BILL NUMBER: SB 972 AMENDED
BILL TEXT
AMENDED IN SENATE MAY 23, 2007
AMENDED IN SENATE APRIL 9, 2007
INTRODUCED BY Senator McClintock
FEBRUARY 23, 2007
An act to amend Sections 742.20, 742.24, and 742.29 of
742.215, 742.24, 742.245, 742.25, 742.29, and 742.30
of, and to add Sections 743, 743.01, and 743.02 to,
the Insurance Code, relating to insurance.
LEGISLATIVE COUNSEL'S DIGEST
SB 972, as amended, McClintock. Insurance: multiple employer
welfare arrangements.
Existing law provides for the regulation of insurers by the
Department of Insurance. Under existing law, a multiple employer
welfare arrangement (MEWA), as defined, that applied to the
department before December 1, 1995, for a certificate of compliance
is not considered an unauthorized insurer and may continue providing
benefits to its members.
This bill would allow a MEWA an
association, as defined, that satisfies specified criteria to
apply to the department on and after January 1, 2008
, for a certificate of compliance for a self-funded or
partially self-funded MEWA, as defined, established by
the association on or after January 1, 2008 .
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 742.20 of the Insurance Code is amended to
read:
742.20. The Legislature finds and declares the following:
(a) An alternative to insurance programs, health care maintenance
organizations, and panel provider organizations was established by
Congress in 1974 through the Employee Retirement Income Security Act
(ERISA). Among the various employee benefit programs established and
governed by ERISA are multiple employer welfare arrangements (MEWA),
which are subject as well to state regulatory and fiscal
standards not inconsistent with ERISA. MEWAs permit trade
associations to create trust funds for the purpose of offering and
providing health care benefits to employer members for their
employees. MEWAs can be created as fully insured or self-funded or
partially self-funded benefit programs.
(b) The Legislature recognizes that some MEWAs provide an
alternative mechanism to traditional health insurance for small
employers. It is the intent of the Legislature to ensure the
financial integrity of MEWA programs by requiring self-funded or
partially self-funded MEWAs to obtain a certificate of compliance
from the Department of Insurance. In order for the Department of
Insurance to grant a certificate of compliance, the MEWA must adhere
to standards set forth in this article that are not inconsistent with
the provisions of ERISA. Further, it is the intent of the
Legislature to provide the Department of Insurance with the authority
to levy monetary penalties and to revoke certificates of compliance
from MEWAs that violate the provisions of this article.
(c) The Legislature has passed significant reforms in the area of
small group health insurance. This article, in no manner, circumvents
these reforms nor is it intended to be a precedent to do so.
Therefore, the small group reform legislation applies to MEWAs to the
extent it is not inconsistent with ERISA.
(d) The provisions of this article are consistent with and
authorized by ERISA, which confers upon the states limited authority
to regulate MEWAs.
SEC. 2. Section 742.215 of the Insurance
Code is amended to read:
742.215. As used in Except as provided in
Section 743, the following definitions apply for purposes of
this article , "self-funded" :
(a) "Self-funded" means a
multiple employer welfare arrangement that undertook at all times and
for a continuous period of five years to reimburse health benefit
costs incurred by covered persons pursuant to the benefits and
coverages provided by their plan exclusively from plan assets.
"Partially
(b) "Partially self-funded" means
a multiple employer welfare arrangement that undertook at all times
and for a continuous period of five years to reimburse health benefit
costs incurred by covered persons pursuant to the benefits and
coverages provided by their plan exclusively from plan assets,
provided, however, that these benefits are reimbursable to the
multiple employer welfare arrangement by stop loss insurance only to
the extent that the benefits exceed fifty thousand dollars ($50,000)
per claim.
SEC. 2. SEC. 3. Section 742.24 of
the Insurance Code is amended to read:
742.24. To Except as specified in
Sections 743 to 743.02, inclusive, to be eligible for a
certificate of compliance, a self-funded or partially self-funded
multiple employer welfare arrangement shall meet all of the following
requirements:
(a) Be nonprofit.
(b) Be established and maintained by a trade association, industry
association, professional association, or by any other business
group or association of any kind that has a constitution or bylaws
specifically stating its purpose, and have been organized and
maintained in good faith with at least 200 paid members and operated
actively for a continuous period of five years, for purposes other
than that of obtaining or providing health care coverage benefits to
its members. An association is a California mutual benefit
corporation comprised of a group of individuals or employers who
associate based solely on participation in a specified profession or
industry, accepting for membership any individual or employer meeting
its membership criteria, which do not condition membership directly
or indirectly on the health or claims history of any person, and
which uses membership dues solely for and in consideration of the
membership and membership benefits.
