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 askthe following questions regarding the applicabilityofchapter 1501, Texas Insurance 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: Forthe purposes ofChapter 1501, Insurance Code, does the payment ofindividual 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 ifthe individual health benefit plan is not offered or endorsed by the employer?

Ifa 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, ifany, does that classification have on the eligibility ofan individual to participate in the Texas Health Insurance Risk Pool under Chapter 1506, Insurance Code, if that individual is eligible to participate in the cafeteriaplan?' Your questions raise many issues off act, which cannotbe resolved in an opinion. See 

### Tex. Att'y Gen. Op. No. GA-0446 (2006) at 18 ("Questions offact 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 onAdministration, 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

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provisions at issue and the legal framework applicable to your questions. We begin by examining chapter 1501, Texas Insurance Code, in light ofyour 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 benefitplan is a small employer health benefitplan subjectto Subchapters C-H 2 

### ifitprovides 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 benefitplan as part ofa plan orprogram for purposes ofSection 106 or 162, IntemalRevenue Code of 1986 (26 U.S.C. Section 106 or 162); or (3) the health benefitplan is an employee welfare benefitplan 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 smallemployerhealthbenefitplanguidelines. See id §§ 1501.201-.215 (subchapterE relatingto 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 ofcoverage 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

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(I) the employerpays a portion ofthe premiums or benefits; (2) the employer or a covered individual treats the health benefitplan as part ofaplan orprogram for purposes ofSection 106 or 162, Internal Revenue Code of 1986 (26 U.S.C. Section 106 or 162); or (3) the healthbenefitplan is an employee welfare benefitplan under 29 C.F.R. Section 2510.3-10). Id. §§ 1501.003-.004 (footnotes added); see also id. § 1501.002 (defining, among other tenns, "healthbenefitplan," "eligible employee," "large employer," "large employerhealth benefitplan," "small employer" and "small employer health benefit plan"). II. Chapter 1501 Applicability A. Statutory Test We first considerthe statutorytest for large and small employerhealthbenefitplans. 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 alarge employerhealthbenefitplan 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. of Ins. Comm'rs v. GuardianLifeIns. Co., 180 S.W.2d 906, 908 (Tex. 1944) (explaining thatthe tenn "or" is generallyconstrued as disjunctive); TEx. LEGISLATNECOUNCILDRAFTINGMANUAL § 7.08 (Aug. 2006) ("Use a colon to introduce a series ofdependent subdivisions orto 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 ifone ofthe following three factors is present: (I) the employerpays aportion ofthepremiums orbenefits; (2) the employer or a covered

'The Texas Departmentoflnsurance (TDI) appears to construe the statute in asimilarfashion. SeeTDI Brief from Sara ShipletWaitt, SeniorAssociate Commissioner, Legal Services, Texas Department oflnsurance, to Nancy S. Fuller, Chair, OpinionCommittee, OfficeoftheAttorneyGeneral of Texas, at2 (Feb. 26, 2008) (onfilewiththe Opinion Committee) [hereinafterTDI 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 actuallypay aportion ofthe premium orbenefits in orderto be considered asmall employerplan under Section 1501.003 or alarge employerplan under Section 1501.004." Brieffrom Jay A. Thompson, ofThompson, Coe, Cousins & Irons, L.L.P., on behalfofthe Texas Association ofLife and Health Insurers, to Nancy S. Fuller, Chair, Opinion Committee, Office ofthe Attorney GeneralofTexas, at7(Mar. 18,2008) (onfile withthe OpinionCommittee) [hereinafterTALHIBrief]. DnderT ALHI'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 ofgrammar or statutory construction.The Honorable Kim Brimer

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individual treats the health benefit plan as part ofa plan orprogram for purposes ofsection 106 or 162 ofthe Internal Revenue Code; or (3) the health benefitplan is an employee welfare benefitplan under 29 C.F.R. section 2510.3-10). TEx. INS. CODE ANN. §§ 1501.003-.004 (Vernon 2007). 

