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

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on January 4, 2006 representing the position of the New York State Insurance Department.

Re: Employee Retirement Income Security Act (ERISA), Multiple Employer Welfare Arrangement (MEWA)

Issues

1. If a parent corporation owns less than 80% of the stock of some subsidiaries, would a self-funded arrangement to provide health benefits to employees covering the corporation and all of its subsidiaries constitute a MEWA?

2. If the arrangement were to constitute a MEWA, what forms would be required to be filed by the corporation with the New York Insurance Department?

Conclusions

1. Such an arrangement would not, solely because the parent corporation owns less than 80% of the stock of a subsidiary, render the arrangement a MEWA.

2. If the arrangement constituted a MEWA, the corporation would have to be licensed as an insurer.

Facts

One of the inquirer’s firm’s clients self-funds its medical plan covering employees of the parent corporation and of its subsidiaries and has purchased stop-loss insurance. While the parent corporation owns in excess of 80% of the stock of most subsidiaries, there are subsidiaries where the ownership interest is more than 50% and less than 80%.

Analysis

It is surmised that the aggregate number of employees covered under the inquirer’s client’s program is in excess of 50. Accordingly, the provisions of New York Insurance Law §§ 3231(h)(1) (McKinney 2000 and 2006 Supplement), dealing with policies of commercial health insurers, and 4317(e)(1) (McKinney 2000 and 2006 Supplement), dealing with contracts of not-for-profit health insurers and all Health Maintenance Organizations, which prohibit the issuance of stop-loss policies and contracts to small groups, is not implicated.

New York Insurance Law § 4235(c)(1) (McKinney 2000 and 2006 Supplement) establishes those groups eligible to purchase group health insurance. New York Insurance Law § 4235(c)(1)(A) authorizes:

A policy issued to an employer . . . which employer . . . shall be deemed the policyholder, insuring with or without evidence of insurability satisfactory to the insurer, employees of such employer, and insuring, except as hereinafter provided, all of such employees or all of any class or classes thereof determined by conditions pertaining to the employment or a combination of such conditions and conditions pertaining to the family status of the employee, for insurance coverage on each person insured based upon some plan which will preclude individual selection. . . . The premium for the policy shall be paid by the policyholder, either from the employer's funds, or from funds contributed by the insured employees, or from funds contributed jointly by the employer and employees. If all or part of the premium is to be derived from funds contributed by the insured employees, then such policy must insure not less than fifty percent of such eligible employees or, if less, fifty or more of such employees.

New York Insurance Law § 4235(d)(1) defines employee:

In this section, for the purpose of insurance hereunder: ‘employees’ includes the officers, managers, employees and retired employees of the employer and of subsidiary or affiliated corporations of a corporate employer, and the individual proprietors, partners, employees and retired employees of affiliated individuals and firms controlled by the insured employer through stock ownership, contract or otherwise; "employees" may be deemed to include the individual proprietor or partners if the employer is an individual proprietor or a partnership; and "employees" as used in subparagraph (A) of paragraph one of subsection (c) hereof may also include the directors of the employer and of subsidiary or affiliated corporations of a corporate employer. (emphasis added)

New York Insurance Law § 107 (McKinney 2000 and 2003 Supplement) defines, for the purposes of the New York Insurance Law,:

(16) ‘Control’. Except for the purposes of article fifteen of this chapter, ‘control’, including the terms ‘controlling’, ‘controlled by’ and ‘under common control with’, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an institution, whether through the ownership of voting securities, by contract or otherwise.

(40) ‘Subsidiary means an institution controlled, directly or indirectly, by another institution . . . . ‘Parent corporation’ means an institution . . . that, directly or indirectly, controls another institution. For the purposes of the definitions in this subsection: (A) an institution is conclusively presumed to be controlled by an institution or retirement system that, directly or indirectly, with power to vote, owns, controls or holds a majority of the outstanding voting securities of such institution . . . .

Based upon the facts the inquirer presented, had the inquirer’s client’s health plan opted to be insured, it would have qualified as an employer-employee plan under New York Insurance Law § 4235(c)(1)(A).

The provision of health benefits to employees by an employer under a self-funded plan would, in the absence of ERISA, 29 U.S.C.A. §§ 1001 et seq. (West 1999 and 2005 Supplement) be considered the doing of an insurance business within the meaning of New York Insurance Law § 1101 (McKinney 2000 and 2006 Supplement) and, unless otherwise exempted under the Insurance Law, require a license from this Department. New York Insurance Law § 1102 (McKinney 2000 and 2006 Supplement). However, since ERISA provides, 29 U.S.C.A. § 1122(b)(2)(B) (West 1999), that employer welfare benefit plans, as defined in 29 U.S.C.A. § 1002(1) (West 1999), (which definition encompasses plans such as those of the inquirer’s client) are not to be considered as insurers under state law, this Department may not require such self-funded plan to be licensed.

Congress has, however, provided an exception for MEWAs to the ERISA exemption from state laws for employee welfare benefit plans. 29 U.S.C.A. § 1144(b)(6) (West 1999):

(A) Notwithstanding any other provision of this section-- (i) in the case of an employee welfare benefit plan which is a multiple employer welfare arrangement and is fully insured . . . any law of any State which regulates insurance may apply to such arrangement to the extent that such law provides-- (I) standards, requiring the maintenance of specified levels of reserves and specified levels of contributions, which any such plan, or any trust established under such a plan, must meet in order to be considered under such law able to pay benefits in full when due, and (II) provisions to enforce such standards, and (ii) in the case of any other employee welfare benefit plan which is a multiple employer welfare arrangement, in addition to this title, any law of any State which regulates insurance may apply to the extent not inconsistent with the preceding sections of this title.

