Puzzling Precedents: Piecing Together MEWAs

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Puzzling Precedents:
Piecing Together MEWAs
Larry Grudzien
Attorney at Law

About Larry
Larry Grudzien
ERISA Attorney
Lawrence (Larry) Grudzien, JD, LLM is an attorney
practicing exclusively in the field of employee
benefits. He has experience in dealing with qualified
plans, health and welfare, fringe benefits and
executive compensation areas. He has more than 35
years’ experience in employee benefit law.
Mr. Grudzien was also an adjunct faculty member of
John Marshall Law School’s LL.M. program in
Employee Benefits and at the Valparaiso University’s
School of Law. Mr. Grudzien has a B.A. degree in
history and political science from Indiana University,
J.D. degree from Valparaiso University School of Law
and LL.M. degree in tax from Boston University
School of Law. He is a member of Indiana and Illinois
Bars.

• It is defined by ERISA as any employee welfare benefit plan or other
arrangement that is established or maintained by two or more
employers to offer or provide welfare benefits to their employees.
• MEWAs do not include plans or arrangements established or
maintained under collective bargaining agreements.
• Health insurance issuers and health maintenance organizations that
are licensed to provide health insurance to the public and employers
also are excluded from the definition of MEWAs.
• How can employer create a MEWA?
 Include businesses that are related, but not part of a controlled group.
 Offer medical coverage to 1099 employees.
Basics

• Are PEOs MEWAs? It depends on the arrangement with the
Employer:
 Payroll provider
 Full-employer
 Co-employer
• Co-employer arrangement is the most common
• Advantages for Small Employers:
 MEWAs permit small employers to provide welfare benefits by pooling their
risks, resources, and employees to achieve group purchasing power.
 Benefits are provided either by purchasing insurance at more favorable
rates or by establishing a joint self-insured plan funded through a tax-
exempt trust.
Basics

Common-Bond MEWAs:
• Alternatively, a MEWA may be an association-sponsored plan where the
employers usually have a common bond such as membership in a trade
association representing a common industry.
Available Welfare Benefits in a MEWA:
• Generally, MEWAs are covered by ERISA only if they qualify as employee
welfare benefit plans.
• ERISA defines welfare benefits to include medical, surgical, hospital care,
sickness, accident, disability, death, unemployment, vacation benefits, training
programs, day-care centers, scholarship funds, prepaid legal services, or
financial assistance for employee housing.
• They do not include pensions, nor insurance to provide pensions.
Basics

Excluded from the MEWA definition are any arrangements
that are established or maintained:
• under or pursuant to one or more arrangements which
DOL finds to be collective bargaining agreements
• by a rural electric cooperative
• by a rural telephone cooperative
• by two or more employers who are found to be members
of the same control group
Plans that are not MEWAs

• Although ERISA generally preempts state laws and
regulations, ERISA §514(b)(6) subjects insured MEWAs to
state insurance laws.
• Collectively bargained plans, which are not MEWAs, are
not subject to state insurance laws.
• To distinguish legitimate plans from fraudulent insurance
schemes marketed under the guise of collectively
bargained plans exempt from state regulation, DOL issued
final rules at 29 C.F.R. §2510.3-40 laying out factors that
would establish a bona fide collective bargaining
relationship.
ERISA Exemption for State Regulation of MEWAs

• ERISA §514(b)(6) creates an exception to the ERISA preemption provisions,
which allows the states to regulate MEWAs under state insurance laws.
• In contrast to the expansive nature of ERISA's preemption blanket that covers
single-employer welfare plans, Congress permitted states to regulate certain
aspects of MEWAs.
• As a result, the degree of actual MEWA regulation varies from state to
state.
• This definition is determined by the following factors:
 First, if the MEWA is fully insured and it is an ERISA-covered plan, all state laws are
preempted except those specifying standards requiring the maintenance of reserves
and the payment of contributions.
 A MEWA is considered fully insured only if DOL determines that the amounts of all
benefits provided by the MEWA are guaranteed under a contract or policy of
insurance issued by a licensed insurance company, insurance service, or insurance
organization qualified to do business in a state.
State Regulation of MEWAs

