New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on October 9, 2001, representing the position of the New York State Insurance Department.

Re: Self-Funded Church Plan, Continuation Requirements

Issues:

1. Does the Self-Funded Health Benefit Plan operated by the church organization in question have to comply with the requirements of the New York Insurance Law?

2. Is the Plan a "group policy or contract" within the meaning of New York Insurance Law §§ 3221(a) & (m) and 4305(e) (McKinney 2000)?

3. Is the requirement for continuation benefits among those that are applicable to the Plan?

4. Are the continuation requirements under New York law comparable to those imposed by the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)?

5. If the Plan were to amend its operations so that employee contributions were no longer required, would it still be subject to the New York Insurance Law?

6. If the Plan were to opt to become subject to the Employee Retirement Income Security Act (ERISA), would it still be subject to the New York Insurance Law?

7. Is the Plan subject to the restrictions and limitations imposed by New York Insurance Law §3231(a) & (h) (McKinney 2000) on insurers functioning as administrators and furnishing stop loss coverage?

Conclusion:

1. Under the facts as presented, the Plan is subject to the requirements of the New York Insurance Law.

2. The Plan would be considered by this Department to be a "group policy" within the meaning of New York Insurance Law §3221. Since the Plan is not a Health Service Corporation, it would not be considered to be within the purview of New York Insurance Law §4305.

3. Continuation benefits are among those that the Plan would have to provide pursuant to New York Insurance Law §3221(m).

4. The continuation requirements under the New York Insurance Law are similar to but not identical with those provided under COBRA.

5. If employee contributions were no longer required, the Plan would be exempt from the New York Insurance Law.

6. If the Plan were to opt to be subject to ERISA, it would no longer be subject to the New York Insurance Law.

7. Because of the size of the Plan in question, it is not subject to those restrictions.

Facts:

An organization is a not-for profit organization that is within the definition of "church organization" in the Internal Revenue Code, 26 U.S.C.A. §3121(w)(3)(B) (West 2000) and contributions to which are deductible in accordance with the Internal Revenue Code, 26 U.S.C.A. §501(c)(3). It maintains a Plan to reimburse eligible employees and volunteers, who number in excess of 500, the bulk of whom are domiciled in New York, for amounts expended for health care for themselves and their dependents. The Plan is administered by a third party administrator and pays benefits from funds provided by constituent churches and affiliated entities. While the bulk of the Plan’s funds are provided by the constituent churches and affiliated entities from their own internally generated funds, some contribution by eligible employees and volunteers is required.

Although the Plan is self-funded, it has purchased reinsurance to reimburse the Plan for amounts expended by the Plan on a particular claim in excess of a specified amount and for amounts expended by the Plan above a specified aggregate for any Plan year.

While the Plan does permit former employees and volunteers to continue coverage after termination of active service, at the same cost as if they had continued in active service, the period of time that such a continuation is available is dependent upon the length of previous active service. The continuation period may, in some instances, be less than would be required under either COBRA or the New York Insurance Law.

Analysis:

New York Insurance Law §3221(m), dealing with policies of commercial insurers, provides, in pertinent part:

A group policy providing hospital, surgical or medical expense insurance for other than accident only shall provide that if all or any portion of the insurance on an employee or member insured under the policy ceases because of termination of employment or membership in the class or classes eligible for coverage under the policy, such employee or member shall be entitled without evidence of insurability upon application to continue his hospital, surgical or medical expense insurance for himself or herself and his or her eligible dependents, subject to all of the group policy's terms and conditions applicable to those forms of benefits and to the following conditions: . . .

(2) (A) An employee or member who wishes continuation of coverage must request such continuation in writing within the sixty day period following the later of: (i) the date of such termination; or (ii) the date the employee is sent notice by first class mail of the right of continuation by the group policyholder . . .

(3) An employee or member electing continuation must pay to the group policyholder or his employer, but not more frequently than on a monthly basis in advance, the amount of the required premium payment, but not more than one hundred two percent of the group rate for the benefits being continued under the group policy on the due date of each payment. . . .

(4) . . . continuation of benefits under the group policy for any person shall terminate at the first to occur of the following: (A) The date eighteen months after the date the employee’s . . . benefits under the policy would otherwise have terminated because of the termination of employment . . .