(c) Be organized and maintained in good faith with at least 2,000
employees and 50 paid employer members and operated actively for a
continuous period of five years.
(d) Have been operating in compliance with ERISA on a self-funded
or partially self-funded basis for a continuous period of five years
pursuant to a trust agreement by a board of trustees that shall have
complete fiscal control over the multiple employer welfare
arrangement, and that shall be responsible for all operations of the
multiple employer welfare arrangement. The trustees shall be selected
by vote of the participating employers and shall be owners,
partners, officers, directors, or employees of one or more employers
participating in the multiple employer welfare arrangement. A trustee
may not be an owner, officer, or employee of the insurer,
administrator, or service company providing insurance or
insurance-related services to the association. The trustees shall
have authority to approve applications of association members for
participation in the multiple employer welfare arrangement and to
contract with an authorized administrator or service company to
administer the day-to-day affairs of the multiple employer welfare
arrangement.
(e) Benefits shall be offered only to association members.
(f) Benefits may be offered only through life agents, as defined
in Section 1622, licensed in the state whose names, addresses, and
telephone numbers have been filed with the commissioner as licensed
life agents for the multiple employer welfare arrangement.
(g) Be operated in accordance with sound actuarial principles and
conform to the requirements of Section 742.31.
(h) File an application with the department for a certificate of
compliance.
(i) The multiple employer welfare arrangement shall at all times
maintain aggregate stop loss insurance providing the arrangement with
coverage with an attachment point that is not greater than 125
percent of annual expected claims. The commissioner may, by
regulation, define "expected claims" for purposes of this subdivision
and provide for adjustments in the amount of the percentage in
specified circumstances in which the arrangement specifically
provides for and maintains reserves in accordance with sound
actuarial principles as provided in Section 742.31.
(j) The multiple employer welfare arrangement shall establish and
maintain specific stop loss insurance providing the arrangement with
coverage with an attachment point that is not greater than 5 percent
of annual expected claims. The commissioner may, by regulation,
define "expected claims" for purposes of this subdivision and provide
for adjustments in the amount of that percentage as may be necessary
to carry out the purposes of this subdivision determined by sound
actuarial principles as provided in Section 742.31.
(k) The multiple employer welfare arrangement shall establish and
maintain appropriate loss and loss adjustment reserves determined by
sound actuarial principles as provided in Section 742.31.
(l) The association has within its own organization adequate
facilities and competent personnel to serve the multiple employer
welfare arrangement, or has contracted with a licensed third-party
administrator to provide those services.
(m) The association has established a procedure for handling
claims for benefits in the event of the dissolution of the multiple
employer welfare arrangement.
(n) On and after January 1, 2003, in addition to the requirements
of this article, maintain a surplus of not less than one million
dollars ($1,000,000), and that this amount be increased as follows:
one million seven hundred fifty thousand dollars ($1,750,000) by
January 1, 2004; two million five hundred thousand dollars
($2,500,000) by January 1, 2005; three million two hundred fifty
thousand dollars ($3,250,000) by January 1, 2006; and four million
dollars ($4,000,000) by January 1, 2007. A self-funded or
partially self-funded multiple employer welfare arrangement that
applies to the department on or after January 1, 2008, for a
certificate of compliance shall, in addition to the requirements of
this article, maintain a surplus of not less than four million
dollars ($4,000,000).
(o) Submit all proposed rate levels to the department for
informational purposes no later than 45 days prior to their
implementation. The proposed rates shall contain an aggregate benefit
structure that has a loss ratio experience of not less than 80
percent. The loss ratio experience shall be calculated as claims paid
during the contract period plus a reasonable estimate of claims
liability for the contract period at the end of the current year
divided by contributions paid or collected for the contract period
minus unearned contributions at the end of the current year.
(p) Comply with the investment requirements of Section
724.245 742.245 .
SEC. 4. Section 742.245 of the
Insurance Code is amended to read:
742.245. (a) A self-funded or partially self-funded multiple
employer welfare arrangement shall maintain at least 25 percent of
the surplus required by subdivision (n) of Section 742.24 or by
subdivision (b) of Section 743.02 in investments specified in
Article 3 (commencing with Section 1170) of Chapter 2 of
Part 2 of Division 1 and in Section 1192.5.
