhere, Congress defined the small group market by reference to whether a business is "an employer who employed" a small number of employees—generally, fifty or fewer."

The complaint goes on to say that Congress decided in the ACA that stronger protections should apply to employees of small employers than to employees of large employers because of historic deficiencies in the small group market. Congress, they claim, delineated "very narrow circumstances in which employees could be 'aggregated' across businesses, based on well-established rules under the [Internal Revenue Code] covering corporate control groups and the like. It would therefore be contrary to the ACA to conclude that Congress permitted some other mechanism whereby the ACA reforms could be circumvented." The states argue that, by treating AHPs as large employers, the final regulations create "plans outside of comprehensive coverage requirements applicable to all three ACA markets, contrary to what Congress intended."

This argument was addressed in the preamble to the final regulations, which explains that:

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.  . . . [A]lthough 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. . . . 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.

The DOL rejoinder here strikes us as least as compelling as the states' argument. Congress nowhere mentioned MEWAs in the ACA. And single, large group MEWAs (i.e., AHPs) pre-date the ACA. Congress saw no apparent need to fashion separate rules for MEWAs under the ACA. Pre-ACA law respecting AHPs should therefore remain in full force and effect. There is moreover substantial guidance under the PHS Act to buttress the DOL's view of the matter, as discussed above.

(2) The Final Rule unlawfully attempts to fragment the individual market by treating self-employed individuals (denominated "working owners") with no  other employees as both "employer" and "employee," contrary to ERISA, Congressional intent, specific definitions governing group health plans under ERISA and the PHS Act, and judicial precedent.

The states assert that self-employed individuals may not be covered under an AHP because self-employed individuals are not "employees" for ERISA purposes. However, the exclusion of self-employed individuals appears nowhere in ERISA. The states rely on a 1992 U.S. Supreme Court decision, Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318, 323–24 (1992), to impose a requirement that AHP participants must be common law employers with common law employees, thereby excluding self-employed individuals with no common law employees (think, Uber drivers).

Darden involved a dispute over the employment status of an insurance agent for Nationwide Mutual Insurance Company policies. The plaintiff, Robert Darden, was a participant in the company retirement plan. Under the terms of the plan, he would forfeit his right to benefits if after his job was terminated he worked for a competitor within 25 miles of his business location. Nationwide terminated Darden's employment. Darden thereupon started selling insurance policies for Nationwide's competitors. Nationwide forfeited Darden's retirement benefits. Darden sued under ERISA claiming protection as an "employee" with the meaning of ERISA section 3(6). As such, he claimed that his benefits were vested and could not be forfeited. Nationwide argued Darden was not an employee, but an independent contractor.

The trial court held that Darden was an independent contractor, not an employee, under common law agency principles. Darden appealed. The U.S. Court of Appeals for the Fourth Circuit reversed, holding that Darden would be an employee, under the ERISA policy, if he could show (i) he had a reasonable expectation that he would receive benefits, (ii) he relied on this expectation, and (iii) he lacked the economic bargaining power to contract out of benefit plan forfeiture provisions. Thus, he was an employee based on the "economic realities test" of employee status.

The U.S. Supreme Court affirmed, but it objected to the application of the economic realities test. In so holding, the Court observed that, "ERISA's nominal definition of 'employee' as 'any individual employed by an employer  [ ] is completely circular and explains nothing.'" Worrying that the economic realities test might thwart the Congressional design or lead to absurd results, however, the Court instead adopted the "common-law test" for determining who qualifies as an "employee" under ERISA.

The Darden holding neither helps nor hurts the states' case, but its dicta may help. If the term "employee" for ERISA purposes is limited to a common law employee of an employer, and if the definition of an employee welfare plan, which an AHP purports to be, is limited to a plan that covers employees, then an AHP that covered self-employed individuals would not be an ERISA-covered plan. States would therefore have full power to regulate such a plan. The question before the court strikes us as relatively easy to frame: can a self-employed individual be both an employer and an employee for ERISA purposes?

In the preamble to the final regulations, the DOL opined that if the association sponsoring the health plan satisfies the requirements to be considered a "bona fide group or association of employers," a self-employed individual would be considered an "employee" of the entire "bona fide group," which correspondingly allows the "working owner" to participate in the AHP. The courts will determine the extent to which this reading of ERISA is within the DOL interpretive jurisdiction or whether such a reading is arbitrary and capacious. We are inclined to favor the former, i.e., that that this reading is consistent with ERISA, at least when accorded Chevron deference. The playing field is not level; it tilts in the DOL's favor. 

(3) The final regulations' "commonality of interest requirement" violates ERISA

According to the states' lawsuit, ERISA has historically "been understood to permit only certain types of associations—those tied by a commonality of interest unrelated to the provision of benefits, and subject to control by employer members—to qualify as an 'association' acting indirectly in an employer's interest under ERISA's definition of employer." The objection here is to the final regulations' greenlighting of AHPs based on employers not in the same trade or business who band together principally to obtain group health plan coverage. The final regulations allow this, provided that the employers are all domiciled in the same state or metropolitan area.

This argument is yet another instance in which the states rely heavily on prior law and precedent. As best we can tell, this approach ignores the DOL's broad interpretive powers over Title I of ERISA conferred by Congress and generally sustained by the courts. And because the DOL satisfied the APA's notice-and-comment process when developing a new interpretation of the "commonality of interest," we believe the DOL is on solid ground, and the states' argument falls short.

(4) The final regulations exceed the DOL's statutory jurisdictional mandate

The states' claim that the final regulations do not carry out Congress's intent to implement ERISA. Rather, the DOL is merely enacting the Trump administration's political agenda. They point out—correctly—that Congress has repeatedly refused to amend ERISA to authorize the expansion of AHPs. The states' claim that the DOL is effectively "legislating changes to the ACA's carefully considered market structures in defiance of Congress in order to undermine the ACA's robust consumer protections" seems to us, however, to miss the mark entirely. This latter argument is political, not legal. The legal issue before the court is whether the final regulations are consistent with ERISA and whether they were properly adopted.

(5) The final regulations fail to take into account the history of abuse in the era of AHPs or other MEWAs

This claim is too political. It does not lend itself to legal relief. This is not to say that fraud and abuse are not serious issues. They are. This is not a question for the courts, however, at least not yet.


A preponderance of the states that are parties to the litigation have enacted laws, or issued guidance, prohibiting the formation of large-group AHPs. So why the lawsuit? The answer, we suspect, is that the possible upheaval in their small group markets caused by widespread adoption of large-group AHPs is somewhere between worrisome and unthinkable to these states. The final rules will be disruptive, to be sure. There is, however, an equally compelling set of concerns faced by small businesses that find it increasingly difficult to afford coverage in the small group markets. These businesses are looking to AHPs for relief.

Both the lawsuit and the state laws banning large-group AHPs have exerted a chilling effect on carriers, although some carriers have been willing to engage in preliminary AHP design efforts. Multi-state AHPs are finding it necessary to skip some states altogether, at least for now. For organizations contemplating the adoption of an AHP, the states' lawsuit poses something of a conundrum. The efforts of first-movers could be for naught, but if the final regulations are upheld—which we think is more likely than not—then organizations that wait for the courts to act could find that all the good risks are in someone else's AHP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Alden J. Bianchi
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions