Don Levit

Shaddon: Great question. I will try to tackle it. For COBRA purposes, he must charge the same rate as active employees. Beyond COBRA, he can charge rates different than similarly situated employees. I assume this is a self-funded arrangement? Don Levit

SoCalActuary: To read an excellent article published by the FASAB, go to: http://www.fasab.gov/pdffiles/socialinsurance_pv.pdf. It is a long article, but to learn more about the FASAB's views on government obligations, you may want to focus on p.8, 9, 38, 41, 80, 81, 85, and 87 to learn about the Alternative View. Focus on p.57-58 for the Primary View. The Alternative View is the present way that FASAB advises the federal government to view its liabilities. The Primary View is a second choice. A comment period is available to the public to discuss the 2 views. Don Levit

SoCalActuary: The FASAB is the Federal Accounting Standards Advisory Board, who is, basically, the accounting advisor for the federal government. You say the liability is an off-the-book balancing item, in which the balnce sheet basis is not relevant. You don't seem to be concerned about the government's financials. You say the issue of proper funding for Social Security has not been ignored. Well, that may be true, but wouldn't you think the longer the government waits to address the long-term solvency of Social Security and Medicare, the more drastic the revisions will have to be? Do you have any concerns about the federal government viewing their long-term liabilities as irrelevant, in that only current liabilities are recognized? Don Levit

SoCalActuary: I assume you are referring to the amounts needed to set aside for DB plans, versus those for DC plans. I think you will agree the employer liability for funding DB plans is much greater than that for DC plans. If you agree to that, why is the FASB biased against DB plans? When I mentioned the federal government, I was referring to the idea that Social Security and Medicare are funded on a pay-as-you-go basis. Are you familiar with the FASAB? Are you aware how it views government liabilities? Don Levit

Folks: I understand that the states will have similar provisions for governmental plans. Any ideas as to why the federal government does not have similar standards, say, in regards to Social Security and Medicare? Don Levit

Wow, this is starting to look like a soap opera with different stories! K Johnson: I want to address our issue presently. Thanks for providing the Casselman case. Here, the employer did more than just collecting premiums, or even paying the premiums for the employees. The employer researched which companies would be appropriate, and required the employees to choose between 1 of 2 companies. In addition, the employer selected the employees who would be eligible. That is quite a bit more involvement than say the employer paying premiums on individual policies selected by the employees before even arriving at their present employer. By the way, Hansen v. Continental was mentioned, so maybe this is a type of bellwether case, particularly for Texas. Don Levit

KJohnson: As Reagan said to Mondale in their debate, "Well, there you go again!" EBIA is a well-respected source, but they do seem to err on the side of conservatism. Let me give you an update on my discussion with Bill Bingham at the TX DOI regarding this very issue. Bill was mentioned as one of the contacts in the Commissioner's Bulletin which warned against this type of activity. I am wondering if TXCafe is aware of this bulletin? If not, I can provide the link to him, and this discussion board. There was a very relevant case which addressed the issue of whether or not individual policies met the definition of being part of a group plan. This case took place in the Fifth Circuit, where Texas is located. The case is Hansen v. Continental Insurance Company. Only one of the factors in whether an individual policy was part of a group plan is the employer subsidy for the premiums. In no case am I aware of is this the sole factor. Rather, the employer must have more involvement than this, particularly if the individual policies were already in force before coming to the employer. I would be happy to fax this case to anyone who wishes to read it. By the way, Bill Bingham was not in interested in reading this case, due to a perceived lack of time. Don Levit

Bird32: I understood Colorado passed a law about 3 years ago, allowing, finally, for self-funded MEWAs. As of 6 months ago, or so, no MEWAs had been formed, apparently because the regulations were so onerous. Let's do the Advisory Opinions offline. Frankly, they're a bit tedious, and we seem to have an oligopoly on this discussion. Don Levit

Bird32: That is correct, except the certificate of compliance must have been submitted by 12-31-95. Check out 23(a) and 31(h). Do you think regulation of an entity includes the right to ban it? Even if that would be logical, it is quite a stretch, wouldn't you say? (almost bordering on arbitrary and capricious, if not actually both). Don Levit

