SMALL EMPLOYER HEALTH BENEFITS PROGRAM
20 West State Street, 10th Floor
P.O. Box 325
Trenton, NJ 08625
Phone: (609) 633-1882 x50306
Fax: (609) 633-2030
DATE: July 28, 2000
To: SEH Member Carriers and Interested Parties
From: Wardell Sanders, Executive Director
Re: Professional Employer Organizations/Employee Leasing Companies
The New Jersey Small Employer Health Benefits ("SEH") Program Board has received a number of inquiries regarding the application of the law governing small employer health insurance, N.J.S.A. 17B:27A-17 et seq. ("SEH Act"), to entities known variously as Professional Employer Organizations ("PEOs"), Employee Leasing Companies, and Co-Employers (hereinafter referred to as "PEOs"). The purpose of this Bulletin is to provide a framework for understanding the application of the SEH Act and other law to situations where a small employer has contracted with a PEO.
By way of background, a PEO is an entity that enters into contractual relationships with client companies to provide those client companies with certain services. Such services may include, among other things, payroll services, legal consultations, human resource administration, pension plans, and insurance coverages including medical benefits, health benefits coverage, worker's compensation coverage, dental coverage, and disability coverage. The services provided by PEOs to client companies vary by PEO. This Bulletin is solely concerned with health benefits coverage issues.
A key issue in the determination of what rules apply to health benefits coverage for employees that are working for client companies of a PEO, is whether it is the PEO or the client company that has sufficient control over the employees to be considered the "employer" of the employees. The SEH Act does not define the term "employer." However, guidance concerning the definition of an "employer" is provided under the federal Employee Retirement Income Security Act ("ERISA"). Section 3(5) of ERISA defines an "employer" as, "any person acting directly as an employer or indirectly in the interest of an employer, in relation to an employee benefit plan." ERISA section 3(6) defines an "employee" as, "any individual employed by an employer."
Common law has identified many factors that must be analyzed and evaluated in order to determine whether an entity is acting as a bona fide employer, all of which address whether the entity is controlling the terms and conditions of the employment relationship. The United States Supreme Court has cited the following test for determining the existence of a bona fide employer-employee relationship:
The Court noted that the test was a fact-specific inquiry, and the Court noted that no one factor was dispositive and that each factor must be weighed. A United States Department of Labor Advisory Opinion further states that neither the representations of a PEO nor the contract's characterization of the parties' relationship is dispositive as to the actual nature of the relationship between the PEO and its client companies. In short, the determination of whether a PEO is an employer or whether the client company is the employer will need to be examined on a case-by-case basis. Carriers are not limited to the common law test cited above and may consider other factors relating to control over the employee.
If a PEO can meet the high threshold requirements for establishing that it is the employer of all of the individuals covered under the arrangement, then the PEO's benefit arrangement will be considered a single-employer plan. If the PEO has a single-employer plan with more than 50 employees, then the plan will not be subject to the SEH Act. If the PEO has a single-employer plan with 50 or fewer employees, the health benefits plan issued to the PEO would be subject to the requirements of the SEH Act.
If a PEO cannot meet the high threshold requirements for establishing that it is the common law employer, then the PEO's benefit arrangement will be considered a multiple employer welfare arrangement ("MEWA") under ERISA and will be subject to State regulation.
Pursuant to N.J.S.A. 17B:27A-48 of the SEH Act, a "multiple employer arrangement" as defined at N.J.S.A. 17B:27A-17 (which includes a MEWA) is required to offer the standard health benefits plans established by the SEH Board to all small employers. Further, the SEH Act provides that a multiple employer arrangement shall conform to the rating requirements of the SEH Act, and the coverage shall be subject to the guarantee issuance and renewal rules of the SEH Act and the rules relating to pre-existing conditions limitations. In addition, carriers are required to notify the Commissioner of Banking and Insurance by December 31st of each year of any health care coverage or benefits, stop loss coverage or administrative services only contracts that it provides or enters into with a multiple employer arrangement that provides health care benefits to employees and their dependents in New Jersey.
In summary, carriers that receive applications for health benefits coverage from a PEO should treat them like other applicants and undertake reasonable measures to ensure that the applicant is eligible for the coverage which it seeks. If a PEO applies for health benefits coverage, the carrier should determine if the PEO or the client company is the employer. If the PEO is determined to be the employer, the carrier should determine the group size and issue SEH coverage if the group size is two to 50 employees and large group coverage if the group size is 51 or more employees. If the PEO is not the employer, each of the client companies that employs from two to 50 employees must be offered the standard health benefits plans, and the carrier and the MEA or MEWA must meet the filing requirements under the SEH Act.