An Employer’s Guide to Multiple Employer Welfare Arrangements (“MEWAs”)

What is a MEWA?

A MEWA is an arrangement where two or more employers pool their contributions to provide group health and other welfare benefits (such as dental, vision, life, and disability) to their employees. Welfare benefits under a MEWA may be self-insured or fully insured. Typically, employers make contributions to the MEWA based on their number of covered employees and the estimated costs associated with each employee. Employee contributions can also be made to a MEWA.

MEWAs offer significant advantages to small and medium-sized employers who want to offer welfare benefits to their employees. Specifically, MEWAs provide employers with cost advantages and a larger pool of plan participants to help mitigate plan risks. MEWAs also help employers minimize fiduciary responsibility, including reporting and disclosure requirements, and give employers the ability to provide better benefit packages to their employees due to economies of scale.

What Federal and State Laws Govern MEWAs?

Federal Laws

MEWAs are subject to certain provisions of the Internal Revenue Code (“IRC”), as well as rules and regulations enforced by the Internal Revenue Service (“IRS”). Except to the extent that a plan is subject to the unrelated business taxable income rules, MEWAs are exempt from taxation as long as they maintain their tax-exempt status under the IRC. The MEWA plan document must be amended or restated periodically to comply with the changing tax laws and IRS regulations.

Many MEWAs are subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), which requires plans to file an annual Form 5500 with the U.S. Department of Labor (“DOL”) and establishes standards for eligibility, participation, reporting, and disclosures, along with rules that all fiduciaries of the plan must follow.

A MEWA is generally considered one plan under ERISA. If ERISA applies at the MEWA level, then only one ERISA plan exists. However, if ERISA applies at the adopting employer level, then many ERISA plans exist because each employer is deemed to sponsor its own ERISA plan. A number of DOL advisory opinions have examined this issue using what is known as “common interest.”

The common interest requirement is used to determine whether the MEWA should be treated as a single plan for ERISA purposes and analyzes the following:

1. How members are solicited;
2. Who is entitled to participate and who actually participates in the association;
3. The process by which the association was formed, the purposes for which it was formed, and what, if any, were the preexisting relationships of its members;
4. The powers, rights and privileges of employer members that exist by reason of their status as employers; and
5. Who actually controls and directs the activities and operations of the benefit program.

In addition, the employers must, either directly or indirectly, exercise control over the plan, both inform and substance.

In addition to the Form 5500, MEWAs are required to file an annual Form M-1, Report for Multiple Employer Welfare Arrangements (MEWAs) and Certain Entities Claiming Exception (ECEs), with the DOL.

State Laws

In addition to federal governance, states also have the authority to regulate MEWAs. States have the ability to treat MEWAs as insurance companies under state law, including MEWAs that qualify as ERISA plans. State laws differ with regard to MEWA regulation, required registration, and reporting requirements.

For most types of MEWAs, states may apply and enforce any state insurance law requiring the maintenance of specific reserves or contributions designed to ensure that the MEWA will be able to satisfy its benefit obligations in a timely fashion. Accordingly, states can subject MEWAs to licensing, registration, certification, financial reporting, examination, audit, and any other requirement of state insurance law necessary to ensure compliance with the state insurance reserves, contributions, and funding requirements. Some state laws impose an additional layer of employer commonality or association requirements. For any MEWA that is self-funded or partially self-funded, any law of any state that regulates insurance may apply to the extent that it is not inconsistent with Title I of ERISA. Accordingly, if a MEWA is self-insured, the only limitation on the applicability of state insurance law to the MEWA is that the law be consistent with Title I of ERISA.

What are the Key Plan Structural and Operational Considerations for MEWAs?

In most MEWA arrangements, the adopting employers are not the plan sponsor. Possible governance structures include lead employer sponsorship, board sponsorship, co-sponsorship, group or association sponsorship, or sponsorship by a third party.

Sponsorship by a Lead Employer

When a lead employer sponsors a MEWA, the sponsoring employer maintains control and appoints plan fiduciaries. The lead employer may be the only named fiduciary under the plan documents. Note that sponsorship by a lead employer may create difficulties in meeting the DOL Advisory Opinion 2012-04A requirement that the adopting employers control the plan.

Board Sponsorship

A board of directors consisting solely of members may be appointed by the adopting employers to serve as the plan sponsor. Alternatively, a board could be appointed solely to appoint and monitor fiduciaries on behalf of the sponsor.

Co-Sponsorship

The plan document can be drafted in such a way that each adopting employer is a co-sponsor of the plan. This approach can be combined with a board structure to ensure control by adopting employers. If a board is not used, each adopting employer must explicitly agree to the appointment, services, and compensation of each fiduciary and service provider.

Group or Association Sponsorship

Because a group or association of employers may be considered an employer for ERISA purposes, a MEWA may be sponsored by a governing body representing a group of employers or by a separate entity such as a not-for-profit association. Note that the DOL has stated that association sponsorship does not automatically confer “employer” and “sponsor” status. In some cases, a board structure may be combined with association sponsorship.

Third-Party Sponsorship

Some MEWAs are created by advisors or professional fiduciaries who form alliances with organizations that sponsor the plan for a fee. Alternatively, a service provider, such as a recordkeeper or advisor, may be a third-party sponsor. As with sponsorship by a lead employer, sponsorship by a third party may create difficulties in meeting the DOL Advisory Opinion 2012-04A requirement that the adopting employers control the plan.

How can a Plan Sponsor Establish and Operate a MEWA from a Legal Standpoint?

To establish a MEWA, the plan sponsor first needs to determine the best structure to achieve the MEWA’s overall goals. After finalizing the initial structural goals, the plan sponsor can work with legal counsel to draft the requisite documents, which may include an association trust, bylaws, and/or other documents depending on the desired structure.

Upon establishment of the MEWA, a federal Form M-1 needs to be filed and must be renewed annually. At the state level, establishment and registration requirements are more complex and largely differ. A MEWA plan sponsor should work with benefits counsel to ensure the overall goals of the MEWA are achieved, and the federal and state compliance requirements can be met.

For additional information, contact Emily Langdon at elangdon@fraserstryker.com.