(b) The balance of the assets of a self-funded or partially
self-funded multiple employer welfare arrangement may be invested in
the following:
(1) An open-ended diversified management company, as defined in
the federal Investment Company Act of 1940 (15 U.S.C. Sec.
80a-1 et seq.), that meets all of the following requirements:
(A) It is registered with, and reports to, the Securities and
Exchange Commission.
(B) It is domiciled in the United States.
(C) Substantially all of its investments consist of investment
grade debt instruments and cash.
(D) All of its assets are held in the United States by a bank,
trust company, or other custodian chartered by the United States, its
states, or territories.
(2) An amount not to exceed 75 percent of any excess of invested
assets over the sum of the reserves and related actuarial items held
in support of policies and contracts, plus the surplus required by
subdivision (n) of Section 742.24 or by subdivision (b) of
Section 743.02 , may be invested in the following:
(A) An open-ended diversified management company, as defined in
the federal Investment Company Act of 1940 (15 U.S.C. Sec.
80a-1 et seq.), that meets all of the following requirements:
(i) It is registered with, and reports to, the Securities and
Exchange Commission.
(ii) It is domiciled in the United States.
(iii) Its investments consist of common and preferred stocks and
cash.
(iv) All of its assets are held in the United States by a bank,
trust company, or other custodian chartered by the United States, its
states, or territories.
(B) Corporate notes, bonds, and preferred stocks that meet all of
the following requirements:
(i) The issuer is domiciled in the United States or Canada.
(ii) The investments are rated investment grade or better by at
least two of the following rating agencies, or their successors:
(I) Standard & Poor's.
(II) Moody's.
(III) Fitch.
(iii) The investments are exchange-traded. "Exchange-traded" as
used in this clause means listed and traded on the National Market
System of the NASDAQ Stock Market or on a securities exchange subject
to regulation, supervision, or control under a statute of the United
States and acceptable to the commissioner.
(C) An investment in a single issuer made pursuant to subparagraph
(B) shall not exceed in the aggregate 10 percent of the multiple
employer welfare arrangement's funds described in this paragraph.
(3) An investment made pursuant to paragraph (1) or subparagraph
(A) of paragraph (2) shall be made in, at minimum, three of the
companies described in those provisions.
(c) The commissioner may, in his or her discretion and after a
hearing, require by written order disposal of an investment made
either in violation of, or no longer in compliance with, this
section. The commissioner may also, after a hearing, require the
disposal of any investment made pursuant to paragraph (2) of
subdivision (b) if the multiple employer welfare arrangement has
failed to maintain cash or liquid assets sufficient to meet its
claims and any other contractual obligations. The commissioner may
also for good cause and after a hearing, by written order require the
disposal of an investment described in subdivision (b).
SEC. 5. Section 742.25 of the Insurance
Code is amended to read:
742.25. In determining the qualification of a multiple employer
welfare arrangement, the commissioner will consider, among other
things:
(a) The history of the multiple employer welfare arrangement ,
other than one for which application was made pursuant to Section
743 .
(b) The competency, character, integrity, responsibility, and
general fitness of the management and administration.
(c) Financial stability.
(d) Whether claims were promptly and fairly adjusted and are
promptly and fully paid in accordance with the law and the terms of
the plan , other than one for which application was
made pursuant to Section 743 .
(e) Fairness and honesty of methods of doing business.
(f) Hazard to covered employees or creditors.
SEC. 3. SEC. 6. Section 742.29 of
the Insurance Code is amended to read:
742.29. An association seeking to establish an employee welfare
benefit plan by the use of a self-funded or partially self-funded
multiple employer welfare arrangement shall apply for a certificate
of compliance on a form prescribed by the commissioner. The
application shall be completed and submitted to the commissioner
along with all of the following:
(a) Copies of all articles, bylaws, agreements, or other documents
or instruments describing the rights and obligations of the
employers, employees, and beneficiaries of the association with
respect to the multiple employer welfare arrangement.
(b) Current audited financial statements of the
association and the multiple employer welfare arrangement, and
Internal Revenue Service Form number 5500 for the last five years.
and Internal Revenue Service Form number 5500 of the
association for the last five years and, other than an association
applying pursuant to Section 743, current audited financial
statements and Internal Revenue Service Form number 5500 of the
multiple employer welfare arrangement for the last five years.
