On December 6, 2011, the U.S. Department of Labor (“DOL”) issued a proposed rule on Form M-1 filing requirements, a proposed rule on DOL ex parte cease and desist orders, a notice of proposed form revision to Form M-1 and a notice of proposed form revision to Form 5500 implementing new requirements for multiple employer welfare arrangements (“MEWAs”) under the Patient Protection and Affordable Care Act (“PPACA”) (referred to as the “Proposed Rules”). PPACA prohibits false statements or representations of fact about a MEWA’s financial condition, benefits provided and its regulatory status in connection with the marketing of participation in a MEWA. The deadline for submitting public comments to the Proposed Rules is March 5, 2012.
MEWAs are multiple employer welfare arrangements or similar entities that offer or provide medical benefits to employees of two or more employers that are not under common control of a single employer. Employer plans that participate in MEWAs are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) in the same manner as any other employer sponsored employee benefit plan. MEWAs covered by ERISA are subject to broader State insurance regulation than single employer ERISA welfare plans. MEWAs generally have been used by small employers as an alternative to traditional health insurance coverage as they enable small employers to purchase health coverage at large group premium rates. Many MEWAs do not satisfy the reserve thresholds or contribution and consumer protection requirements under State law applicable to licensed health insurance issuers. In its fact sheet announcing the Proposed Rules, the DOL stated that MEWAs promote “abusive and fraudulent practices and become financially unstable,” and cited to examples of MEWAs that failed to cover millions of dollars in unpaid claims and benefits.
New Reporting Requirements. An employer who sponsors an employee benefit plan subject to ERISA through participation in a MEWA is obligated to file a Form M-1 with the DOL. This is not solely the obligation of the MEWA for reason that each employer’s plan, with the exception of certain employee associations, constitutes a distinct ERISA plan independently subject to the requirements of ERISA. Unless the employer has a designated plan administrator responsible for the filing of the Form M-1, the employer is statutorily presumed to be the plan administrator of the plan it sponsors.
The Proposed Rules expand the DOL reporting requirements for MEWAs and impose substantial penalties for failure to report. The reporting rules also apply to multiemployer arrangements claiming they are exempt from the MEWA requirements. Typically, these are plans and arrangements established pursuant to a collective bargaining agreement (referred to by the DOL as “ECEs”).
- MEWAs are required to file annual reports with the DOL on Form M-1 by March 1 of the year following the taxable year. All MEWAs and ECEs are required to file a Form M-1 within 90 days of the MEWA’s or ECE’s origination or establishment.
- The Proposed Rules would require MEWAs to file a Form M-1 with the DOL 30 days prior to registration, and ECEs to file a Form M-1 30 days prior to origination, as well as an annual Form M-1. The Proposed Rules make clear that the obligation to file Form M-1 extends to all MEWAs, whether or not ERISA-covered plans, and ECEs. Although the requirements may differ as to what constitutes a registration event for MEWAs and an origination event for ECEs, the Preamble to the Proposed Rules makes clear the general intent is to require all such arrangements to be subject to similar reporting requirements.
- MEWAs that are ERISA plans filing Form 5500 annual reports will be required to prove their compliance with the Form M-1 filing requirements. MEWAs that are ERISA plans of small employers (less than 100 employees) will no longer be exempt from the requirement to file a Form 5500 annual report.
- The Proposed Rules impose civil and criminal penalties for a MEWA’s failure to file or the fraudulent filing. Civil penalties are up to $1,100 per day from the date of failure to file or the filing of the fraudulent Form M-1. Criminal penalties are up to 10 years imprisonment, fines under Title 18 of the United States Code or both.
In conjunction with the issuance of the Proposed Rules, the DOL proposed changes to Form M-1 to incorporate the new reporting requirements. The proposed Form M-1, among other things, requires contact information of all persons associated with the MEWA, including promoters and third party vendors and providers.
On January 23, 2012, the DOL issued its revised Form M-1 for 2011, which has been updated to reflect PPACA requirements that became effective in 2011. The 2011 Form M-1 is due by March 1, 2012, unless an extension to May 1, 2012 has been previously requested.
DOL Authority to Take Immediate Action Against MEWAs Deemed Fraudulent. PPACA authorizes the Secretary to issue ex parte cease and desist orders when it appears that the conduct of a MEWA is: (a) fraudulent; (b) creates an immediate danger to the public safety or welfare; or (c) is causing or is expected to cause significant, imminent and irreparable public injury.
Fraudulent conduct is defined under the Proposed Rules as acts or admissions of a MEWA or a MEWA’s agent or employee that are committed knowingly and with an intent to deceive or defraud participants of the financial condition, benefits offered, management of the MEWA or the existing regulatory status of a MEWA under Federal or State law. The DOL appears particularly concerned with MEWAs making false claims that the arrangement is established pursuant to a collective bargaining agreement and therefore exempt from MEWA requirements as an ECE. Conduct that creates an immediate danger to the public safety or welfare or that is expected to cause significant, imminent or irreparable public injury does not require intent. Examples of such conduct include a failure to establish or maintain ERISA claims procedures or a record keeping system, embezzlement or unreasonable compensation or payments to MEWA operators or third party providers.
The Secretary may also issue a summary order to seize the assets of a MEWA that the Secretary determines is in a financially hazardous condition. A financially hazardous condition occurs when a MEWA in imminent danger of becoming unable to pay benefit claims when due, a MEWA has sustained a significant loss of assets or the MEWA or a person responsible for the MEWA has been the subject of a cease and desist order.
A person that is adversely affected by a cease and desist or summary seizure order may request an administrative hearing regarding the order.
What This Means for Employers. The proposed civil and criminal penalties for failure to file Form M-1 raise the stakes for employers. All employers that participate in a MEWA, including arrangements subject to collective bargaining agreements, should review the MEWA’s status and compliance with the Form M-1 filing requirements, as well as the requirements of ERISA-covered plans to file Form 5500 Annual Reports. Employers also should be careful not to enter into any arrangement that inadvertently creates a MEWA. This can occur in a variety of circumstances, such as a merger or acquisition, or the consolidation of plans offered by subsidiaries or affiliates that are independent employers that offer their own benefit plans.
A member of the Firm, Daly D.E. Temchine, aptly comments that the requirements of the Proposed Rules and the enforcement authority provided to the Secretary to act quickly have the potential to make MEWAs a more secure mechanism for employers to use as a vehicle for the provision of health benefit coverage to their employees. The disclosures required to be made by MEWAs enable employers, or their brokers or other agents, to conduct more informative investigations of a MEWA’s finances and operations than had previously been the case. The availability of information, however, also creates a potential for greater liability on the part of an employer, broker or agent who fails to seek out that information and places in jeopardy the benefits promised to eligible participating employees.”