This definition is determined by the following factors:
• Second, if the MEWA is an ERISA-covered plan which is not fully
insured, only those state laws that are inconsistent with ERISA are
preempted.
• This category includes self-funded plans or stop-loss plans.
• Under a stop-loss arrangement, an insurance company generally
agrees to reimburse a plan when claims exceed a certain amount.
• The plan itself pays benefits out of its own assets until the stop-loss
trigger point is reached.
• State insurance regulation of these plans is not limited to reserve and
contribution requirements, but also encompasses other insurance laws
that are not inconsistent with ERISA.

• ERISA permits states to regulate MEWAs whether they are self-insured or
insured.
• In practice, states have exercised this authority in diverse ways.
• Some states have no MEWA-specific laws.
• Others have simple registration requirements.
• More typically, states will treat MEWAs, to one degree or another, the same as
insurance companies and impose, for example, rules relating to licensing,
reserves, surpluses and mandated benefits.
• Some states may require employers that participate in MEWAs to accept
liability for benefits if the MEWA is unable to pay.
• Some states may prohibit MEWAs completely.

• States often exempt fully insured MEWAs from the operations of their
MEWA statutes.
• However, they are prohibited from imposing regulations relating to
reserves and contributions including licensing, registration,
certification, financial reporting, examination, audit and other
requirements necessary to enforce standards regarding reserves and
contributions. In addition, States can effectively regulate them through
their group insurance laws that govern the issuance of policies to
associations of employers.
• For example, a state may prohibit issuance of a policy to an
“association” of employers, unless the association meets certain
criteria that are unlikely to be met by a group of unrelated employers
that wish to associate primarily for the purpose of obtaining insurance.

• MEWAs that are not fully insured are subject to all state laws
that are not inconsistent with ERISA.
• Some states have created special rules that exempt
professional employer organizations from their MEWA laws.
• However, this does not affect their status as MEWAs under
federal law.
• While the specifics will vary with the laws of the respective
states, given the wide variations in state regulations, operation
of a multi-state MEWA can range from difficult to impossible,
particularly if the MEWA is self-insured.

Examples:
• Illinois:
 No registration of MEWAs
 Prohibit self-insured MEWAs
• Indiana
 MEWAs are also required to make quarterly filings.
 MEWAs must file an annual renewal.
• Wisconsin:
 Self-insured MEWAs are treated as unlicensed insurers MEWAs

• Michigan
 Michigan requires licensure of MEWAs that do business with
Michigan employers and are not fully insured.
 To obtain licensure, a MEWA must be controlled by its members,
have adequate cash reserves, and purchase excess loss insurance.
 A complete description of MEWA licensure requirements can be
found in Chapter 70 or the Michigan Insurance Code.
• Employers may be subject to other state rules if cover
employees in other states
• Chart of state laws: http://www.naic.org/prod_serv/II-HA-
95.pdf

• Generally, MEWAs are covered by ERISA only if they
qualify as employee welfare benefit plans.
• The extent of state regulation of MEWAs depends on
whether a MEWA is an ERISA-covered plan.
• Employee welfare benefit plans are those that are
established or maintained by an employer or employee
organization, or both, for the purpose of providing health
care and other welfare benefits to its participants or their
beneficiaries through the purchase of insurance or
otherwise.
MEWAs and Employee Welfare Benefit Plans

• Two-Step Process: A two-step process is involved in
determining whether a plan constitutes an employee
welfare benefit plan:
• The first step is to determine whether the benefits provided
by the plan are welfare benefits.
• If these benefits are provided, the second step is to
determine whether the plan is established or maintained
by an employer or an employee organization.
MEWAs and Employee Welfare Benefit Plans

• ERISA applies at the MEWA level only where the MEWA qualifies as a
“bona fide group or association of employers” within the meaning of
the ERISA §3(5) definition of employer.
• Several court cases and DOL advisory opinions have addressed this
issue.
• As these authorities recognize, a MEWA can be an ERISA plan for
Form 5500 reporting and other purposes only if the group or
association of employers participating in the MEWA satisfies the
DOL's “commonality of interest” and “control” tests.
• Both of these tests must be met before a MEWA will itself be
considered to be an ERISA plan.
At what level does ERISA apply?

