Multiple Employer VEBAs and state regulation

[Don Levit]

Multiple employer VEBAs are considered MEWAs, and as such, would be regulated by the states.

According to Section 514(b)(6)(A)(ii), any law of any state which regulates insurance may apply to the extent not inconsistent with the preceding sections of this title.

I know there is a separate section which outlines the purposes of ERISA. Are they included in Title 1? If not, wouldn't it be prudent to consider the outline of purposes for ERISA in determining whether any state laws were "inconsistent" with ERISA?

Don Levit

[vebaguru]

Certain portions of ERISA automatically pre-empt state laws; other sections don't. With respect to the MEWA rules, the Secretary of Labor has the choice as to whether to assert Federal pre-emption. Since the early 1980s, the Secretary has refused to assert such pre-emption, permitting states to regulate MEWAs that fall under the definition of life insurance.

The issue with respect to MEWA regulation, therefore, is not a function of whether a state law is inconsistent with ERISA.

[Don Levit]

Vebaguru:

You are correct about the Secretary of Labor being able to assert federal preemption. But in Section 514, it specifically says that only those state laws which are consistent with ERISA may be applied to MEWAs.

So, those laws which are inconsistent with ERISA may not be applied. To me, it seems that the purposes for establishing ERISA are important. For example, one purpose for establishing ERISA was to encourage employers to establish pension and welfare plans. Along those lines, state laws should serve the same purpose. What do you think?

Don Levit

[vebaguru]

While you are technically correct, my point is that the Secy of Labor has already deferred regulation to the states. No state legislature or insurance commissioner is going to look at ERISA to see which regulations they can promulgate. In fact, since the DoL has declined to pre-empt, even a well-founded court action (commissioner tries to impose regulations inconsistent with ERISA on welfare plans in state, benefit plan removes to Federal Court) is likely not to fail. Because the courts will never second-guess the DoL on an issue where discretion has been granted by statute, due to separation of powers.

[Don Levit]

But discretion has not been granted by statute. Discretion to the states has been granted up to this time, by the DOL.

The statute says that states are to use discretion in not passing laws that are inconsistent with ERISA.

I am merely saying that, by law, the states do not have the right to regulate MEWAs, without considering the regulations in light of ERISA.

So, we are back to what states have traditionally done in regulating MEWAs since 1983.

In your opinion (or others out there), would it be appropriate for commissioners to consider not only state regulations' effects regarding ERISA, but other federal laws.

For example, VEBAs have strict guidelines regarding the amount of reserves they can accumulate. Anything exceeding this amount is subject to an excise tax.

Many states have reserve laws which could very well trigger the UBIT. Not only would this be costly to the VEBA, reducing the amount of benefits for the participants. But also, the premiums would have to be higher, in order to accumulate these reserves. This would seem to be in violation of the trustees' responsibility to provide solely for the interest of the participants.

I am suggesting that states need to consider the impact their laws have, in relation to federal laws that also exist.

What do you think?

Don Levit

[vebaguru]

In 1983, Congress amended ERISA, as part of Public Law 97-473, to provide an exception to ERISA’s broad preemption provisions for the regulation of MEWAs under State insurance laws. This permitted the DOL and the states to have concurrent jurisdiction over MEWAs. Section 1144 of ERISA says:

ERISA Section 1144. I do not agree that state insurance commissioners are required to consider ERISA's purposes in regulating insurance arrangements, even though such arrangements may also be subject to DoL regulation. I believe that practitioners are the ones who need to consider both sets of regulations and laws. May commissioners appropriately consider other statutes in issuing their regulations? Of course.

I know of no "strict guidelines" relative to accumulations within VEBAs. Are you referring to the limitations imposed by IRC sections 419 and 419A? Those apply to all welfare benefit plans, not to VEBAs?

The issue you raise about choosing between insufficient reserves or excise taxes only obviates the fact that a MEWA is not an appropriate vehicle for providing self-insured benefits. The ideal impact of state laws and regulations would be to close down all self-insured MEWAs.

