On August 26, North Carolina passed a law allowing small businesses to band together to offer group health insurance through association health plans (“AHPs”). The Small Business Health Care Act, passed without the governor’s signature, authorizes the formation of large group health plans for association members, including small businesses and sole proprietors. However, these plans can be implemented only if they do not violate federal law, and the federal regulations authorizing this form of AHPs were struck down at the U.S. District Court for the District of Columbia earlier this year. While this decision is currently on appeal at the D.C. Circuit, North Carolina has included in its legislation a back-up plan that the state can pursue expansion of AHPs in case the federal regulations remain struck down.

The U.S. Department of Labor issued regulations last June expanding the situations under which AHPs could be formed. These regulations were created in response to a push by the Trump administration to provide greater choice in health care coverage. Proponents of the regulations believed that the expansion of AHPs could make coverage more affordable and accessible for small business employees and sole proprietors. The regulations, however, were met with significant criticism on the grounds that AHPs would undermine the Patient Protection and Affordable Care Act (“ACA”), create instability in the ACA marketplaces, and lead to gaps in patient protection and coverage. This March, as noted in a prior C&M alert, the U.S. District Court for the District of Columbia struck down these regulations.

In response to the AHP rulemaking at the federal level, certain states took action. Some states drafted legislation to expand the use of AHPs and others moved to restrict the expansion of such plans. With the federal rule’s fate unclear, North Carolina created a back-up plan in its legislation. North Carolina’s law requires the state Department of Insurance to consider submitting an ACA Section 1332 waiver request to the federal government with the goal of allowing working owners and employers within the same geographical area to participate in a group health plan that is subject to large group market insurance requirements.

Section 1332 of the ACA permits states to apply for waivers in order to pursue innovative strategies for providing residents with health coverage. Under Section 1332, the U.S. Department of Health and Human Services (“HHS”) can waive certain statutory requirements. However, critics are unsure of whether a Section 1332 waiver could in fact authorize the formation of AHPs under the new North Carolina law.

In order to allow North Carolina’s expanded form of AHPs, the definition of “employer” under the Employee Retirement Income Security Act (ERISA), which governs private employer-sponsored health plans, would need to be waived under Section 1332 of the ACA or otherwise struck down by the courts. HHS may, however, lack adequate authority to allow states to redefine the statutory term “employer” under ERISA. If, however, HHS ultimately grants a waiver request from North Carolina, other states would likely follow suit.