The commonality of interest test requires that the entity maintaining the plan,
and the individuals benefiting from it, be tied by a common economic or
representational interest, not simply the provision and receipt of welfare benefits.
According to DOL guidance, the determination of whether an association or
group of employers meets the test will depend on all of the facts and
circumstances involved, including—
• how the association solicits members
• who is entitled to participate and who actually participates in the association
• the process by which the association was formed
• the association's purposes
• the relationship of its members outside the organization
• the powers, rights, and privileges that a member enjoys as a result of joining
the association

• The control test requires the employer-members of the association to
control and direct the activities and operations of the benefit plan.
• The control must exist in both form and substance, although the DOL
will generally not rule on whether a group or association exercises
control in substance over a benefit program.
• The test is designed to exclude from ERISA coverage those entities
that exist only for the entrepreneurial purpose of selling health
coverage to employer-members.
• To pass this test, therefore, representative employer-members must
be involved in designing and administering the plan of benefits made
available to their employees.

• MEWAs are required to file Form M-1, Annual Report for Multiple
Employer Welfare Arrangements and Certain Entities Claiming Exception,
with DOL for the purpose of determining whether the requirements of
HIPAA, the Mental Health Parity Act of 1996, the Newborns' and Mothers'
Health Protection Act of 1996, and the Women's Health and Cancer
Rights of 1988 are being met.
• The reporting requirements allow for earlier detection of unsound MEWAs
to reduce the risk of financial losses for employees, employers, and health
care providers if a MEWA fails to pay claims. MEWAs Form M-1 annual
reporting filings are available electronically on the website of DOL's
Employee Benefits Security Administration (http://www.dol.gov/ebsa).
• DOL's interim final rules also set civil penalties up to $1,527 per day for
failure to file Form M-1. (DOL Reg. 29 C.F.R. §§2520.101-2, 2560.502c-5)
MEWA Reporting Requirements

• The rules apply to other entities that offer or provide coverage
for medical care to the employees of two or more employers but
claim not to be MEWAs because they are established or
maintained pursuant to a collective bargaining agreement.
• An “entity claiming exception” (ECE) that has been in existence
for three years or longer is excepted from the reporting
requirements.
• An ECE is an entity that claims it is not a MEWA on the basis
that the entity is established or maintained pursuant to one or
more agreements that DOL finds to be collective bargaining
agreements under ERISA §3(40)(A)(i) and 29 C.F.R. §2510.3-
40.
MEWA Reporting Requirements

• MEWAs are required to register with DOL before they
begin operations.
• In addition, under these rules, MEWAs must report to DOL
annually regarding ERISA compliance.
• MEWAs comply with both requirements by filing the Form
M-1.
• The Form M-1 must be filed electronically.
• ERISA-covered plans subject to the Form M-1 reporting
rules also must include proof of Form M-1 filings as part of
their Form 5500 filings.
DOL MEWA Reporting Rules

• In the case where a MEWA is an ERISA plan, only one Form 5500
needs to be filed for the plan, because it will be considered a single
ERISA plan.
• Participating employers then would have no independent Form 5500
reporting obligation.
• Effective with the 2013 Form 5500, plans that are required to file Form
M-1 are no longer eligible to take advantage of the Form 5500 filing
exemption for insured or unfunded (or combination insured/unfunded)
plans with fewer than 100 participants.
• All MEWAs that are ERISA plans must file Form 5500, regardless of
size.
• Also, Form M-1 filing compliance information must be provided as part
of Form 5500 filings.

