Guest Article

(From the March 28, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Insurer Must Be Licensed by the State to Insure the Types of Benefits Offered in Order for MEWA to Be Fully Insured

In a recent Advisory Opinion, the Department of Labor reaffirmed its position that in order for a multiple employer welfare arrangement (MEWA) to be considered fully insured - and, therefore, exempt under ERISA from having to comply with most state insurance laws - the plan must obtain insurance from an insurer licensed or admitted in the state to insure the type of benefits the MEWA offers. The insurer must be obligated first-in-line to pay all benefits due under the plan directly to plan participants, the Department explained.

ERISA Preemption

ERISA § 514 generally preempts state laws that relate to employee benefit plans. The purpose of this preemption is to relieve ERISA plans from the burden of having to comply with various differing requirements among the states. However, state laws that regulate insurance, banking or securities are not preempted and can still apply to employee benefit plans - although ERISA prohibits the states from "deeming" employee benefit plans to be in those businesses for that purpose. As a result, self-funded ERISA group health plans, for example, are generally exempt from state insurance laws, while insured ERISA group health plans are generally subject to those laws through the state's regulation of the underlying insurance policies.

MEWAs, as employee welfare benefit plans that provide benefits to employees of more than one employer (other than pursuant to a collective bargaining agreement), present an increased risk that the promised benefits might not be paid. For that reason, the preemption provisions of ERISA are not as generous for MEWAs. ERISA § 514 specifically subjects self-funded MEWAs to state insurance laws (to the extent they are not inconsistent with ERISA), while subjecting fully-insured MEWAs to a smaller subset of the state insurance laws (i.e., to those insurance laws that regulate the maintenance of specified contribution and reserve levels). To avoid having to comply with the full set of state insurance laws that are not inconsistent with ERISA, MEWAs often seek to qualify as "fully insured" and thereby remain subject only to the state contribution and reserve levels. ERISA § 514 provides that the Department of Labor is empowered to determine whether a MEWA is fully insured:

Standards for "Fully Insured" MEWAs

In Advisory Opinion 2011-01A, a MEWA had earlier requested a determination from the Department regarding whether it was "fully insured" and was advised it was not because the policy "did not unconditionally guarantee payment of all benefits due to the participants." The MEWA submitted a revised certificate that the Department also rejected because the MEWA, rather than the insurer, retained "first-in-line responsibility for paying participants and beneficiaries." (Under the revised certificate, a participant or beneficiary whose claim was denied could join the underwriters in a legal proceeding against the MEWA to seek judicial resolution of the denial.) The underwriter could not assume first-inline responsibility for payment of the benefits, the Opinion explained, because it was not licensed to sell direct group health insurance to the MEWA or its participants.

In rejecting the MEWA's claim that it was fully insured, the Department explained:

Stop loss or reinsurance policies would not typically satisfy this definition or the other requirements to qualify a MEWA as "fully insured," which would result in the MEWA being obligated to comply with the full scope of state insurance laws that are not inconsistent with ERISA. The Advisory Opinion also pointed out that ERISA § 501(b) imposes criminal penalties on persons who are convicted of violating ERISA § 519, which prohibits the making of false statements or representations of fact in connection with the marketing or sale of a MEWA.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Erinn Madden 202.220.2692, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.