Self-Insured MEWAs

[EBECatty]

My understanding is that, for MEWA definition purposes, the DOL follows the common control rules, including an 80% ownership requirement for a subsidiary, although the Form M-1 filing exemptions apply down to 25% ownership. My further understanding is that the DOL will not consider an ASG to create a single-employer plan for MEWA definitional purposes unless they also meet the requisite ownership requirements.

I also understand that several (or many?) states' laws follow this definition to determine when a MEWA exists that may be subject to state regulation.

In other words, a subsidiary owned 70% by a parent would still give rise to a MEWA for DOL and state-law purposes (but would be excused from filing a Form M-1).

I'm interested in others' practical experience with how employers address this issue, particularly as a matter of state law with self-insured group health plans:

1. Whether intentionally or inadvertently, they ignore the arrangement's status as a MEWA. My guess is this occurs inadvertently somewhat regularly. Are state regulators more lenient on good-faith situations like this (as opposed to the problematic self-insured MEWAs that have made headlines)?
2. They follow all state law rules governing self-insured MEWAs, including registration, filings, etc. and continue the self-insured MEWA as such.
3. They don't cover the subsidiary and find another group health plan alternative (e.g., fully insured plan covering the subsidiary's employees).

Would appreciate any insight.  

[Brian Gilmore]

I don't have answers to all your questions, other than that's a particularly dangerous situation to be in.  I would want to unwind that arrangement asap to avoid ongoing potential exposure.

I do have a short overview of this issue on slides 7-8 here if it's helpful: ABD Office Hours Webinar: M&A for H&W Employee Benefit Plans

The most common situation where I've see this issue arise recently is with so-called "TSA" (transitional services agreement) coverage.  The TSA often provides that seller permits buyer's employees to remain in seller's health plan for a transitional period post-close.  Many M&A attorneys presume this does not present an issue without consulting ERISA counsel.

One quick question of you:

On 9/20/2021 at 12:57 PM, EBECatty said:

In other words, a subsidiary owned 70% by a parent would still give rise to a MEWA for DOL and state-law purposes (but would be excused from filing a Form M-1).

I'm not following what exemption from the Form M-1 filing requirement you're relying on here.

[Luke Bailey]

4 hours ago, Brian Gilmore said:

On 9/20/2021 at 2:57 PM, EBECatty said:

In other words, a subsidiary owned 70% by a parent would still give rise to a MEWA for DOL and state-law purposes (but would be excused from filing a Form M-1).

I'm not following what exemption from the Form M-1 filing requirement you're relying on here.

Brian, EBECatty is referring to the 2020 M-1 instructions, page 2, lower right-hand column:

Quote

In addition, in no event is reporting required by the administrator of an entity that meets the definition of a MEWA or ECE because one or more of the following is true: (1) It provides coverage to the employees of two or more trades or businesses that share a common control interest of at least 25 percent at any time during the plan year, applying principles similar to the principles applied under section 414(c) of the Internal Revenue Code.

Re the basic question, I have not discussed the < 80% ownership question with a state insurance department, but I have sought informal advice from the Texas Dept. of Insurance regarding the Affiliate Service Group MEWA (e.g., with incorporated partners in a law firm) as well as the "transition services agreement" issue following an M&A transaction (which is another M-1 filing exception for the 410(b)(6)(C) period) and was told that TDI was aware that in these situations a MEWA existed, but it was not an enforcement priority for them.

[Brian Gilmore]

Thanks, Luke.  Good to know.  I wasn't aware of that common-but-not-common-enough ownership M-1 filing exemption.

Also interesting re the Texas DOI mindset here.  I don't believe Texas is one of the handful of states that prohibit (or severely restrict) self-insured MEWAs, so it's possible they're a bit more lax than other states.  A rare ERISA situation where state DOI interpretations of self-insured plan law will all be so important because of the exception from preemption for MEWAs.

[EBECatty]

Thank you both for your thoughts.

I've encountered the issue in TSAs in M&A transactions as well, but those I've dealt with have been a few weeks/months at most, so everyone involved felt the risk was manageable. It also seems odd that you could have a single employer ASG for many ERISA purposes, but not for MEWAs.

Interesting to know Texas takes a less aggressive approach; based on the seeming lack of any publicly available enforcement information, I have to assume many other state regulators aren't actively looking for these types of arrangements either. 

Many states require self-insured MEWAs to become fully licensed in the state as a health insurance company, which strikes me as wildly inefficient in the situations we're discussing.

Aside from putting each unrelated entity into its own fully-insured plan, which also seems inefficient given the circumstances, I don't see another great option.

[Luke Bailey]

13 hours ago, EBECatty said:

based on the seeming lack of any publicly available enforcement information, I have to assume many other state regulators aren't actively looking for these types of arrangements either. 

That has been my conclusion, EBECatty.

13 hours ago, Brian Gilmore said:

I don't believe Texas is one of the handful of states that prohibit (or severely restrict) self-insured MEWAs, so it's possible they're a bit more lax than other states. 

Brian, I think if you had the classic entrepreneur putting together a self-insured MEWA with hundreds of employees that started to slow-pay claims, they'd be right in there with the DOL. At least I hope they would! The Texas Insurance Code has the usual complement of prohibitive requirements (solvency, audits, etc.) for self-insured MEWAs.

[EBECatty]

Following up here, any thoughts on whether the parent company could hire the subsidiary's employees directly then assign (lease, second, etc.) them to the subsidiary, similar to how one party to a joint venture may second its employees to the JV but retain them as employees for employment/benefits purposes?

It seems the biggest hurdle would be ensuring the parent has enough control to remain a common-law employer of those employees, but I would think in a majority-owned subsidiary situation (say, 70-75%) it wouldn't be that much of a stretch as long as you had the right language, oversight, and control. 

[Brian Gilmore]

Yeah I think that works.  In that case you don't even need the parent to be common law employer.  That's not realistic anyway since the sub will almost certainly be directing and controlling the duties of those workers.

It would just be like any outside staffing firm arrangement (or PEO).  In all those situations, the worksite employer is generally always going to be the common law employer.  But as long as the staffing firm is the employer of record, we don't have an issue.  It's still a single employer plan.

Just don't forget to follow the ACA employer mandate rules to ensure the sub is treated as having offered coverage through the parent: https://www.theabdteam.com/blog/aca-employer-mandate-and-outside-staffing-firms-2/