ATTORNEY GENERAL OF TEXAS

GREG ABBOTT

July 2,2008

The Honorable Kim Brimer

Chair, Committee on Administration

Texas State Senate

Post Office Box 12068

Austin, Texas 78711-2068

Dear Senator Brimer:

Opinion No. GA-0640

Re: Applicability ofchapter 1501, Texas Insurance

Code, to certain health benefit "cafeteria" plans

offered by employers (RQ-0662-GA)

You ask the following questions regarding the applicability ofchapter 1501, TexasInsurance

Code, to certain health benefit plans and the related effect such applicability may have on an

individual's eligibility to participate in the Texas Health Insurance Risk Pool:

For the purposes ofChapter 1501, Insurance Code, does the payment

of individual health benefit plan premiums through a cafeteria plan

that is funded entirely by pre-tax deductions from employer[-]paid

salaries create a small or large employer health benefit plan if the

individual health benefit plan is not offered or endorsed by the

employer?

If a cafeteria plan that is funded entirely by pre-tax deductions from

employer[-]paid salaries is classified as a small or large employer

health benefit plan, what effect, if any, does that classification have

on the eligibility of an individual to participate in the Texas Health

Insurance Risk Pool under Chapter 1506, Insurance Code, if that

individual is eligible to participate in the cafeteria plan?'

Your questions raise many issues offact, which cannot be resolved in an opinion. See Tex.

Att'y Gen. Op. No. GA-0446 (2006) at 18 ("Questions of fact are not appropriate to the opinion

process."). We can, however, provide some guidance as to the interpretation of the statutory

'See Letterfrom Honorable Kim Brimer, Chair, Committee on Administration, Texas State Senate, to Honorable

Greg Abbott, Attorney General ofTexas, at 2-3 (Jan. 2, 2008) (on file with the Opinion Committee, also available at

http://www,texasattorneygeneral.gov) [hereinafter Request Letter].
The Honorable Kim Brimer - Page 2 (GA-0640)

provisions at issue and the legal framework applicable to your questions. We begin by examining

chapter 1501, Texas Insurance Code, in light of your questions.

I. Chapter 1501

Chapter 1501 of the Insurance Code is the state's "Health Insurance Portability and

Availability Act." 'TEx. INS. CODE ANN. § 1501.001 (Vernon 2007). Sections 1501.003 and

1501.004 respectively define small and large employer health benefits plans for the purposes of

chapter 150I:

§ 1501.003. Applicability: Small Employer Health Benefit Plans

An individual or group health benefit plan is a small employer

health benefit plan subject to Subchapters C-H 2 ifit provides health

care benefits covering two or more eligible employees of a small

employer and:

(I) the employer pays a portion ofthe premiums or benefits;

(2) the employer or a covered individual treats the health

benefit plan as part of a plan or program for purposes of Section 106

or 162, IntemalRevenue Code of 1986 (26 U.S.C. Section 106 or

162); or

(3) the health benefit plan is an employee welfare benefit plan

under 29 c.P.R. Section 2510.3-10).

§ 1501.004. Applicability: Large Employer Health Benefit Plans

An individual or group health benefit plan is a large employer

health benefit plan subject to Subchapters C and M3 if the plan

provides health care benefits to eligible employees of a large

employer and:

'Subchapter C sets out the provisions ofcoverage for both small and large employer health benefit plans. See

TEX. INS. CODE ANN. §§ 1501.101-.111 (Vernon 2007). Subchapter D mandates the issue of, and sets the parameters

for, small employer health benefit plans to small employers. See id. §§ 1501.151-.159. Subchapters E through H

establish small employer health benefit plan guidelines. See id §§ 1501.201-.215 (subchapterErelating to underwriting

and rating plans); 1501.251-.260 (subchapter F outlining provisions of coverage); 1501.301-.326 (subchapter G

providing for reinsurance); 1501.351-.358 (subchapter H concerning marketing).

'Subchapter C sets out the provisions of coverage for both small and large employer health benefit plans. See

id §§ 1501.101-.111. Subchapter M establishes participation criteria, coverage requirements, premium rates and

marketing requirements pertaining to large employer benefit plans. See id. §§ 1501.601-.616.
The Honorable Kim Brimer - Page 3 (GA-0640)

(I) the employer pays a portion ofthe premiums or benefits;

(2) the employer or a covered individual treats the health

benefit plan as part of a plan or program for purposes of Section 106

or 162, Internal Revenue Code of 1986 (26 U.S.C. Section 106 or

162); or

(3) the health benefit plan is an employee welfare benefit plan

under 29 C.F.R. Section 2510.3-10).

