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The Co-Employment Solution for Employers with Association Health Plans

(7-10 minute read)

On June 21, 2018, the U.S. Department of Labor (DOL) published a final rule designed to allow small businesses to pool together and buy health insurance through an association. However, this expansion was recently limited by a Federal court ruling, leaving plan sponsors and members confused about the next steps. This article helps confused plan participants fill in the gaps and delivers a comprehensive view of association health plans (AHPs).

Our goal is to explain the purpose, history, and popularity of AHPs; the DOL’s final rule; the invalidation of the final rule; the next steps for AHP sponsors, and how a PEO arrangement can help solve the AHP dilemma.


Association health plans (AHPs) enable small employers—typically those with 50 or fewer employees—to purchase health insurance as a unit in the large group market. By combining their buying power under one umbrella, small employers enjoy the same rewards available to large employers, including broader benefit packages and affordable premiums.

The concept is certainly appealing, especially since small businesses often struggle to provide health insurance on their own, which puts them at a competitive disadvantage for talent attraction and retention. AHPs were introduced to level the playing field.

Originally, offering health insurance could not be the sole reason for merging a group of small employers into an AHP. Members of the association also needed to share a “commonality of interest” that is not related to offering health insurance (e.g. also be members of an industry group). This stipulation made it difficult for many small employers to access and offer AHPs.


Association health plans have been around for decades and have developed a controversial reputation along the way. Initially, AHPs called themselves “employers” or “employee associations” so that they could claim preemption—under the Employment Retirement Income Security Act (ERISA) of 1974—from state insurance laws. Unfortunately, this resulted in many AHPs defrauding their members, filing for bankruptcy, and leaving millions in unpaid claims.

In 1983, ERISA was amended to exempt AHPs from claiming the ERISA preemption. The amendment allows states to impose and enforce state insurance rights on AHP arrangements. Along with being subject to ERISA and applicable state rules, AHPs must comply with the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, Health Insurance Portability and Accountability Act (HIPAA), Affordable Care Act (ACA), and other group health regulations.

The ACA has played an instrumental role in reforming AHP rules. Prior to the ACA, many AHPs were exempted from state laws that applied to commercial insurance companies—such as benefit mandates and underwriting limitations. The ACA changed the game by including significant reforms and consumer protections to curtail abuse by AHPs.

Under the ACA, policies sold through an association must conform to the same federal and state standards that apply to the individual and small group markets—including providing 10 essential health benefits (as defined by the ACA) and accepting people with preexisting medical conditions. Large group health plans do not have to satisfy the essential health benefits criteria, but they must accept people with preexisting conditions.

Research indicates that many AHPs disbanded in the wake of the new ACA rules.


According to a 2019 article published by Kaiser Health News, nationally, there are an estimated 30,000 people enrolled in associated health plans—with a recent uptick after the initial decline following the ACA’s passage in 2014.

A more targeted survey, reported by, found that 34 new association health plans were launched shortly after the DOL issued its final rule on AHPs in 2018.


Published on June 21, 2018, the DOL’s final rule broadens ERISA’s definition of “employer.” This expansion creates a simpler path for association health plans to qualify as a large group—a move that effectively exempts AHPs from providing some of the ACA’s most crucial consumer-related protections.

Key Aspects of the Final Rule:

  • An association can be formed for the sole purpose of providing AHPs as long as there’s a “commonality of interest.” The final rule relaxes the “commonality of interest” test by permitting unrelated employers in varying industries to be categorized as acting in the interest of their members as long as they share a common geography. The “commonality of interest” test is also satisfied if members are in the same industry.
  • “Working owners,” such as sole proprietors and certain self-employed individuals, can participate in AHPs even if they have no employees.
  • AHPs must comply with the regulation’s nondiscrimination provisions. They cannot discriminate against employees based on health factors or prohibit membership in the plan because of a health condition.
  • The final rule does not impact AHPs that existed prior to the rule. Those plans can continue to operate as before, or they can adopt the new rule if they wish to expand their coverage options.
  • Implementation dates were staggered, from September 2018 through April 2019. An employer’s implementation date depends on whether the plan is old or new and whether the benefits are self-funded or funneled through a third-party insurer.

The final rule received mixed reviews. Business groups such as the U.S. Chamber of Commerce and the Society for Human Resource Management (SHRM) were among the rule’s advocates.

Among the critics were policy experts, who took issue with the following:

  • AHPs do not have to provide all 10 essential health benefits, such as prescription drugs and mental health services. If they choose to offer the 10 essential benefits, they can stop at any point, since no mandate compels it. The new rule also says that employers with AHPs covering 15 or more employees must provide maternity coverage; however, employers with fewer employees do not have to comply.
  • AHPs can set premium rates based on gender, age, occupation, and other factors. For example, they can charge small businesses with a younger workforce much more than they charge small businesses with older workers.
  • Small business employees who purchased an individual policy on the ACA marketplace because their employer does not provide coverage will get shortchanged if their employer starts offering an AHP that does not measure up to their ACA plan.

