Offering coverage to Board Members can cause problems for an employer

My self-funded client has a board member who is asking to be covered on the client’s employee benefits plans.  Is this permitted? 

Compliance Team Response:

Assuming the board member is a non-employee director, offering coverage is not recommended because it could create a prohibited MEWA.  Full summary below.

1) Offering Coverage to Non-Employee Directors Likely Creates a MEWA

A multiple employer welfare arrangement (MEWA) is an arrangement used to provide employee welfare benefits to the employees of two or more employers that are not part of the same controlled group of businesses.  Allowing outside, non-employee directors to participate may create a MEWA.  The DOL has refused to definitively opine on this.

However, the DOL has stated that where an employer covers both its employees and independent contractors, the plan would be considered a MEWA because employees from two unrelated employers participate in the plan.  A MEWA is a health plan established or maintained for the benefit of employees of two or more employers (including one or more self-employed individuals).

Because non-employee directors are generally considered self-employed individuals, including them in a health plan likely creates a MEWA in the same manner that offering coverage to a standard independent contractor creates a MEWA.

2) California Prohibits Self-Funded MEWAs

One important consequence of providing benefits through a MEWA is that you lose much of the ERISA preemption of state law.  Outside of a MEWA, a self-insured employer-sponsored group health plan is not subject to state insurance law because of ERISA preemption.  However, state insurance law can regulate a MEWA.

In California, state insurance law has prohibited the creation of any new self-funded MEWA since 1995.  A handful of other states have taken a similar approach to essentially ban new self-funded MEWAs, primarily because they were ripe for fraud in the early 90s.

Our consistent position has therefore been that self-insured plan should not be made available to non-employee directors.  It is very possible that making a self-funded plan available to non-employee directors violates California state insurance law.  (Note that a separate state insurance law provision prevents offering coverage to non-employee directors under a fully insured plan.)

3) Form M-1 Filing Requirement

MEWAs are required to file a Form M-1 with the DOL.  Plans that fail to file the M-1 may be subject to penalties of up to $1,527 per day.  This is treated as a personal liability of the administrator (i.e., no corporate protection for the liability), and it cannot be paid with MEWA assets.  Furthermore, unlike the Form 5500 DFVCP program, there is no delinquent filer program providing reduced penalties for missed Form M-1 filings.

One item to note here is that there is an exception from the M-1 filing requirement for a plan that provides coverage to non-employee directors where the number of such non-employees covered is less than 1% of the total number of employees or former employees covered by the MEWA.  Although this exception could prove helpful in potentially avoiding the Form M-1 filing requirement, it strongly suggests that offering coverage to a non-employee director creates a MEWA (otherwise there would be no need for the exception), which again would be prohibited by California law.

4) Section 125 Cafeteria Plan Exclusion

Lastly, even if the company chose to offer coverage to a non-employee director (which, again, is not recommended for all of the reasons stated above), any outside, non-employee director will not be eligible to participate in the Section 125 cafeteria plan.  This means that they will not be able to use the POP to pay their share of the premium on a pre-tax basis—and therefore the director’s payment would need to be made on an after-tax basis.

I’ve included a number of relevant cites below for reference.

Regulations:

ABA, JCEB Q&A:

https://www.americanbar.org/content/dam/aba/migrated/jceb/2005/qa05dol.authcheckdam.pdf

DoL staff also indicated that because they have a pending advisory opinion request on the subject, they were not prepared to provide an answer in this context on the issue of whether a health plan maintained by a single employer would be a MEWA if it were extended to cover nonemployee members of the employer’s board of directors.

California Insurance Code §742.24(h):

§742.24. Eligibility for certificate of compliance

• To be eligible for a certificate of compliance, a self-funded or partially self-funded multiple employer welfare arrangement shall meet all of the following requirements:

• (h) File an application with the department for a certificate of compliance no later than November 30, 1995.