The reporting requirements apply to administrators—including third party
administrators—of MEWAs or ECEs. In the case of a MEWA or ECE that
is a group health plan and the administrator is not designated, the plan
sponsors, as defined at ERISA §3(16)(B), are responsible for filing the
M-1.
In the case of a MEWA or ECE for which an administrator is not
designated and a plan sponsor cannot be identified, jointly and severally,
the person or persons actually responsible for the control, disposition, or
management of the cash or property received by or contributed to the
MEWA or ECE—irrespective of whether they directly exercise such
control, disposition, or management—are responsible for filing the M-1.

In addition to the annual filing, a special Form M-1 must be
filed 30 days prior to operating in a new state and within 30
days after triggering events including:
• operating in any new state not previously identified
• a merger with another MEWA
• the number of employees receiving coverage under the
MEWA increases by 50% or more
• a material change

• Under 29 C.F.R. §2520.101-2, MEWA administrators must file a form with DOL
for the purpose of determining whether the requirements of certain health care
laws are being met.
• The rules also set penalties for failure to file the form and procedures for
hearings and appeals concerning the penalties.
• The principal purpose of the rule is to determine the extent of compliance by
MEWAs with ERISA §703, which was enacted as part of the Health Insurance
Portability and Accountability Act. ( 29 C.F.R. §2520.101-2 adds a definition of
“excepted benefits” and defines the term by reference to ERISA §733(c) and
29 C.F.R. §2590.732(b).
• The definition was added because of a clarification that MEWAs or entity
claiming exceptions that provide coverage consisting solely of excepted
benefits are not required to report under this section.
• ECEs are entity that are not MEWAs due to the exception in ERISA
§3(40)(A)(i).
MEWA Compliance with Health Care Laws

Section 29 C.F.R. §2520.101-2 provides the following requirements:
• The rule requires filing by the administrator of a MEWA that provides benefits
consisting of medical care on whether the MEWA is a group health plan
• The final rules also requires filing by the administrator of an ECE that offers or
provides coverage consisting of medical care during the first three years after
the ECE is originated
• A MEWA or ECE is not subject to filing a Form M-1 if it provides coverage that
consist solely of excepted benefits, such as a governmental plan, church plan,
or plan maintained solely for the purpose of complying with worker's
compensation laws
• However, if a MEWA provides coverage both to such excepted plans as above
and to any group health plan that is subject to ERISA, the MEWA is required
to file the Form M-1 due to the exception in ERISA §3(40)(A)(i)

The rule also clarifies that reporting is not required if an entity would not
constitute a MEWA or ECE but for any of the three following circumstances:
• Common Control Interest of at Least 25 Percent:
 A filing is not required on behalf of certain plans or other arrangements that provide
coverage to the employees of two or more employers that share a common control
interest.
 If an entity would not constitute a MEWA or ECE but for the fact that 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, a
Form M-1 filing is not required.
 However, while use of a 25 percent test may result in a determination of common
control for purposes of the Form M-1 filing requirement, common control generally
means, under tax code §§414(b) and (c), an 80 percent interest in the case of a
parent-subsidiary group of trades or businesses a more than 50 percent interest in
the case of a brother-sister relationship among organizations controlled by five or
fewer persons that are the same persons with respect to each organization.

constitute a MEWA or ECE but for any of the three following
circumstances:
• Temporary MEWAs
 Created by a Change in Control: A temporary arrangement providing
medical benefits to the employees of more than one employer created by a
change in control will not subject the plan to the Form M-1 filing
requirement.
 Temporary in this case means the arrangement does not extend beyond
the end of the plan year following the plan year in which the change in
control occurs.
 The change in control must occur for a purpose other than avoiding Form
M-1 filing.
 ERISA §3(40)(A)(i)

constitute a MEWA or ECE but for any of the three following circumstances:
• Very Small Number of Persons Who Are Not Employees or Former
Employees:
 Entities that would not be a MEWA or ECE but for the fact that they cover a very
small number of persons (excluding spouses and dependents) who are not
employees or former employees of the plan sponsor, are exempt from the filing
requirements.
 For example, an arrangement may cover nonemployee members of the board of
directors of the plan sponsor or individuals classified as independent contractors.
 The number of employees or former employees covered by the arrangement,
determined as of the last day of the year to be reported (or, in the case of a 90-day
origination report, determined as of the 60th day following the origination date) can
not exceed 1 percent of the total number of employees.
 due to the exception in ERISA §3(40)(A)(i)