Some states argued that the new rule would cripple demand for ACA plans by pulling younger, healthier individuals away from the ACA market. These states also claim the new rule would be costly for them to administer because they would have to spend more resources on thwarting consumer fraud. In July 2018, 11 states filed a lawsuit in federal court to block the DOL’s final rule.


On March 28, 2019, federal judge John Bates blocked the DOL’s final rule, citing the agency’s efforts as “clearly an end-run around the ACA.” According to Judge Bates, the DOL pushed the definition of “employer” beyond ERISA’s authority. He stated that the rule “does violence” to ERISA and was created to let employers “avoid the most stringent requirements of the ACA.”
Judge Bates disagreed with the final rule permitting AHPs to be formed solely for the purpose of selling insurance or on the basis of geography. He also said that self-employed individuals without employees are not regarded as employers under ERISA.

On April 26, 2019, the DOL appealed Judge Bates’ ruling.


Per an article published by SHRM, unless the DOL acquires a stay of Judge Bates’ order, “plans formed under the vacated sections of the rule are illegal.”

For AHPs formed under the final rule before it was vacated, plan sponsors should continue to fulfill their existing responsibilities for the rest of the plan year. If the final rule remains vacated at the end of the plan year, the ACA’s individual and small group rules plus state regulations will apply—since the AHP will no longer be subject to ERISA.

According to Josh Archambault of the Foundation for Government Accountability, individual states should start enacting legislation so that small businesses and trade associations can provide the most fitting AHPs for their employees and members. Although the full effect of Judge Bates’ ruling is unclear, states can ensure that small employers have access to affordable health insurance (like large employers) by updating their laws.

Because AHPs formed under the final rule are not compatible with the ACA’s intent, it’s doubtful whether federal courts will allow the regulations to stand. Meanwhile, employers with AHPs formed under the final rule should immediately:

  1. Let employees know when their current health coverage will expire.
  2. Decide whether to seek an alternative way of delivering health benefits. (States have great latitude to develop their own guidelines and there may be additional federal guidelines at some point, but it will take considerable time for all of that to happen.)

Whether your AHP was developed before or after the final rule, there may be a better solution for your business—and it comes in the form of co-employment.


Co-employment occurs when a Professional Employer Organization (PEO) enters into a joint-employment relationship with a client. Under this arrangement, the PEO shares and manages many of the client’s workforce-related responsibilities and liabilities. The extent of these responsibilities and liabilities is laid out in the co-employment contract.

Generally, the responsibilities pertain to human resources, benefits, payroll, compliance, and employment taxes. As the employer of record, the PEO uses its own employer identification number for certain HR and payroll purposes—such as wage and tax reporting—thereby shifting liability to the PEO. Although the PEO assumes much of the employer’s administrative burdens, it does not handle the day-to-day running of the employer’s business. The employer retains control over managing its worksite employees (WSEs) and operations.

According to the National Association of Professional Employer Organizations (NAPEO):

“PEOs provide services to 175,000 small and mid-sized businesses, employing 3.7 million people.”

“Between 2008 and 2017, the number of WSEs employed in the PEO industry grew at a compounded annual rate of 8.3 percent.”

“Small businesses that work with a PEO grow 7 to 9 percent faster, have employee turnover that is 10 to 14 percent lower, and are 50 percent less likely to go out of business.”


The PEO model covers employee benefits, which go beyond administration. Co-employment providers—like Axios HR—provide their clients with real value by giving them access to the same quality of health insurance and affordable pricing that larger employers receive.

A common pain point for employers with AHPs is finding and retaining compatible employers to establish and maintain the association. This dilemma disappears when you join a PEO because the co-employment relationship makes you part of a much larger group of employers. These employers are banded together to form a Multiple Employer Plan or Master Health Insurance Policy, which comes with competitive coverage and rates.

Established PEOs, like Axios HR, do not just offer medical coverage but also specialty benefits, such as dental and vision insurance. They can also lower your workers’ compensation premiums and provide access to unique benefits, such as pet insurance, financial wellness tools, elder care services, employee assistance program, identity theft protection, and more—all at preferred rates.

The co-employment provider does the heavy lifting, including:

  • Plan design
  • Strategic management
  • Price control
  • Cost management
  • Plan administration
  • Employee education
  • Regulatory compliance

This leaves you with more time to focus on running your business. As for pricing, the good news is that it generally costs less to partner with a co-employment provider than to run your own HR department. (Most PEO services are bundled into one cost-effective package.)

Instead of hiring HR and payroll consultants, an employment law attorney, a CPA, and an insurance broker, it’s probably more economical to partner with a PEO that specializes in these areas and back-office administration. For example, as your co-employment provider, Axios HR would respond to any questions you have regarding HR, payroll, compliance, taxes, and insurance.

With the DOL’s final rule currently null and void, this is a challenging time for AHP sponsors.




August 5, 2019




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