OGC Op. No. 09-01-04

The Office of General Counsel issued the following opinion on January 13, 2009 representing the position of the New York State Insurance Department.

RE: Employers’ Trust for Health Insurance

Questions Presented:

1) May a group of not-for-profit educational institutions form a trust for the purpose of self-funding health insurance benefits for the employees of the employers?

2) May an insurer issue a group policy to a trust formed by group of not-for-profit educational institutions to jointly purchase health insurance for employees from an authorized insurer or health maintenance organization (HMO)?

Conclusions:

1) No, not without a duly issued licensed from the New York State Insurance Department. If a group of employers forms a trust for the purpose of providing health insurance benefits for the employees of the employers, and if the coverage is self-funded rather than fully insured, then the group of employers would be doing an insurance business within the meaning of Insurance Law § 1101(a), which requires a license in accordance with Insurance Law § 1102.

2) Yes, an authorized insurer may issue a group accident and health insurance policy to the extent permitted by N.Y. Ins. Law § 4235(c)(1) (McKinney 2007). Under Insurance Law § 4235(c)(1)(D) an insurer, subject to certain conditions may sell a group accident and health insurance policy to a trustee of a fund established by one or more employers.

Facts:

The inquirer reports that:

A group of not-for-profit educational institutions (approximately 120 throughout the state) are desirous of forming a trust (MEWA) to jointly purchase health insurance from a New York licensed health insurer, HMO or PPO. At this time it is unclear whether the trust would constitute an ERISA-covered plan.

The inquirer states that some of the employers have less than 50 employees, and asks whether the group of institutions can lawfully fulfill its objective.

Analysis:

I. Employer trust self-funding health benefits

An employer's provision of health benefits to employees constitutes an employee welfare benefit plan (“benefit plan”) under the federal Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1002(1) (LEXIS 2008). All such plans, with the exception of church plans that have not elected ERISA coverage ¹ and governmental plans, ² are covered under ERISA. 29 U.S.C. § 1003(a). 29 U.S.C. § 1002(1) provides:

(1) The terms "employee welfare benefit plan" and "welfare plan" mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 [29 U.S.C. § 186(c)] (other than pensions on retirement or death, and insurance to provide such pensions).

ERISA generally pre-empts state laws that relate to benefit plans. See 29 U.S.C. § 1144(a). However, ERISA may not be construed “to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.” See 29 U.S.C. § 1144(b)(2)(A). ERISA also specifically states that an employer’s benefit plan or a trust established under such a plan may not be deemed an insurer or to be engaging in an insurance business. 29 U.S.C. § 1144(b)(2)(B). Yet, a state is not pre‑empted from applying its insurance law to a multiple employer welfare arrangement (MEWA) that is not fully insured, provided that the state’s laws are not inconsistent with ERISA. 29 U.S.C. § 1144(b)(6). See also Opinion of the Insurance Department’s Office of General Counsel No. 05-09-05 (September 9, 2005).

A MEWA is defined in 29 U.S.C. § 1002(40)(A) (LEXIS 2008) as follows:

The term "multiple employer welfare arrangement" means an employee welfare benefit plan, or any other arrangement (other than an employee welfare benefit plan), 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 (including one or more self-employed individuals), or to their beneficiaries, except that such term does not include any such plan or other arrangement which is established or maintained —

(i) under or pursuant to one or more agreements which the Secretary finds to be collective bargaining agreements,

(ii) by a rural electric cooperative, or

(iii) by a rural telephone cooperative association.

Thus, generally speaking, a MEWA is a benefit plan established or maintained by two or more employers, or any other arrangement that is established for the purpose of offering or providing the benefits set forth in 29 U.S.C. § 1002(1) to employees of two or more employers.

A MEWA is fully insured (and within the ERISA pre-emption) only if all of its benefits are provided in full through insurance. See 29 U.S.C. § 1144(b)(6)(D). A MEWA that is not fully insured is referred to as “self-funded,” and may be subject to a state insurance law that is not inconsistent with ERISA.