Bird32: My experience with many state regulators is that if a company has employees in more than one state, and they are covered under an employer health plan, the company is located in more than one state. The discrepancies between different states' manners of regulating MEWAs points to the federal requirements of uniform and consistent regulation of MEWAs. Some ERISA attorneys believe the uniform and consistent requirements apply only to fully insured MEWAs, but have not been able to back up their premise with hard, case facts, or even ERISA provisions. The fact is that self funded employers who form MEWAs need the uniform and consistent guidelines even more than commercial insurers, who may very well be licensed anyway in all the states the MEWA has employees in. The extra cost of complying with each state's regulations has alrady been borne by the insurers. The common ownership provisions are complicated, when one has to decide whether or not a MEWA exists. I would be happy to send you some DOL Advisory Opinions on this particular matter. My advice would be to assume that the entity is a MEWA, and license the entity in each state in which employees are located. I can tell you it will be a battle with the regulators to get them to agree with the uniform and consistent regulations. Most states do not have self-funded MEWA laws, and, therefore, require the same reserve and surplus requirements as a full-fledged commercial insurer. California has banned MEWAs since 1995 (an act, in my opinion, which is illegal). Don Levit

A couple of questions, in regard to your first instance. I assume you are thinking of a self-funded arrangement. Are the employers in the same line of business? Are the 2 states comtiguous? If the arrangement is self funded, each state has the right to regulate the MEWA, and the entity must be properly licensed in each state. While the 2 states have the right to regulate the MEWA, the regulation must be uniform and consistent, according to federal law. That does not mean the regulation must be the same, but it does mean, in my opinion, there may need to be compromises in how the entity is regulated, as a whole. In regards to your second instance, if 15 states are involved, the degree of cooperation between all 15 states is even more important for a self-funded plan, to achieve regulation that is uniform and consistent, as required by federal law. By the way, the purpose for uniform and consistent regulation is to keep administrative costs low, in order to maximize the benefits for the participants. Beware of state regulators that disregard federal law, and who desire to regulate the MEWA, as if it was located in only their particular state. Don Levit

KJohnson: Thanks for providing this case. The employer did more than merely pay the premiums. He also decided annually whether to increase the disability benefit, and could have terminated the policy at any time. Also it stated "that it is true that no single act constitutes the establishment of an ERISA plan; the purchase of insurance does not conclusively establish a plan." While it does provide cases where an employer's payment of premiums, standing alone, was substantial evidence of the existence of an ERISA plan, it would be interesting to see the context in which this statement was given. If you can provide any of those cases to me, on p. 9, I would appreciate it. Also, if the employee bought the individual policy before coming to the employer, it would seem that the plan would not be an ERISA plan according to New Eng. v. Baig, distinguishing cases where there was a direct contractual arrangement between the insurer and the employer establishing the plan (as in the case you provided), or where direct payment of premiums were made by the employer to the insurer, as in Baig. Don Levit

g8r: Thanks for providing this Rev. Rul. It seems that according to the RR, those who elect cash pay taxes, because the employers did not verify the employees actually had their own policies. If the employers did do this, then Section 125 would not apply, but the employee would not report the premiums paid by the employer as income, right? Also, do you think the employer could selectively choose to reimburse those employees who certify other coverage, or. would they have to reimburse all who certify other coverage? Don Levit

KJohnson: Would we be able to look at the taxation simply as the employer paying for an accident and health policy? I get sections 105 and 106 confused as I get older. Could the employer selectively choose which premiums to pay for, from the HRA, depending on which employees brought individual policies to the employer, without creating an ERISA plan? Don Levit

KJohnson: Thanks for your reply. Reimbursement of the premium would not be employer-provided coverage, in my opinion, just because there is an employer-employee relationship that qualifies under Code Section 106. The reason being that the employer must do something in addition to merely paying premiums to demonstrate this is an ERISA plan. A couple of excerpts from Hansen v. Continental Insurance Co. "The fact that a plan does not meet the DOL regulations for exclusion from ERISA does not mean that the plan is necessarily covered by ERISA. Kidder, 932 F.2d at 351-52; Gahn, 926 F.2d at 1452. Put another way, the plans excluded from ERISA coverage by the DOL regulations (you cited) are not the only plans not covered by ERISA. As the Eleventh Circuit noted, an employer or employee organization, ... and not individual employees must establish or maintain the plan, fund, or program, Donovan, 688 F.2d at 1373. If an employer does no more than purchase insurance for her employes, and has no further involvement with the collection of premiums, administration of the policy, or submission of claims, she has not established an ERISA plan. Kidder, 932 F.2d at 353; Memorial Hospital 904 F.2d at 242. I agree with your points about HRAs being able to reimburse for individual premiums. While the HRA is an ERISA plan, would it not be exempt from state regulation if it was merely used to pay individual premiums? I don't think that HSAs can purchase individual policies, except for COBRA purposes, and for periods of unemployment. Your observation about HSAs not being ERISA plans was very astute. I think the same logic can be used for employer contributions to pay premiums for employees' individual policies without being considered ERISA plans. Don Levit