(c) Proof of a fidelity bond in an amount equal to 10 percent of
the funds handled annually by the multiple employer welfare
arrangement or that will be handled annually by the multiple
employer welfare arrangement of an association applying pursuant to
Section 743 . In no case may the amount of the bond be less
than fifty thousand dollars ($50,000) nor more than five hundred
thousand dollars ($500,000).
(d) A fiduciary liability policy with limits of not less than five
hundred thousand dollars ($500,000).
(e) A statement showing in full detail the benefit plan upon which
the association has established and maintained the multiple employer
welfare arrangement.
(f) A copy of all contracts or other instruments that it makes
with or issues to the association members, together with a copy of
its plan description and the printed material used in
enrolling members during the two years preceding the date of
application. .
(g) Proof of aggregate and specific stop loss insurance with an
insurer licensed to do business in this state.
(h) A copy of all contracts or other instruments that were used
with administrators and producers during the two years preceding the
date of application.
(i) Biographical affidavits for the trustees, plan administrators
of the multiple employer welfare arrangement, officers and directors
of the association, other persons acting in a fiduciary capacity and
any third-party administrators performing services on behalf of the
multiple employer welfare arrangement.
SEC. 7. Section 742.30 of the Insurance
Code is amended to read:
742.30. The commissioner shall not issue a certificate of
compliance to a self-funded or partially self-funded multiple
employer welfare arrangement unless the employers participating in
the multiple employer welfare arrangement are members of a bona fide
trade, industrial, or professional association as described in
subdivision (b) of Section 742.24 or an association as described
in paragraph (1) of subdivision (b) of Section 743 that satisfies
the criteria set forth in Section 743.01 .
SEC. 8. Section 743 is added to the
Insurance Code , to read:
743. (a) An association that satisfies the criteria of Section
743.01 may apply to the commissioner for a certificate of compliance
for a self-funded or partially self-funded multiple employer welfare
arrangement established by the association on or after January 1,
2008.
(b) The following definitions apply for purposes of this section:
(1) "Association" means a California mutual benefit corporation
comprised of a group of individuals or employers who associate based
solely on participation in a specified profession or industry,
accepting for membership any individual or employer meeting its
membership criteria, which do not condition membership directly or
indirectly on the health or claims history of any person, and which
uses membership dues solely for and in consideration of the
membership and membership benefits.
(2) "Partially self-funded" means a multiple employer welfare
arrangement that reimburses health benefit costs incurred by covered
persons pursuant to the benefits and coverage, provided by their plan
exclusively from plan assets provided, however, that these benefits
are reimbursable to the multiple employer welfare arrangement by stop
loss insurance only to the extent that the benefits exceed fifty
thousand dollars ($50,000) per claim.
(3) "Self-funded" means a multiple employer welfare arrangement
that reimburses health benefit costs incurred by covered persons
pursuant to the benefits and coverage provided by their plan
exclusively from plan assets.
SEC. 9. Section 743.01 is added to the
Insurance Code , to read:
743.01. To be eligible to apply for a certificate of compliance
pursuant to Section 743, the association shall satisfy the following
criteria:
(a) Maintain a constitution or bylaws specifically stating its
purpose.
(b) Have been organized and maintained in good faith and operated
actively for purposes other than that of providing health care
coverage benefits to its members for a continuous period of five
years immediately preceding the date of its application.
(c) Have, at minimum, 200 paid members at the time of its
application.
SEC. 10. Section 743.02 is added to the
Insurance Code , to read:
743.02. An association applying for a certificate of compliance
pursuant to Section 743 shall establish that its self-funded or
partially self-funded multiple employer welfare arrangement satisfies
all of the requirements of Section 742.24, other than the
requirements set forth in subdivisions (b), (c), (d), and (n) of that
section, and the following additional requirements:
(a) Operate in compliance with ERISA on a self-funded or partially
self-funded basis pursuant to a trust agreement by a board of
trustees that shall have complete fiscal control over the multiple
employer welfare arrangement, and that shall be responsible for all
operations of the multiple employer welfare arrangement. The trustees
shall be selected by vote of the participating employers and shall
be owners, partners, officers, directors, or employees of one or more
employers participating in the multiple employer welfare
arrangement. A trustee may not be an owner, officer, or employee of
the insurer, administrator, or service company providing insurance or
insurance-related services to the association. The trustees shall
have authority to approve applications of association members for
participation in the multiple employer welfare arrangement and to
contract with an authorized administrator or service company to
administer the day-to-day affairs of the multiple employer welfare
arrangement.
(b) In addition to the requirements of this article, maintain a
surplus of not less than four million dollars ($4,000,000).