Id. §§ 1501.003-.004 (footnotes added); see also id. § 1501.002 (defining, among other tenns,

"health benefit plan," "eligible employee," "large employer," "large employer health benefit plan,"

"small employer" and "small employer health benefit plan").

II. Chapter 1501 Applicability

A. Statutory Test

We first considerthe statutory test for large and small employer health benefit plans. A colon

introduces three means by which a small employer health benefit plan under section 1501.003 is

created and, likewise, a colon introduces three means bywhich a large employer health benefit plan

under section 1501.004 is created. Id. §§ 1501.003-.004. As the three means in the respective

provisions are connected by the word "or," they should be read as alternatives.' See Bd. ofIns.

Comm'rs v. Guardian Life Ins. Co., 180 S.W.2d 906, 908 (Tex. 1944) (explaining that the tenn "or"

is generally construed as disjunctive); TEx. LEGISLATNE COUNCILDRAFTING MANUAL § 7.08 (Aug.

2006) ("Use a colon to introduce a series of dependent subdivisions or to introduce subdivisions of

a definitions section.").

Thus, an individual or group health benefit plan that provides benefits to the requisite

employees is a small or large employer health benefit plan if one ofthe following three factors is

present: (I) the employer pays a portion ofthe premiums or benefits; (2) the employer or a covered

'The Texas Department oflnsurance (TDI) appears to construe the statute in a similar fashion. See TDI Brief

from Sara Shiplet Waitt, Senior Associate Commissioner, Legal Services, Texas Department oflnsurance, to Nancy S.

Fuller, Chair, OpinionCommittee, Office ofthe Attorney General ofTexas, at 2 (Feb. 26, 2008) (on file with the Opinion

Committee) [hereinafter TDI Brief].

Without offering supporting citation, the Texas Association ofLife and Health Insurers (TALHI) asserts in a

briefsubmitted to our office that "the Texas Legislature intended that an employer must actually pay a portion ofthe

premium or benefits in order to be considered a small employer plan under Section 1501.003 or a large employer plan

under Section 1501.004." Brieffrom Jay A. Thompson, ofThompson, Coe, Cousins & Irons, L.L.P., on behalf ofthe

Texas Association ofLife and Health Insurers, to Nancy S. Fuller, Chair, Opinion Committee, Office ofthe Attorney

General ofTexas, at7(Mar. 18,2008) (on file with the Opinion Committee) [hereinafterTALHIBrief]. DnderTALHI's

proposed construction we would have to read the term "and" after 1501.003(1) and 1501.004(1). See id. at 5. Such a

reading is not supported by the rules of grammar or statutory construction.
The Honorable Kim Brimer - Page 4 (GA-0640)

individual treats the health benefit plan as part of a plan or program for purposes ofsection 106 or

162 ofthe Internal Revenue Code; or (3) the health benefit plan is an employee welfare benefit plan

under 29 C.F.R. section 2510.3-10). TEx. INS. CODE ANN. §§ 1501.003-.004 (Vernon 2007).

B. Safe Harbor

We understand you to inquire only about the third means by which a small or large employer

health benefit plan is created contained in sections 1501.003(3) and 1501.004(3).5 See Request

Letter, supra note 1, at 1-2 (predicating questions on the application of29 C.F.R. § 2510.3-10);

TEX. INS. CODE ANN. §§ 1501.003(3) (Vernon 2007) (providing that a plan is a small employer

health benefit plan if, among other things, the plan "is an employee welfare benefit plan under 29

C.F.R. Section 2510.3-1G),'); 1501.004(3) (providing that a plan is a large employer health benefit

plan if, among other things, the plan "is an employee welfare benefit plan under 29 C.F.R. Section

251O.3-1G),')·

The federal regulation referred to in sections 1501.003(3) and 1501.004(3)-29 C.F.R.

section 251 0.3-1 G)-is commonly known asthe "safe harbor" exclusion and, as youpoint out, rather

than providing what constitutes an "employee welfare benefit plan" it explains whattype ofprogram

is not within that term. See Request Letter, supra note 1, at 2; 29 C.F.R. § 2510.3-10); McNeil v.