### B. Safe Harbor We understandyouto inquire only aboutthe thirdmeans bywhich 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 2510.3-1 G),'); 1501.004(3) (providing that a plan is a large employerhealthbenefit plan if, among otherthings, 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. section251 0.3-1 G)-is commonlyknown as the "safeharbor" exclusion and, asyoupointout, rather thanproviding whatconstitutes an "employeewelfarebenefitplan" itexplains 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 ofan employee organization, under which (l) No contributions are made by an employer or employee organization; (2) Participation inthe 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 permitthe insurerto publicizethe programto employees or members, to collectpremiums throughpayroll deductions or dues checkoffs and to remit them to the insurer; and

'We note that regardless ofwhetherany particularplanfalls 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

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(4) The employer or employee organization receives no consideration in the form ofcash orotherwise in connection withthe program, otherthan 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). Ifaplan 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. CODEANN. §§ 1501.003(3), .004(3) (Vernon 2007); 29 C.F.R. § 2510.3-10).6 We notefirstthatthe safeharborexclusionis applicable, byits express terms, to "group" and "group-type" programs. 29 C.F.R. § 2510.3-10); see also 

### 0 'Brien v. Mutual of OmahaIns. 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 individualhealth benefitplan you describe is not a group or group-type program, it will not fall within the safe harbor exclusion. Section ISO 1.002(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 ofcoverage 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 healthbenefitplanunderwhich anumber ofindividual policies are offeredto 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 ofeachofthepolicytypes andcontracts includedinthe definition of"health benefit plan"). Because you do not specifY the type ofplan 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 similarmanner. 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), aplan falls withinthe safeharborfromtreatmentas an employee welfarebenefitplanundetTitle I, Employee Retirement Income SecurityAct (ERISA), and is not, therefore an employee welfarebenefitplanforpurposes of TIC §§ 1501.003(3) or 1501.004(3).") (footnote deleted). 70ne briefreceived in our office seems to argue that individualhealthbenefitplans are notencompassedwithin 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. or franchise policies and other specific types ofpolicies contained in the definition. Individual health insurance policies are not included in the defmition ofhealth benefit plan

....").The Honorable Kim Brimer

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Assuming the individual health benefitplanyou describe is a group or group-type insurance program, all four elements ofthe safeharborexclusionmustbe satisfied to qualifY for the exclusion. See 29 C.F.R. § 2510.3-1(j) (2004); House v. Am. UnitedLife Ins. Co., 499 F.3d 443, 449 (5th Cir. 2007), cert. denied, 128 S. Ct. 1309 (2008) ("Theplanmust meet all four criteria to be exempt from ERISA."). Consideration ofeach ofthe four elements ofthe safeharbor exclusion in anyparticular circumstance involves questions offact. See, e.g., House, 499 F.3d at 449-50 (the existence ofan 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 cafeteriaplanwithindefinition of"compensation"), 851.001 (6) (Vernon2004) (including cafeteria plan within definition of "compensation"); TEx. INs. CODE ANN. §§ 1551.003(5), 1601.003(3) (Vernon 2007) (providing "cafeteriaplan" 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 ofcash 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 'IHealth Ins. Co., 150 S.W.3d 718, 724-25 (Tex. App.-Austin 2004) ("Under a cafeteriaplan, an employee may request an employer to reduce an employee's wages by a certain amount in exchange for the employer purchasing insurance on behalfofthe 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 ofthe safe harbor exclusion. You also describe the plan at issue as one that is funded entirelybypre-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

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Assuming the type ofplanyou 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 ifa cafeteriaplan that is funded entirely bypre-tax deductions from employer-paid salaries is classified as a small or large employer health benefit plan, "what effect, ifany, ... that classification [has] on the eligibility ofan 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 exclusionprohibitions for small employerhealthbenefitplans); 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 atproviding otherwiseuninsurableindividuals with access to healthinsurance. 

### See TEx. INS. CODEANN. § 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 mightmakethe individualyou inquire about-apersonwho 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 

### eligiblefor 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 ofthe medical or health conditions" covered by the Pool. TEx. INS. CODE ANN. § 1506.l52(a)(3)(C)-{D) (Vernon 2007).The Honorable Kim Brimer

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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 eligible for healthbenefitp1anll coverage provided in connection with a policy, plan, orprogram 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 ofthese two provisions, it is apparent that, with certain exceptions, mere eligibility for health care benefits or coverage from a healthbenefitplan canmake 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

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### SUMMARY The payment of individual health benefit plan premiums through a cafeteriaplan that is funded entirely by pre-tax deductions from employer-paid salaries andthatis notoffered orendorsedbythe 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 anemployeewelfarebenefitplanunder 29 C.F.R. section25 10.3-1 

### G) (i.e., does notfall withinthe safeharbor exclusion). Whether any particular plan meets these requirements involves questions offact. An individual who is eligible to participate in a cafeteriaplan that is funded entirely by pre-tax deductions from employer-paid salaries and that constitutes a small or large employer health benefit planunderchapter 1501, may, depending uponthe 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