(6) This subsection shall not be applicable where a continuation benefit is available to the employee or member pursuant to Chapter 18 of the Employee Retirement Income Security Act or Chapter 6A of the Public Health Service Act.

New York Insurance Law §4305(e) contains a similar requirement applicable to contracts issued by Health Service Corporations, usually Blue Cross/Blue Shield Plans, and Health Maintenance Organizations.

COBRA, Pub. L. No. 99-272 required that group health plans provide continuation coverage upon the occurrence of specified qualifying events. This requirement has been codified as part of ERISA at 29 U.S.C.A. §1161 et seq. (West 2000).

The required continuation coverage is specified in 29 U.S.C.A. §1162, which provides in pertinent part:

The term ‘continuation coverage’ means coverage under the plan which meets the following requirements: (1) Type of benefit coverage. The coverage must consist of coverage which, as of the time the coverage is being provided, is identical to the coverage provided under the plan to similarly situated beneficiaries under the plan with respect to whom a qualifying event has not occurred. …

(2) Period of Coverage. The coverage must extend for at least the period beginning on the date of the qualifying event and ending not earlier than . . . the date which is 18 months after the date of the qualifying event. . . .

(3) Premium requirements. The plan may require payment of a premium for any period of continuation coverage, except that such premium--(A) shall not exceed 102 percent of the applicable premium for such period, and (B) may, at the election of the payor, be made in monthly installments.

Those plans that are subject to ERISA are described in 29 U.S.C.A. §1003 (West 2000), which provides in subsection (b) thereof:

(b) The provisions of this title shall not apply to any employee benefit plan if- . . .(2) such plan is a church plan with respect to which no election has been made under section 410(d) of the Internal Revenue Code of 1986 . . . .

A church plan is defined, 29 U.S.C.A. §1002(33) (West 2000), in pertinent part:

(A) The term ‘church plan’ means a plan established and maintained . . . for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 of the Internal Revenue Code of 1986.

(B) The term ‘church plan’ does not include a plan- … if less than substantially all of the individuals included in the plan are individuals described in subparagraph (A) or in clause (ii) of subparagraph (C) (or their beneficiaries).

(C) For purposes of this paragraph- . . .(ii) The term employee of a church or a convention or association of churches includes--(I) a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry, regardless of the source of his compensation; (II) an employee of an organization . . . which is exempt from tax under section 501 of the Internal Revenue Code of 1986 and which is controlled by or associated with a church or a convention or association of churches; and (III) an individual described in clause (v). . . . (v) If an employee who is included in a church plan separates from the service of a church or a convention or association of churches . . . the church plan shall not fail to meet the requirements of this paragraph merely because the plan-(I) retains the employee's accrued benefit or account for the payment of benefits to the employee or his beneficiaries pursuant to the terms of the plan; or (II) receives contributions on the employee's behalf after the employee's separation from such service, but only for a period of 5 years after such separation, . . . .

Internal Revenue Code §410(d) (West 2000) allows a church plan to make an irrevocable election to be subject to ERISA.

Since the organization’s plan has not made the election pursuant to Internal Revenue Code §410(d), it is not subject to ERISA requirements, including COBRA continuation

requirements. Benefit plans that are not subject to ERISA are, except for church plans, subject to state insurance laws. 29 U.S.C.A. §1144(b)(2)(A) (West 2000) There is, however, a special rule, 29 U.S.C.A. §1144a (West 2000), applicable to church plans, which provides in pertinent part:

(b) State insurance law. A State insurance law described in this subsection is a law that—(1) requires a church plan . . . to be licensed; . . .

(d) Enforcement authority. Notwithstanding any other provision of this section, for purposes of enforcing provisions of State insurance laws that apply to a church plan that is a welfare plan, the church plan shall be subject to State enforcement as if the church plan were an insurer licensed by the State.

New York Insurance Law §1101(a) (McKinney 2000) provides, in pertinent part:

In this article: (1) ‘Insurance contract’ means any agreement or other transaction whereby one party, the ‘insurer’, is obligated to confer benefit of pecuniary value upon another party, the ‘insured or ‘beneficiary’, dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event. (2) ‘Fortuitous event’ means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.