K Johnson: Thanks for your reply. Employers who pay all of a premium may have established an ERISA plan, if the employer has endorsed the coverage. Paying of premiums is only one indication the employer has endorsed the policy. I am consulting with the Texas Department of Insurance about this very issue, which is the subject of a recently published bulletin. Instead of this being reviewed on a case-by-case basis, the bulletin states that any premiums paid by an employer through an HRA makes the policy an ERISA plan. Thus, the insurer must offer the individual policy to all employees, without proving health. I understand the intention of the bulletin, which is to protect the group market from adverse selection. While possibly a good intention, their reasoning is flawed, in my opinion. One reason comes from a fifth circuit case, Hansen v.Continental Ins. Co., 940F.2d 971 (5th Cir., 1991). If you are unable to get it, I would be happy to fax it to you. Also, I can provide the link for the Texas Department of Insurance bulletin. Don Levit

Lisa: I received an e-mail today from Roy Ramthun, who is one of the primary authors of the HRA legislation. He agrees with my assessment. I also have located a Fifth Circuit court case, which applies for Texas. I sent the case to Bill Bingham at the Texas Department of Insurance, and he has not replied back. The case is Hansen v. the Continental Insurance Company, 940F.2D 971, 1991. "The fact that a plan exists, however, does not necessarily mean the plan is an ERISA plan. As the Eleventh Circuit noted, an employer or employee organization... and not individual employees... must establish or maintain the plan, fund, or program. Donovan, 688 F.2d at 1373. To determine whether an employer established or maintained an employee benefit plan, the court should focus on the employer and its involvement with the administration of the plan., Gaha, 926F.2d at 1452. Thus, if an employer does no more than purchase insurance for her employees, and has no further involvement with the collection of premiums, administration of the policy, or submission of claims, she has not established an ERISA plan. Kidder, 932 F.2dat 353; Memorial Hospital, 904 F.2dat 242. As this Court explained in one of its early cases on the subject, considering the history, structure, and purposes of ERISA, we cannot believe that that Act regulates bare purchases of health insurance where...the purchasing employer neither directly or indirectly owns, controls,administers, or assumes responsibility for the policy or its benefits. Taggart Corp. v. Life & Health Benefits Admin.,617 F.2d 1208, 1211 (5th Cir. 1980).

Vebaguru: To summarize the purpose of the MEWA amendment, the DOL booklet entitled "MEWAs" provides a good summary. "Prior to 1983, a number of states attempted to subject MEWAs to State insurance law requirements, but were frustrated in their regulatory and enforcement efforts by MEWA-promoter claims of ERISA-plan status and Federal preemption. Recognizing that it was both appropriate and necessary for states to be able to enforce State insurance laws, the Congress amended ERISA in 1983, 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. As a result of the 1983 MEWA amendments to ERISA, states are now free to regulate MEWAs. The Department has expressed the view that any state insurance law which sets standards requiring the maintenance of specified levels of reserves and specified levels of contributions in order for a MEWA to be able to pay benefits will generally not be 'inconsistent' with the provisions of Title 1. To cite a Suprteme Court case, I turn to Inter-Modal Rail Employees Ass'n. v. Atchison, Topeka, & Santa Fe, 520 U.S. 510,515. Reasoning that Congress specifically provided employers the freedom to amend or terminate welfare benefit plans in order to encourage the voluntary adoption of such plans, since Congress knew that the inability to amend such plans in light of unforeseen events might deter employers from adopting such plans. Could you cite a Supreme Court case which will explain in a bit more detail your concerns? Don Levit

Vebaguru: I agree with you that many MEWAs have been nothing more than shams. The vast majority of the problems occurred because the MEWAs were unlicensed; not because their structure itself was flawed. The reason the MEWA Amendment was passed was, primarily, due to the confusion as to whether or not states had the authority to regulate these entities. The Congress clearly said that the states did have regulatory authority. The primary objective of that authortity, as stated in the law, was to ensure the timely payment of benefits. Nothing in federal law states that MEWAs are to be discouraged. Congress could have outlawed them in 1983, but, instead wisely allowed states to regulate them, so these financial fiascoes were less likely to occur. States without MEWA laws close down unlicensed MEWAs. California is one state that passed a law in 1995 banning all future MEWAs from being formed. This law, in my opinion, is illegal, because California has only the authority to regulate MEWAs. Only Congress can outlaw MEWAs, as they are clearly provided for in ERISA, and as I stated before, they were not banned by Congress in 1983. The Supreme Court rulings encourage the formation of employer benefit plans, of which MEWAs are one type. The Texas MEWA statute has specific reserve requirements. In Art. 3.95-8 it states in © (d) "on application of a MEWA, the commissioner may waive or reduce the requirement for aggregate stop-loss coverage and the amount of reserves required on a determination that the interests of the participating employers and employees are adequately protected." Don Levit