According to the United States Department of Labor, a state insurance law is inconsistent with ERISA if it “abolishes or abridges an affirmative protection or safeguard otherwise available to plan participants and beneficiaries under Title I of ERISA or conflict with any provision of title I of ERISA.” Op. U.S. Dept. Labor 90-18 (reprinted in United States Department of Labor Employee Benefits Security Administration, MEWAs – Multiple Employer Welfare Arrangements under the Employee Retirement Income Security Act (ERISA): A Guide to Federal and State Regulation, at 42 (2004)). A state insurance law “will, generally, not be deemed ‘inconsistent’ with the provisions of title I of ERISA if it requires ERISA-covered MEWAs to meet more stringent standards of conduct, or to provide more or greater protections to plan participants and beneficiaries, than required by ERISA.” Id. Further, a state insurance law that requires ERISA-covered MEWAs to be licensed as insurers is not inconsistent with ERISA. See id.

Thus, where a MEWA self-funds benefits, it is – as noted above – subject to state insurance law, because there is no ERISA pre-emption. Accordingly, a MEWA’s self-funding of health benefits constitutes the doing of an insurance business within the meaning of Insurance Law § 1101(a), and as such, requires a license from the Insurance Department issued in accordance with Insurance Law § 1102. See Opinion of Office of General Counsel No. 07-04-10 (April 12, 2007). Information about the necessary components of an application for an insurer’s license, including information about minimum capital and surplus requirements and the statutory deposit, and an application form, is available at http://www.naic.org/industry_ucaa.htm.

II. Insurance purchase by an employer trust

The inquirer also asks whether the group of not-for-profit educational institutions may form a trust to jointly purchase health insurance for the employees of the institutions. The Insurance Law does not regulate the purchase of insurance by an employer, but it regulates the issuance of insurance by an insurer. And as noted above, ERISA does not pre-empt state laws that regulate insurers that provide insurance to benefit plans.

An authorized insurer may issue a group accident and health insurance policy only to the types of groups set forth in Insurance Law § 4235(c)(1). The inquiry did not provide sufficient information for the Office of General Counsel to determine at this time whether the trust that would be formed by the group of not-for-profit educational institutions for the purpose of purchasing accident and health insurance for the employees of the institutions would constitute an allowable group under Insurance Law § 4235(c)(1). Therefore, OGC can only provide a response general in nature at this time.

In pertinent part, Insurance Law § 4235(c)(1)(D) allows an insurer to sell a group accident and health insurance policy to a trustee of a fund established or participated in by two or more employers to insure employees of such employers provided that certain criteria are satisfied. For instance, the policy must insure at least 50 persons at the time it is issued, unless any part of the premium is contributed by insured persons, in which case the policy must insure 100 persons at the time it is issued. Insurance Law § 4235(c)(1)(D) reads, in relevant part, as follows:

(D) A policy issued to a trustee or trustees of a fund established, or participated in, by two or more employers . . . which trustee or trustees shall be deemed the policyholder, to insure employees of the employers . . . for the benefit of persons other than the employers . . . subject to the following requirements:

(i) The persons eligible for insurance shall be all of the employees of the employers . . . or all of any class or classes thereof determined by conditions pertaining to their employment . . . .

(ii) The premium for the policy shall be paid by the trustee or trustees either wholly from funds contributed by the employer or employers of the insured person . . . or jointly from such funds and funds contributed by the insured persons specifically for their insurance or from contributions by the insured persons. A policy on which all or part of the premium is to be derived from funds contributed by the insured persons specifically for their insurance may be placed in force only if it insures not less than fifty percent of the then eligible persons, or, if less, fifty or more of such eligible persons excluding any as to whom evidence of individual insurability is not satisfactory to the insurer. A policy on which no part of the premium is to be derived from funds contributed by the insured persons specifically for their insurance must insure all eligible persons, excluding any as to whom evidence of individual insurability is not satisfactory to the insurer.

(iii) The policy shall insure at least fifty persons at date of issue, except that if part of the premium is to be derived from funds to be contributed by the insured persons specifically for their insurance the policy shall insure at least one hundred employees . . . at date of issue.

