Leasing Healthcare Employees? Don’t Overlook the Benefits Traps, Part II

Employee Benefits Alert

Client Alert

Author(s) ,

As discussed in Part I of this series, there are clear business reasons for healthcare organizations to enter into employee leasing arrangements, including to receive ongoing services, to bridge transitions in mergers and acquisitions, and to allocate costs and responsibilities among joint venture partners. Whatever the goal, these arrangements have the potential to give rise to some employee benefits compliance concerns that, if not managed correctly, could expose one or both organizations to significant liability. In Part I, we discussed the application of state-level employee leasing laws and how compliance with them may be managed. In this Part II, we will focus on the potential for the group health plan being offered to leased employees to be treated as a “multiple employer welfare arrangement” (MEWA) and why this should be a particular concern for the organization acting as a lessor.

Inadvertent MEWA Status — Lessor Beware

Stated simply, a MEWA is a group health plan offered to employees of two or more employers who are not under “common control.” For this purpose, common control generally means at least 80% common ownership in the case of a parent-subsidiary group of trades or businesses and at least either 80% common ownership among organizations with a brother-sister relationship or more than 50% if such organizations are controlled by five or fewer persons who are the same persons with respect to each organization. Sometimes the degree of common ownership is difficult to determine, especially as a result of complex ownership attribution rules.

The consequence of becoming a MEWA is that ERISA will cease to preempt the application of state insurance laws to the plan and special filing requirements will be triggered. In other words, all states in which the plan operates will be free to treat the employer like an insurance company and require compliance with their regulations governing benefits, reserves, and administration. Some states specially regulate MEWAs more narrowly, but they still impose substantial limitations, such as requiring that the plan be funded with a trust. For an employer maintaining a self-funded group health plan, complying with these requirements is generally not possible and can lead to significant exposure for violations of state insurance or MEWA regulations.

In the context of employee leasing, a self-funded group health plan is most likely to be deemed a MEWA if the employees are not respected as common law employees of the lessor. While the facts and circumstances of the arrangement are most likely to drive the determination on this point, the parties to the arrangement should ensure that the agreement clearly reflects the intent that the lessor be treated as the common law employer of the leased employees.

Additionally, in some states, lessors can avoid potentially triggering MEWA status by registering as a “professional employer organization” (PEO). Refer to Part I of this series for a discussion on PEO registration requirements. These states provide a safe harbor under which the self-funded group health plan of a lessor will not be treated as a MEWA but only if the lessor is registered as a PEO. Thus, if registering as a PEO is feasible in these states, lessors can have assurance that their self-funded group health plan will not be subject to the insurance laws or any MEWA regulations of that state. Importantly, however, this assurance does not extend to other states in which the group health plan operates, which may still consider the plan a MEWA.

The final key benefits compliance issue that organizations leasing healthcare employees should consider will be discussed in the forthcoming Part III of this series.

If you have any questions about benefits compliance in employee leasing, please contact one of the attorneys in the Employee Benefits and Executive Compensation Practice Group at Bradley.