Time Ins. Co., 205 F.3d 179, 190 (5th Cir. 2000) (explaining that 29 C.F.R. § 2510.3-10) is a federal

regulation promulgated by the Secretary ofLabor called the "safe harbor" exclusion that exempts

certain insurance programs from the scope of the Employee Retirement Income Security Act

(ERlSA». The safe harbor exclusion provides, in relevant part, that

the term[] "employee welfare benefit plan" ... shall not include a

group or group-type insurance program offered by an insurer to

employees or members of an employee organization, under which

(l) No contributions are made by an employer or employee

organization;

(2) Participation in the program is completely voluntary for

employees or members;

(3) The sole functions of the employer or employee

organization with respect to the program are, without endorsing the

program, to permit the insurer to publicize the program to employees

or members, to collect premiums through payroll deductions or dues

checkoffs and to remit them to the insurer; and

'We note that regardless ofwhether any particular plan falls within subsection (3), itmay nonetheless constitute

a small or large employer health benefit plan pursuant to sections 1501.003(l}--(2) or 1501.004(l}--(2).
The Honorable Kim Brimer - Page 5 (GA-0640)

(4) The employer or employee organization receives no

consideration in the form ofcash or otherwise in connection with the

program, other than reasonable compensation, excluding any profit,

for administrative services actually rendered in connection with

payroll deductions or dues checkoffs.

29 C.F.R. § 2510.3-10) (2004) (emphasis added). Ifa plan falls within the safe harbor exclusion at

29 C.F.R. § 2510.3-IG), it is not an employee welfare benefit plan for purposes of sections

1501.003(3) or 1501.004(3), Texas Insurance Code. TEx. INS. CODE ANN. §§ 1501.003(3), .004(3)

(Vernon 2007); 29 C.F.R. § 2510.3-10).6

We note first that the safe harbor exclusion is applicable, by its express terms, to "group" and

"group-type" programs. 29 C.F.R. § 2510.3-10); see also 0 'Brien v. Mutual ofOmaha Ins. Co., 99

F. Supp. 2d 744, 747 (E.D. La. 1999) (concluding that the safe harbor exclusion did not apply to an

individual health insurance policy acquired by an employee directly from an insurance company

because it was not a group or group-type policy). Ifthe individual health benefit plan you describe

is not a group or group-type program, it will not fall within the safe harbor exclusion.

Section ISO1.002(5) defines the term "health benefit plan" to "mean[] a group, blanket, or

franchise insurance policy, a certificate issued under a group policy, a group hospital service

contract, or a group subscriber contract or evidence of coverage issued by a health maintenance

organization that provides benefits for health care services." TEx. INs. CODE ANN. § 1501.002(5)

(Vern0n 2007). An examination ofthe enumerated policy types and contracts included within the

definition of "health benefit plan" reveals that certain individual health benefit plans are

encompassed within that definition,7 and we assume it is this type ofplan to which you refer when

you use the phrase "individual health benefit plan." Request Letter, supra note I, at 1-3. A

franchise insurance policy is, for example, an "individual health benefit plan under which a number

ofindividual policies are offered to a selected group." 28 TEx. ADMIN. CODE §§ 3.601(c)(3) (2008)

(Tex. Dep't Ins., Purpose and Scope, Applicability, and Definitions Used in This Subchapter);

26.4(17) (Tex. Dep't Ins., Definitions); see also Tex. Att'y Gen. Op. No. GA-0327 (2005) at 4-5

(discussing the meaning ofeach ofthe policy types and contractsincluded in the definition of"health

benefit plan"). Because you do not specifY the type of plan at issue, we can not rule out the

possibility that the individual health benefit plan you describe is a group or group-type program.

'The TDI appears to construe this statute in a similar manner. See TDI Brief, supra note 4, at 8 ("To the extent

that an employer correctly applies and implements the safe harbor regulations established at 29 C.F.R. § 2510.3-10),

a plan falls within the safe harbor from treatment as an employee welfare benefit plan undetTitle I, Employee Retirement

Income Security Act (ERISA), and is not, therefore an employee welfare benefit plan for purposes ofTIC §§ 1501.003(3)

or 1501.004(3).") (footnote deleted).