29 CFR §2520.101-2(c)(2)(ii)(C):

• (ii) Nothing in this paragraph (c) shall be construed to require reporting under this section by the administrator of an entity that would not constitute a MEWA or ECE but for the following circumstances under this paragraph (c)(2)(ii).undefinedundefinedundefined

29 CFR §2520.101-2(c)(3), Example 4:

Example  (4)  (i) Facts. Company E maintains a group health plan that provides benefits for medical care for its employees (and their dependents) as well as certain independent contractors who are self-employed individuals. The plan is therefore a MEWA. The administrator of Company E’s group health plan uses calendar year data to report for purposes of the Form M-1. The administrator of Company E’s group health plan determines that the number of independent contractors covered under the group health plan as of the last day of calendar year 2013 is less than one percent of the total number of employees and former employees covered under the plan determined as of the last day of calendar year 2013.

(ii) Conclusion. In this Example 4, the administrator of Company E’s group health plan is not required to report via the Form M-1 for calendar year 2013 (a filing that is otherwise due by March 1, 2014) because it is subject to the exception to the filing requirement provided in paragraph (c)(2)(ii)(C) of this section for entities that cover a very small number of persons who are not employees or former employees of the plan sponsor.

California Insurance Code §10270.55(e):

§ 10270.55. “Employees” and “members” under group disability insurance

• (a)  With respect to a policy issued to a corporation, co-partnership or individual employer eligible for group insurance pursuant to Section 10270.5, the term “employees” may be deemed to include the officers, managers and employees of subsidiary or affiliated corporations, and the individual proprietors, partners and employees of affiliated individuals and firms, when the business of such subsidiary or affiliated corporations, firms or individuals is controlled by the policyholder through stock ownership, contract or otherwise, or when the policyholder is controlled by affiliated corporations, firms or individuals through stock ownership, contract or otherwise.

• (b)  With respect to a policy issued to a co-partnership or individual employer pursuant to Section 10270.5, the term “employees” may be deemed to include the individual proprietor or partners of the policyholder.

• (c)  With respect to a policy issued to a trust pursuant to subdivisions (1) or (4) of subsection (a) of Section 10270.5 the term “employees” may be deemed to include (1) the individual proprietors and partners of any employers which are individual proprietors or partnerships, (2) the employees of an association, and (3) the trustee, or trustees, or the employees of the trustee, or trustees, or both, if their duties are principally connected with such trusteeship.

• (d)  With respect to a policy issued to an association pursuant to subdivision (3) of subsection (a) of Section 10270.5 the term “members” may be deemed to include the employees of the association.

• (e)  Nothing contained herein shall permit a director of a corporate employer to become insured under a group policy unless such person is otherwise eligible as a bona fide employee of the corporation by performing services other than the usual duties of a director.

• (f)  Nothing contained herein shall permit an individual proprietor or partner to become insured under a group policy unless he is actively engaged in and devotes a substantial part of his time to the conduct of the business of the proprietor or partnership.

• (g)  Nothing contained herein shall permit any employee to become insured under a group policy unless he is an officer, manager, or employee for compensation of the employer to whom a group policy is issued, or of one or more of the individuals, firms, or corporations specified in subdivision (a), or of the association or trustee or trustees specified in subdivision (c), or of the association specified in subdivision (d).

• (h)  Officers, managers, and employees of a public agency who receive no compensation may be insured under a group policy purchased pursuant to the provisions of Article 1 (commencing with Section 53200) of Chapter 2, Part 1, Division 2, Title 5 of the Government Code.

Prop Treas. Reg. §1.125-1(g)(2)(i):

(2) Self-employed individual not an employee.

(i) In general. The term employee does not include a self-employed individual or a 2-percent shareholder of an S corporation, as defined in paragraph (g)(2)(ii) of this subsection. For example, a sole proprietor, a partner in a partnership, or a director solely serving on a corporation’s board of directors (and not otherwise providing services to the corporation as an employee) is not an employee for purposes of section 125, and thus is not permitted to participate in a cafeteria plan. However, a sole proprietor may sponsor a cafeteria plan covering the sole proprietor’s employees (but not the sole proprietor). Similarly, a partnership or S corporation may sponsor a cafeteria plan covering employees (but not a partner or 2-percent shareholder of an S corporation).