Insurance Law §1102 (McKinney 2000) proscribes the doing of an insurance business in New York unless the insurer is either licensed or exempt from licensure.

New York Insurance Law §1108(e) (McKinney 2000) exempts from the requirement of licensure:

Any corporation, organized under the laws of any state, solely to provide gratuitously for support or relief of the priests, clergy or ministers of any religious denomination, or their dependents, is exempt from all provisions of this chapter . . . (emphasis added).

Since the organization requires contributions toward the plan from its employees, it does not provide the plan benefits gratuitously and, thus, is not entitled to the exemption provided by New York Insurance Law §1108(e). Accordingly, the organization would ordinarily have to be licensed by this Department and provide the continuation benefit mandated by New York Insurance Law §3221(m). If the Plan were to provide minimum required benefits, including a continuation requirement, given the prescriptions of ERISA, this Department would not penalize the Plan for not being licensed.

The organization has purchased stop loss insurance. It has long been the position of this Department that stop loss insurance policies issued to self-funded welfare benefit plans providing health coverage are considered to be accident & health insurance, not reinsurance, and must meet New York’s minimum benefit requirements. The characterization of stop loss insurance was formally conveyed to the insurance industry by Circular Letter No. 7 of 1982, issued on April 13, 1982, and codified in New York Insurance Law §4237-a (McKinney 2000). In addition, on June 27, 1985, this Department issued Actuarial Information Letter No. 5 that provided, inter alia:

The insurer [issuing the stop loss policy] must undertake to ensure that statutorily mandated benefits be covered under the employer’s plan.

This provision, among other requirements in New York law, was invalidated as being contrary to ERISA in Travelers Insurance Company v. Cuomo, 14 F.3d 708 (1993). While much of the holding of Travelers was appealed and the holding reversed in New York State Conference of Blue Cross Plans v. Travelers Insurance Company, 514 U.S. 645 (1995), the holding on Actuarial Letter No. 5 was not appealed. Therefore, while Actuarial Letter No. 5 is not effective for most stop loss policies, it was not invalidated in so far as it affected non-ERISA plans. Accordingly, it is a condition precedent for the insurer issuing the stop loss policy to the organization to assure that its insured, the Plan, provides, inter alia, the New York required continuation benefit.

If the plan were to discontinue employee contributions, it would, in accordance with New York Insurance Law §1108(e), no longer be required to be licensed by this Department. Although, as an exempt insurer, it would no longer directly be subject to the continuation requirements of New York Insurance Law §3221(m), the obligation on the stop loss insurer to assure that continuation benefits are provided would not be eliminated.

If the plan were to make the election allowed by Internal Revenue Code §410(d), it would become subject to ERISA and, pursuant to ERISA, 29 U.S.C.A. §1144(a), this Department would be divested of jurisdiction. The plan, however, would then have to provide COBRA continuation benefits.

New York Insurance Law §3231(a) and (h) (McKinney 2000) provide, in pertinent part:

(a) No individual health insurance policy and no group health insurance policy covering between two and fifty employees or members of the group exclusive of spouses and dependents, hereinafter referred to as a small group, providing hospital and/or medical benefits, including medicare supplemental insurance, shall be issued in this state unless such policy is community rated and, notwithstanding any other provisions of law, the underwriting of such policy involves no more than the imposition of a pre-existing condition limitation as permitted by this article. . . .

(h)(1) Notwithstanding any other provision of this chapter, no insurer, subsidiary of an insurer, or controlled person of a holding company system may act as an administrator or claims paying agent, as opposed to an insurer, on behalf of small groups which, if they purchased insurance, would be subject to this section. No insurer, subsidiary of an insurer, or controlled person of a holding company may provide stop loss, catastrophic or reinsurance coverage to small groups which, if they purchased insurance, would be subject to this section.

The above requirements were enacted as part of a comprehensive reform of the availability of accident and health insurance. The second cited requirement was instituted to discourage employers who would be "small groups" from avoiding the requirements of the statute by becoming self-funded. Since the organization in question has a number of employees well in excess of 50, the above stricture would not be applicable to it.

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.

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