(iv) The insurance coverage under the policy shall be based upon some plan precluding individual selection either by the insured persons or by the policyholders [or] employers . . . However, with respect to a policyholder, [or] employer . . . such plan may permit a number of selections by the policyholder, employer . . . if the selections offered utilize consistent plans of coverage so that the resulting plans of coverage are reasonable. Furthermore, such a plan may permit a limited number of selections by insured persons if the selections offered utilize consistent plans of coverage for individual group members so that the resulting plans of coverage are reasonable . . . .

Insurance Law § 4235(c)(1)(B), (H) and (K) also set forth other permissible groups that may be relevant to an employer, but those provisions do not appear relevant to the inquiry. Insurance Law § 4235(c)(1)(B) describes a group consisting of a trust established by or participating in by employer members of a trade association. Insurance Law § 4235(c)(1)(H) allows an insurer to issue a group policy to “an association, or to a trustee or trustees of a fund established, created or maintained for the benefit of members of one or more associations, all of whose eligible members have the same profession, trade or occupation . . . .” Insurance Law § 4235(c)(1)(K) describes a group consisting of “an association or the trustee or trustees of a trust established, or participated in, by one or more associations, to insure association members . . .” These allowable groups do not appear relevant because a critical element of each is that the group has been in existence for at least two years and was formed for a purpose principally other than obtaining insurance. See Ins. Law § 4235(c)(1)(B)(i)(I), (H) and (K)(i)(II),(III). The limited facts presented by the inquiry, however, indicate that the group has not yet been formed and that the principal purpose of forming it is to obtain insurance.

Assuming for the purposes of further discussion that the group meets the criteria of Insurance Law § 4325(c)(1)(D), please be advised that if any of the employers has 50 or fewer employees, then pursuant to Insurance Law § 3231(a) for commercial insurers or Insurance Law § 4317(a) for not-for-profit health insurers and health maintenance organizations, the group policy is subject to community rating. See also N.Y. Comp. Codes R. & Regs. tit. 11,§ 360.8(e) (Regulation 145). Insurance Law § 3231(a) ³ reads as follows:

(a) 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 . . . 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. . . . Group hospital and/or medical coverage . . . obtained through an out-of-state trust covering a group of fifty or fewer employees or participating persons who are residents of this state must be community rated regardless of the situs of delivery of the policy. . . . For the purposes of this section, "community rated" means a rating methodology in which the premium for all persons covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status or occupation.

In order to effectuate the community rating requirement set forth in Insurance Law § 3231(a), the Superintendent of Insurance promulgated N.Y. Comp. Codes R. & Regs. tit. 11, Part 360 (Regulation 145), which defines “community rating” as “a rating methodology in which the premium for all persons covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status or occupation.” 11 NYCRR § 360.2(b). An insurer must charge the community rate to all employers of an Insurance Law § 3425(c)(1)(D) employer group that includes one or more member employers that has 50 or fewer employees (exclusive of spouses and dependents). 11 NYCRR § 360.8(e)(1). But the insurer may charge an experience-based rate to the employers with more than 50 employees (exclusive of spouses and dependents) if the insurer provides a separate, community-rated policy to the employers with 50 or fewer employees (exclusive of spouses and dependents). 11 NYCRR § 360.8(e)(2).

For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.

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¹ 29 U.S.C. § 1002(33) defines a “church plan” as follows:

(33) (A) The term "church plan" means a plan established and maintained (to the extent required in clause (ii) of subparagraph (B)) 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 [26 USCS § 501].

(B) The term "church plan" does not include a plan—

(i) which is established and maintained primarily for the benefit of employees (or their beneficiaries) of such church or convention or association of churches who are employed in connection with one or more unrelated trades or businesses (within the meaning of section 513 of the Internal Revenue Code of 1986 [26 USCS § 513]), or

(ii) 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).

² 29 U.S.C. § 1002(32) defines a “governmental plan” in relevant part as “a plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.”

³ Insurance Law § 4317, which governs not-for-profit health insurers and health maintenance organizations, sets forth identical requirements.