If you followed any news outlets at all on Friday, you probably read or heard headlines like this one from CNN: “Court Blocks Another Trump Attempt to Undermine Obamacare”. While the Washington, D.C. District Court’s decision in State of New York, et. al. v. United States Department of Labor, et. al. does impact health plans, its tentacles reach well into the retirement plan world as well.
The case arose from several states challenging the DOL’s recently finalized Association Health Plan (“AHP”) regulations that were intended to allow small businesses and self-employed individuals to band together through a “bona fide” association to secure healthcare coverage that is less expensive and/or restrictive that what those same businesses can obtain on their own.
You may be wondering what that has to do with MEPs. Well, the basis for the States’ challenge is that DOL’s change to the ERISA definition of “Employer” that is necessary to make the regulation work is unreasonable and, therefore, exceeds their authority. The trick is that the DOL used an almost identically worded definition in its proposed regulations expanding Multiple Employer Plans to bona fide associations. In other words, the problem with the regulation is not that it has to do with health plans, the problem is that it “stretches the definition of ‘employer’ beyond what ERISA’s text and purpose will bear.” Pretty unequivocal.
Let’s take a quick look at what the Court said. The opinion sets the stage by reviewing the current requirements that apply if a group of unrelated employers want to form a single employee benefit plan (whether health or retirement):
- Purpose: The association must have at least one substantial business purpose other than the provision of benefits.
- Commonality: The members must have genuine commonality of interest beyond the provision of benefits.
- Control: The members that participate in the benefit plan must exercise control, either directly or indirectly, in form and in substance.
The AHP regulations do not change those fundamental requirements, but they do change what it takes to satisfy them. And that is what the Court disliked, pulling no punches in describing why. This post would be far too long if we went into all the details, but here is a quick-ish description of the Court’s reasoning.
Purpose
The Court described the DOL’s new interpretation in the AHP regulations as “flimsy” and “perfunctory” and failing “to set meaningful limits on the character and activities of an association.” The opinion goes on to describe how the rule’s provisions make it so that even an association that is not economically viable outside of the benefit plan would be acceptable. Here is what the Court had to say:
“In short, the Final Rule’s purpose test provides no meaningful limit on the associations that would qualify as “bona fide” ERISA “employers.” It does no work towards narrowing extant associations to only those that act “in the interest of” employers. Although it describes its requirement in terms of a “substantial business purpose,” this requirement gives way under the slightest pressure.”
Commonality
Like the proposed association retirement plan regulations, the AHP regulations significantly loosen the requirements to meet the commonality requirement, indicating that simply being in the same geographic region (state or metro area) is sufficient. The Court described an example in which extremely disparate businesses in the state of California could form an AHP under the new regulations even though they have nothing in common and might even have conflicting interests. Again, the opinion says it clearly and succinctly:
“There is nothing intrinsic in common geography that would generate the types of economic or reputational ties that courts have deemed essential for a plan to be covered by ERISA.”
“The Court concludes, therefore, that the geography standard under the Final Rule fails to account in any way for employers’ commonality of interest. This standard effectively eviscerates the genuine commonality of interest required under ERISA, thereby expanding the scope of the statute beyond what ERISA intended. “
Control
Last but not least, the Court describes how the control requirement is meant to work in tandem with the commonality requirement to ensure that those controlling the plan are doing so in furtherance of common interests and not just the interests of those with the loudest voices. “In other words, the control test is only meaningful if employer members’ interests are already aligned.”
After ripping DOL’s arguments with respect to the expansion of “bona fide” associations, the Court set its sites on the reclassification of so-called working owners as both employers and employees. ERISA was designed to govern benefits provided in the context of an employer/employee relationship. Since businesses without employees other than the owners and their spouses inherently do not have that type of employment relationship, they have never been treated as employers for ERISA purposes. The AHP regulations as well as the proposed association retirement plan rules change that, providing that for these narrow purposes, a working owner without any employees is considered both the employer and the employee.
We’ll go straight to the source to find out what the Court thought about that argument.
“And the contention that two working owners without employees, neither of whom is within ERISA’s scope alone, could associate with one another and thereby come within the statute’s reach is absurd.”
And then there is this gem…
“It is unreasonable to say that Congress drafted the statute with the intent to regulate a person’s internally conflicted relationship with himself. That would threaten to turn ERISA into an exercise in psychoanalysis."
And this one…
“When one counts the employees employed by two self-employed persons without employees, the sum is zero. DOL’s feat of prestidigitation transforms two individuals, neither of whom works for the other, into a total of three employers and two employees.”
Association Retirement Plans: What's Next?
It is difficult to say. As we mentioned above, the proposed regulations that would expand the available of 401(k) MEPs to associations uses language that is almost identical to what the Court invalidated in this opinion. Since those same definitions apply to both health and retirement plans, logic suggests that DOL will either have to go back to the drawing board or wait to finalize the association retirement plan rules pending further appeal of this decision (which could take years). Alternatively, the DOL could consider removing associations from the proposed rule and finalizing it only with respect to PEOs. Because of the interplay of all these rules, however, doing so runs the risk of creating even more of labyrinth of uneven playing fields and unintended consequences.
Time will tell, and we will tell you when it does.
