Simply stated, ERISA health insurance is the very large U.S. market of employer-sponsored health plans regulated under the federal Employee Retirement Income Security Act (ERISA) of 1974. ERISA is a U.S. labor and tax law that governs workers’ retirement and employer-sponsored health insurance, and is administered and enforced by the U.S. Department of Labor (DOL). Among other things, ERISA imposes minimum standards for employer-sponsored health insurance, including documentation, reporting, and fiduciary requirements. With limited exceptions, ERISA applies to health insurance plans established by private-sector employers for their employees, regardless of the states where they operate. Nationally, about 136 million people are covered by an ERISA-regulated health plan, making ERISA health insurance the largest segment of the U.S. health insurance market.
History of ERISA Health Plans
ERISA was passed by Congress and signed into law by President Gerald Ford on Labor Day, September 2, 1974. ERISA restricts the ability of states to enact laws relating to employer-sponsored health insurance coverage. This federal preemption spares multi-state employers the burden of complying with 50 different sets of state laws and regulations. However, under ERISA, states retain the authority to regulate insurance carriers and health maintenance organizations (HMOs). Accordingly, employers that choose a fully-insured health plan (where the insurance company assumes all financial responsibility for the costs of enrollees’ medical claims) do not receive the full preemption benefits of ERISA, and they remain subject to certain state regulation. By contrast, employers that choose to “self-fund” their ERISA health plan are not subject to most traditional state insurance laws.
The number of ERISA health plans, and the number of Americans insured by ERISA health plans, has grown significantly over the last 25 years. According to the DOL’s 2018 Report to Congress, there were approximately 2.2 million ERISA-covered health plans in 2015 covering approximately 136 million people. It is estimated that approximately 60 percent of these individuals were covered by a self-funded ERISA health plan and the remaining 40 percent were covered under a fully-insured ERISA health plan. Today, ERISA health insurance is the single largest segment of the U.S. health insurance market.
ERISA imposes minimum requirements on employer-sponsored health plans, including:
- Plan Document Requirements — All ERISA health plans must be administered in accordance with a written plan document that covers details such as named fiduciaries, plan administration and operation, how benefits are paid, specific procedures for processing benefit claims and benefit appeals that comply with DOL regulations, certificates of coverage, special enrollment rights and nondiscrimination rules, and how the plan will protect the medical privacy of plan participants and beneficiaries.
- Summary Plan Description Requirements — ERISA explicitly requires the plan administrator to furnish participants and beneficiaries with a written summary plan description (SPD) in understandable terms that describes health plan benefits, provider networks details, and cost sharing provisions such as premium, deductible, co-insurance, and co-payment amounts for which the participant or beneficiary will be responsible.
- Reporting Requirements — ERISA requires annual reporting of financial and another information to both the DOL and plan participants.
- Fiduciary Requirements — ERISA sets standards and rules governing the conduct of any person who exercises authority or control over the management of a plan.
Over the years, there have been two significant amendments to ERISA that further protect employees who are covered under an ERISA health plan. First, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) allows separated employees to continue their employer-sponsored health coverage for up to 18 months after separation from the employer, as long as they were terminated for anything except gross misconduct. Second, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits health plans from refusing to cover an employee’s pre-existing conditions and bars them from defined categories of discrimination.
ERISA After the ACA
The Patient Protection and Affordable Care Act (ACA) of 2010, signed by President Barack Obama, has limited impact on the ERISA health insurance market. The primary purpose of the ACA was to reduce the number of uninsured Americans largely by modernizing the U.S. individual health insurance market and expanding Medicaid. As a general matter, the ACA didn’t significantly change the ERISA law, its regulatory regime, or the existing ERISA health insurance market. However, the ACA does contain certain health insurance market reforms that apply to ERISA health plans. Notably, most of these ACA minimum standards were already met or exceeded by ERISA health plans prior to the ACA’s enactment into law. The most important ACA insurance market reforms impacting ERISA health plans are:
- Large Employers Required to Offer Health Coverage – The ACA’s employer shared responsibility provision (employer mandate) requires employers with 50 or more full-time equivalent employees to offer affordable health insurance to their employees who work at least 30 hours per week. Although there was no requirement under ERISA for employers to offer health insurance to their employees, the vast majority of large employers did offer coverage prior to the ACA’s employer mandate.
- Cap on Out-of-Pocket Costs – ERISA health plans must cap out-of-pocket costs at $8,150 for an individual and $16,300 for a family (for the 2020 plan year). Similarly, ERISA health plans cannot have annual or lifetime dollar limits on Essential Health Benefits. The significant majority of ERISA health plans have deductible and out-of-pocket cost limits well below the ACA maximum thresholds.
- All Pre-Existing Conditions Are Covered - ERISA health plans cannot impose pre-existing condition waiting periods on new enrollees for Essential Health Benefits, regardless of whether they had continuous coverage prior to enrolling in the plan. Additionally, once an employee is determined eligible for ERISA coverage, the waiting period for coverage to begin cannot exceed 90 days.
- Children Can Remain on Parents’ Plan Until Age 26 – All ERISA health plans offering dependent coverage are required to allow children to remain on a parent’s plan until they turn 26.
- MLR Requirement for Fully-Insured ERISA Health Plans — All fully-insured ERISA health plans for large businesses (generally more than 50 employees) must have a medical loss ratio (MLR) of at least 85%. The MLR is the percentage of total premium revenue that is spent on medical claims and health care quality improvement (as opposed to administrative and marketing expenses and profits). By comparison, the MLR for the ACA individual and small group market is only 80%. The higher MLR greatly benefits employees who can access coverage in the large group ERISA health insurance market, rather than the ACA individual and small group markets. Additionally, the higher MLR for large ERISA groups reflects the efficiency and scale advantages realized by larger, more stable, and less fragmented risk pools.
Future of ERISA Health Plans
ERISA coverage is expected to expand significantly in 2020 as a result of newly implemented DOL regulation. For the first time on a broad basis, the ERISA market will open to small businesses, sole proprietors, and gig economy workers by means of association health plans. Association health plans are Multiple Employer Welfare Arrangements (MEWAs) that, under new regulation, allow many small businesses and sole proprietors to band together within a single large group ERISA health plan. Given the advantages of large group health plans (ranging from flexibility to integrate digital health programs to general price savings), association health plans are anticipated to increase by millions the number of workers covered by ERISA health plans.