70ne briefreceived in our office seemsto argue that individual health benefit plans are not encompassedwithin

the definition of "health benefit plan." See TALHI Brief, supra note 4, at 6 ("The term health benefit plan is defmed

... to mean only group. blanket. orfranchise policies and other specific types of policies contained in the definition.

Individual health insurance policies are not included in the defmition of health benefit plan ....").
The Honorable Kim Brimer - Page 6 (GA-0640)

Assuming the individual health benefit plan you describe is a group or group-type insurance

program, all four elements ofthe safe harbor exclusion must be satisfied to qualifY for the exclusion.

See 29 C.F.R. § 2510.3-1(j) (2004); House v. Am. United Life Ins. Co., 499 F.3d 443, 449 (5th Cir.

2007), cert. denied, 128 S. Ct. 1309 (2008) ("The plan must meet all four criteria to be exempt from

ERISA."). Consideration ofeach ofthe four elements ofthe safe harbor exclusion in any particular

circumstance involves questions offact. See, e.g., House, 499 F.3d at 449-50 (the existence of an

ERISA plan, which depends in part on whether the plan falls within the safe harbor exclusion, is a

mixed question oflaw and fact unless the facts are undisputed); McNeil, 205 F.3d at 189 (holding

that whether an insurance policy constitutes an ERISA plan is an issue of fact). We cannot,

therefore, determine whether the individual health benefit plan you describe falls within the safe

harbor exclusion.

You tell us various things about the individual health benefit plan at issue that may be

relevant to the applicability of the safe harbor exclusion. You describe the payment of plan

premiums as being made through a "cafeteria plan." Request Letter, supra note 1, at 2-3. State

statutes define this term to mean a plan authorized by section 125 ofthe Internal Revenue Code,

and we assume that you mean the same when you use the term. See, e.g., TEX. EDUC. CODE ANN.

§ 22.101(1) (Vernon Supp. 2007) ('''Cafeteria plan' means a plan as defined ... by Section 125,

Internal Revenue Code ...."); TEX. GOV'T CODE ANN. §§ 811.001(7) (Vernon Supp. 2007)

(including cafeteriaplan within definition of"compensation"), 851.001 (6) (Vernon 2004) (including

cafeteria plan within definition of "compensation"); TEx. INs. CODE ANN. §§ 1551.003(5),

1601.003(3) (Vernon 2007) (providing "cafeteria plan" means a section 125 plan). Section 125 of

the Internal Revenue Code defines a cafeteria plan as:

a written plan under which-

(A) all participants are employees, and

(B) the participants may choose among 2 or more benefits

consisting of cash and qualified benefits.8

26 U.S.C.A. § 125(d)(l) (West Supp. 2007) (footnote added); see also Nat'! Plan Admin., Inc. v.

Nat 'I Health Ins. Co., 150 S.W.3d 718, 724-25 (Tex. App.-Austin 2004) ("Under a cafeteria plan,

an employee may request an employer to reduce an employee's wages by a certain amount in

exchange for the employer purchasing insurance on behalf ofthe employee or for reimbursing the

employee for medical or child-care expenses."), rev'd on other grounds, 235 S.W.3d 695 (Tex.

2007). That a plan is a cafeteria plan is not dispositive as to the application of the safe harbor

exclusion.

You also describe the plan at issue as one that is funded entirely by pre-tax deductions from

employer-paid salaries and is not offered or endorsed by the employer. Request Letter, supra note

1, at 2. Like the fact that the plan at issue is a cafeteria plan, those factors are relevant but not

dispositive as to whether the plan falls within the safe harbor exclusion.

'With some exceptions, the term does not include a plan that provides for deferred compensation. See 26

U.S.C.A. § 125(d)(2) (West Supp. 2007).
The Honorable Kim Brimer - Page 7 (GA-0640)

Assuming the type ofplan you describe does not fall within the safe harbor exclusion and is

a small or large employer health plan under chapter 1501, we consider your second question.

III. Texas Health Insurance Risk Pool

You ask if a cafeteria plan that is funded entirely by pre-tax deductions from employer-paid

salaries is classified as a small or large employer health benefit plan, "what effect, if any, ... that

classification [has] on the eligibility of an individual to participate in the Texas Health Insurance

Risk Pool under Chapter 1506, Insurance Code, ifthat individual is eligible to participate in the

cafeteria plan[.]" Request Letter, supra note I, at 3. We assume from your question that the

individual is only eligible for but not actually covered by the plan you describe. Id; see also TEx.