• If ERISA does not apply at the MEWA level, each
employer providing benefits to its employees through the
MEWA will be considered to maintain a separate ERISA
health plan subject to COBRA.
• For example, if unrelated employers provide medical
benefits through a MEWA that is not an ERISA employee
benefit plan, each of these employers will be deemed to
maintain its own ERISA health plan.
• These plans exist separately for COBRA purposes, and
each employer would therefore be responsible for COBRA
due to the exception in ERISA §3(40)(A)(i).

• If ERISA does not apply at the MEWA level (and this is often the case,
as discussed previously), each employer providing benefits to its
employees through the MEWA will be considered to maintain a
separate ERISA health plan subject to COBRA.
• For example, if unrelated employers provide medical benefits through
a MEWA that is not an ERISA employee benefit plan, each of these
employers will be deemed to maintain its own ERISA health plan.
• These plans exist separately for COBRA purposes, and each
employer would therefore be responsible for COBRA compliance.
• In the unlikely event that a MEWA is itself an ERISA plan, it appears
that instead of the participating employers, the designated plan
administrator of the MEWA would be responsible for COBRA
compliance.
COBRA

• Each private-sector employer participating in a MEWA governed by ERISA
generally is considered to have established a separate group health plan for
the benefit of its employees.
• In that case, each separate plan is required to comply with HIPAA’s portability
requirements.
• In addition, the MEWA itself will be responsible for compliance with HIPAA’s
portability requirements.
• First, those MEWAs that are themselves considered group health plans under
ERISA would be subject to the HIPAA portability provisions set forth in
ERISA—since those MEWAs would fit the definition of a “group health plan”
for HIPAA portability purposes.
• Second, all MEWAs covering private-sector employers, regardless of whether
they satisfy the ERISA test for separate group health plan status, appear to be
subject to the HIPAA provisions set forth in the Code.
HIPAA

• DOL the power to issue cease-and-desist orders against abusive MEWAs and
individuals associated with them, and to seize the assets of a financially
unstable MEWA if necessary to protect participants, employers or other
members of the public.
• Health insurance issuers that are licensed and approved by each state in
which they offer health insurance coverage are excepted from coverage under
the rules.
• The DOL may issue a cease-and-desist order, without prior notice or hearing,
when it determines it has reasonable cause to believe that the MEWA or any
individual acting on behalf of the MEWA (including a third-party administrator)
has engaged in conduct that:
 Is fraudulent
 Creates an immediate danger to the public safety or welfare (in that it unreasonably
increases the risk of nonpayment of benefits)
 Is causing or can be reasonably expected to cause significant, imminent, and
irreparable public injury
Enforcement

• The DOL also has the authority under ERISA and the final
rules to summarily seize a MEWA’s assets if it appears
that the MEWA is in financial jeopardy.
• In the normal course, the rules require the DOL to obtain
court authorization prior to seizing assets.
• DOL may issue a summary seizure order without prior
court authorization if it reasonably believes that a delay in
issuing the order will result in the dissipation of plan assets
or the destruction of plan records.
Enforcement

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Company Background – Book of Business
Copyright 2017 – Not to be reproduced without express permission of Benefit Express Services, LLC
Clients & Services Supported
226
Administration Participants 1,500,000+
3,952Technology Clients
Reimbursement / COBRA clients 187
Average client size - participants 4,100
Mid/Large Administration clients
ACA 1095 Forms Generated 250,000
250 employees serving our clients from two services
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Larry Grudzien
Attorney at Law
(708) 717-9638
larry@larrygrudzien.com
www.larrygrudzien.com
Copyright 2017 – Not to be reproduced without express permission of Benefit Express Services, LLC
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Puzzling Precedents: Piecing Together MEWAs

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