Folks: I came across a case today in which an organization named Coalition America was mentioned. Apparently, CA functions as some type of clearinghouse (sort of like The Connector in MA) in which it has various insurers as clients. For example, assume CA does business with insurers A and B. Then every provider who has a contract with insurer A also has a contract with insurer B, and vice versa. Anyone familiar with this type of practice? Don Levit

Scott: To my knowledge, this would be okay, even under the rules for a VEBA. I can see where you would be concerned, in that the VEBA, as a non commercial insurer, has even stricter fiduciary responsibilities than those of a commercial insurer. It must be extra careful to keep administrative costs reasonable, and benefits higher for the participants. Don Levit

Ashley: Thanks for providing the link. I will take a look at it. If the reserves and surplus are "excessive," then there may be some fiduciary violations to the participants, because premiums may be higher than necessary in order to pay back the (excessive) loan, and benefits would be less due to the excess. A VEBA has much more stringent responsibilities as a fiduciary to the participants, than a commercial insurer would have to its policyholders. Excessive UBIT could be viewed as a fidiciary violation, as well as my prior explanation regarding higher premiums and lower benefits. While most states do not have maximum surplus laws for commercial insurers, this would not apply, in my opinion, to self-funded VEBAs. Of course, many regulators that I have spoken with are concerned, primarily, with enforcing state laws, and have little interest in how they may conflict with federal laws. Because the VEBA is funded under a 501©(9), for example, it is supposed to offer benefits that are not provided in the commercial market, in order to "earn" its tax exempt status. This can provide the necessary breathing room to provide more innovative plans. Obtaining a financial assessment seems like a great idea. You will have to have an actuary's opinion anyway, in order to satisfy (at least most) Department of Insurances.

Vebaguru: You are correct about states that do not have MEWA laws simply applying the state laws, as if the insurer were a full-blown commercial insurer. However, this strategy , while legal, is illogical, as well as actuarially unsound. These are not my words, but the feeling of the NAIC, as well as the Lewin Group, a well-respected actuarial firm. States that pretend that MEWAs have similar liabilities as commercial insurers do have discretion in how those state laws are applied. Typically, the commissioners have the right to adjust the requirements, as they see fit for the public interest. Also, the 1983 MEWA amendment which specifically allowed states to regulate MEWAs says that states may apply any and all insurance laws to ensure the timely payment of benefits. It does not say that states must apply all laws, and that the laws they do apply should be geared toward the financial integrity of the MEWA. The laws as they are applied are not to discourage the formation of MEWAs, as employers are encouraged through ERISA, as well as Supreme Court rulings, to form benefit plans. Don Levit

Ashley: Typically, settlor functions are those activities that take place before the trust creation, as well as those activities after the trust is created that relate to business or administrative decisions. Settlor decisions have little or no relation to fiduciary responsibilities. Could you explain to us what PTE 80-26 is? Since the state applied boiler plate rules for reserves and surplus, you can be assured the general requirements do not fit what would be needed for your plan. These are not my words. Rather, this is the opinion of the NAIC, as well as the Lewin Group, a well respected actuarial firm. With stop-loss insurance, I assume the reserve and surplus requirements were lowered, as opposed to a self insured plan without stop-loss insurance. Do the MEWA reserve laws account for that? What state are you in? By the way, if the reserve and surplus requirements are excessive, the VEBA will have Unrelated Business Income Tax to pay. If that occurs, the reserve and surplus laws may be preempted to lower or eliminate the UBIT. If that is the case, a VEBA may be an excellent choice. Don Levit

Ashley: I gather that the association is in only one state, correct? What type of trust are you using; is it a VEBA? Are the employers satisfied with the reserves and surplus required by the state laws? Were the amounts required according to the laws as written for MEWAs, or, were the requirements the same as for commercial insurers? In other words, were the reserve and surplus requirements decided after reviewing the MEWA's liabilities, or did the Department of Insurance use the "boiler plate" requirements? I gather the MEWA is partially self insured, correct? Don Levit