[Don Levit]

I was thinking of the UBIT as it applies to 10-or-more employer plans, of which the VEBA could be used as a funding mechanism. If the amounts set aside in this arrangement exceed the fund's account limit, the excess is taxed as unrelated business income.

Whether insurance commissioners consider ERISA's purposes in deciding which state laws apply to self funded MEWAs is certainly up to them. Rather than focusing on that as a requirement, I personally feel that would be good policy, for self funded MEWAs are part of ERISA.

When you state that MEWAs are inappropriate for self funding medical benefits, are you referring to the form itself, or the substance?

The form is nothing other than a single employer arrangement multiplied by 1, 2, 10, etc.

If you are referring to the substance of a multiple employer plan, my bias is that these plans can be structured to be more accountable than single employer plans. This is because single employer plans have virtually no fiduciary responsibility to the participants to ensure that claims will be paid in a timely manner.

Don Levit

[vebaguru]

Non-VEBAs are not tax exempt and are therefore not subject to UBIT. VEBAs are subject to UBIT with respect to non-passive or debt-financed income, or on income which is not "exempt function income" (such as investment gains on retiree medical amounts).

The rules you seem to be referring to are not UBIT rules but rules relating to excess accumulations under IRC 419A.

MEWAs are inappropriate for self-funding medical benefits because they are not as secure as insurance companies, and are not rated for consumers to know how secure they are. This is not a matter of 1, 2 10, etc. Of course, my comments and opinions would not apply to MEWAs that establish captive insurance companies or to those who fund their benefits through insurance companies.

The appropriate comparison is not to single-employer plans, because that is not what is offered in the marketplace, but to insurance company sponsored or underwritten plans.

Single-employer plans are an issue almost all states have chosen not to regulate as such. Such plans are covered by ERISA, however, and are subject to DOL regulation.

[Don Levit]

How would you feel if the MEWA was partially self funded, with stop-loss insurance for the catastrophic claims? Why would this be less secure than a single employer who does the same? I would think the ability to spread risk would be a benefit for employers, particularly under the 10-or-more employer plans. As you probably know, there is not experience rating in these arrangements, so that the trust fund operates more like an insurance mechanism, than a pure funding mechanism.

As an aside, non exempt function income would include income not actuarially needed for paying claims in a particular year, right?

Don Levit

[Don Levit]

One item I forgot. Do you feel single employer self funded plans provide the necessary oversight, being subject only to regulation by the DOL? Isn't that one of the reasons we had all those insolvent MEWAs, since up until 1983 they were subject only to federal regulation?

Don Levit

[vebaguru]

Employers screw their employees all the time, in lots of ways. (Ask the Enron and MCI/Worldcom people.) Adopting and maintaining a self-funded health plan creates another risk to employees of getting screwed. State legislatures determine how many burdens to place on employers. They could outlaw self-funded plans entirely, or make employers post a bond, or regulate all self-funded plans as insurance arrangements, or impose separater regulations on such plans. Most states have chosen to do none of the above since employers are not required (outside of Hawaii) to provide health benefits in the first place. Remember that employers are fiduciaries with respect to any plan adopted, and ERISA gives participants remedies in addition to state laws.

For those states that have MEWA laws, a partial self-funded MEWA would be satisfactory. Again, the appropriate comparison is not with single-employer plans (which run the gamut) but with plans offered by licensed insurance carriers. A plan's status under tax laws (IRC 419A(f)(6)) has no bearing on whether benefits are protected adequately. Community-rated health plans go broke all the time.

The ability to spread risk is a benefit for employers with employees who are high utilizers, a negative to employers whose employees are healthy.

Specific provisions under both IRC 419 and 501©(9) impute such amounts (income not actuarially needed for paying claims in a particular year) to the employer as taxable income. UBIT is payable on UBTI by the tax-exempt entity.