. . .

(D) For purposes of this paragraph, a multiple employer welfare arrangement shall be considered fully insured only if the terms of the arrangement provide for benefits the amount of all of which the Secretary determines are guaranteed under a contract, or policy of insurance, issued by an insurance company, insurance service, or insurance organization, qualified to conduct business in a State.

A MEWA is defined, 29 U.S.C.A. § 1002(40):

The term ‘multiple employer welfare arrangement’ means an employee welfare benefit plan, or any other arrangement . . . which is established or maintained for the purpose of offering or providing any benefit described in paragraph (1) to the employees of two or more employers . . . .

(B) For purposes of this paragraph-- (i) two or more trades or businesses, whether or not incorporated, shall be deemed a single employer if such trades or businesses are within the same control group, (ii) the term "control group" means a group of trades or businesses under common control, (iii) the determination of whether a trade or business is under "common control" with another trade or business shall be determined under regulations of the Secretary applying principles similar to the principles applied in determining whether employees of two or more trades or businesses are treated as employed by a single employer under section 4001(b) except that, for purposes of this paragraph, common control shall not be based on an interest of less than 25 percent, . . . .

Section 4001(b)(1) of ERISA, 29 U.S.C.A. § 1301(b) (West 1999), referenced in 29 U.S.C.A. § 1002(40)(B), deals with coverage of the Pension Benefit Guaranty Corporation (PBGC), and provides:

An individual who owns the entire interest in an unincorporated trade or business is treated as his own employer, and a partnership is treated as the employer of each partner who is an employee within the meaning of section 401(c)(1) of the Internal Revenue Code of 1986. For purposes of this title, under regulations prescribed by the corporation [PBGC], all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer and all such trades and businesses as a single employer. The regulations prescribed under the preceding sentence shall be consistent and coextensive with regulations prescribed for similar purposes by the Secretary of the Treasury under section 414(c) of the Internal Revenue Code of 1986

29 C.F.R. § 4001.3(b)(2) (1996), defining terms to be used by the PBGC, provides:

Persons are under common control if they are members of a ‘controlled group of corporations’, as defined in regulations prescribed under section 414(b) of the [Internal Revenue] Code, or if they are ‘two or more trades or businesses under common control’, as defined in regulations prescribed under section 414(c) of the [Internal Revenue] Code.

Section 414 of the Internal Revenue Code, 26 U.S.C.A. § 414 (West 2002) provides, in pertinent part:

(b) Employees of controlled group of corporations. . . . [A]ll employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a)) . . . shall be treated as employed by a single employer. . . .

(c) Employees of partnerships, proprietorships, etc., which are under common control. . . . [A]ll employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer. . . .

Section 1563 of the Internal Revenue Code, 29 U.S.C.A. § 1563 (West 2002) provides:

Controlled group of corporations. For purposes of this part, the term ‘controlled group of corporations’ means any group of-- (1) Parent-subsidiary controlled group. One or more chains of corporations connected through stock ownership with a common parent corporation if-- (A) stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of each of the corporations . . . is owned . . . by one or more of the other corporations;

Neither the Secretary of Health & Human Services, as authorized by ERISA, nor the Secretary of the Treasury, as authorized by the Internal Revenue Code, have further defined control or control group within the context of ERISA.

While it could be argued that the preceding statutes, taken together, compel the conclusion that inclusion in a plan of a subsidiary where less than 80% of the stock is owned renders the entire plan a MEWA, such a conclusion would mean that the last clause of 29 U.S.C.A. § 1002(40) was mere surplusage and of no import.

In addition, the provisions governing MEWAs were added by Congress, Public Law 97-473 (1983), to grant states some modicum of authority over arrangements that did not fall within traditional arrangements, such as single employer plans, trade association plans, or labor union plans. The legislative history of the MEWA amendment to ERISA indicates it was intended to eliminate an exemption that had been taken advantage of by "scam artists":

It has come to our attention, through the good offices of the National Association of Insurance Commissioners, that certain entrepreneurs have undertaken to market insurance products to employers and employees at large, claiming these products to be ERISA covered plans. For instance, persons whose primary interest is in the profiting from the provision of administrative services are establishing insurance companies and related enterprises. . . . They are no more ERISA plans than any other insurance policy sold to an employee benefit plan.

House Committee on Education and Labor, Activity Report of Pension Task Force (94th Congress 2d Session, 1977) quoted in Cong. Rec. (daily ed. May 21, 1982) (statement of Rep. Erlenborn).

Since the arrangement entered into by the inquirer’s client was not one of those contemplated by Congress when it granted limited jurisdiction over MEWAs to states, and based upon the complete language of 29 U.S.C.A. § 1002(40), this Department would not consider the inquirer’s client’s arrangement to be a MEWA, solely because it includes a subsidiary in which the ownership interest is between 50% and 80%.

This conclusion is bolstered when considering that the regulation of the Secretary of Labor, in determining which entities have to register as MEWAs, concludes that the principles of 26 U.S.C.A. § 414 are consistent with only requiring an ownership interest of 25%. 29 C.F.R. 2520.101-2(c)(2)(ii)(A) (2003). The Secretary of Labor specifically made this determination, 68 Fed. Reg. 17494 (April 9, 2003) notwithstanding the language of Internal Revenue Code § 1563).

If, however, it should be determined that the plan does not constitute a MEWA, New York, unlike some other jurisdictions, does not have a separate regulatory structure for MEWAs. Therefore, in accordance with New York Insurance Law § 1102 the inquirer’s client would have to be licensed as an insurer.

For further information one may contact Principal Attorney Alan Rachlin at the New York City office.