INS. CODE ANN. §§ 1501.151-.152 (Vernon 2007) (establishing guaranteed issue requirements and

exclusion prohibitionsfor small employer health benefit plans); 1501.602-.603 (providing coverage

requirements and exclusion prohibitions for large employer health benefit plans).

The Texas Health Insurance Risk Pool (the "Pool") is a legislatively created insurance

pool aimed at providing otherwise uninsurable individuals with accessto health insurance. See TEx.

INS. CODE ANN. § 1506.101 (Vernon 2007). Eligibility for coverage from the Pool is established in

subchapter D, chapter 1506, Insurance Code. Section 1506.153(a) sets out a list ofindividuals who

are not eligible for coverage from the Pool. Id. § 1506.153(a). You do not identify a particular

provision that you believe would result in ineligibility. Request Letter, supra note I. We examine

two statutory provisions that might make the individual you inquire about-a person who is eligible

to participate in an individual health care benefit plan under chapter 1501-ineligible to obtain

coverage from the Pool.9

First, we consider section 1506.153(a)(2), which provides that

an individual is not eligible for coverage from the pool if...

(2) at the time the individual applies to the pool, except as

provided in Subsection (b), the individual is eligible for other health

care benefits ... other than:

(C) individual coverage conditioned by a limitation

described by Section 1506.152(a)(3)(C) or (0).10

TEX. INS. CODE ANN. § 1506.153(a)(2) (Vernon 2007) (emphasis added).

9An individual covered by the plan you describe may, depending on the facts, be ineligible for coverage from

the Pool under other provisions as well.

IOSection 1506.152(a)(3)(C) describes "an offer to issue substantially similar individual coverage only with

conditional riders" and subsection (D) relates to "a diagnosis of the individual with one of the medical or health

conditions" covered by the Pool. TEx. INS. CODE ANN. § 1506.l52(a)(3)(C)-{D) (Vernon 2007).
The Honorable Kim Brimer - Page 8 (GA-0640)

Second, we consider section 1506.153(a)(7), which provides that "an individual is not

eligible for coverage from the pool if... the individual is eligiblefor health benefit p1anll coverage

provided in connection with a policy, plan, or program paid for or sponsored by an employer, even

though the employer coverage is declined." Id. § 1506.153(a)(7) (footnote and emphasis added).

Certain part-time employees are excepted from this provision. Id.

Based on the express language of these two provisions, it is apparent that, with certain

exceptions, mere eligibility for health care benefits or coverage from a health benefit plan can make

one ineligible for coverage from the Pool. Therefore, ifan individual is eligible to participate in an

individual health benefit plan classified as a small or large employer health benefit plan under

chapter 1501, the individual may, depending on the facts, be ineligible for coverage from the Pool.

"The term "health benefit plan" is broadly defmed in chapter 1506 as "an individual or group health benefit

plan" including, among other things, any "health care plan or arrangement that pays for or furnishes medical or health

care services by insurance or otherwise." Id. § 1506.002(a).
The Honorable Kim Brimer - Page 9 (GA-0640)

SUMMARY

The payment of individual health benefit plan premiums

through a cafeteria plan that is funded entirely by pre-tax deductions

from employer-paid salaries and that is not offered or endorsed by the

employer is a small or large employer health benefit plan under

section 1501.003(3) or 1501.004(3), Insurance Code, ifthe plan (1)

is a health benefit plan that provides health care benefits (2) to the

requisite employees and (3) is an employee welfare benefitplanunder

29 C.F.R. section 25 10.3-1G) (i.e., does not fall within the safe harbor

exclusion). Whether any particular plan meets these requirements

involves questions offact.

An individual who is eligible to participate in a cafeteria plan

that is funded entirely by pre-tax deductions from employer-paid

salaries and that constitutes a small or large employer health benefit

plan under chapter 1501, may, depending upon the facts, be ineligible

to participate in the Texas Health Insurance Risk Pool under chapter

1506 ofthe Insurance Code.

KENT C. SULLIVAN

First Assistant Attorney General

ANDREW WEBER

Deputy Attorney General for Legal Counsel

NANCY S. FULLER

Chair, Opinion Committee

Christy Drake-Adams

Assistant Attorney General, Opinion Committee