                               ATTORNEY GENERAL OF TEXAS
                                            GREG        ABBOTT




                                                  July 2,2008



The Honorable Kim Brimer                               Opinion No. GA-0640
Chair, Committee on Administration
Texas State Senate                                     Re: Applicability ofchapter 1501, Texas Insurance
Post Office Box 12068                                  Code, to certain health benefit "cafeteria" plans
Austin, Texas 78711-2068                               offered by employers (RQ-0662-GA)

Dear Senator Brimer:

       You ask the following questions regarding the applicability ofchapter 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:

                 For the purposes of Chapter 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 Letter from Honorable Kim Brimer, Chair, Committee on Administration, Texas State Senate, to Honorable
Greg Abbott, Attorney General of Texas, 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 if it provides health
                 care benefits covering two or more eligible employees of a small
                 employer and:

                        (I) the employer pays a portion of the 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 M 3 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 (subchapter E relating 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 of the 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 consider the 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 by which 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 COUNCIL DRAFTING 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 of the 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, Opinion Committee, 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 of Life and Health Insurers (TALHI) asserts in a
brief submitted to our office that "the Texas Legislature intended that an employer must actually pay a portion of the
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." Brief from Jay A. Thompson, of Thompson, Coe, Cousins & Irons, L.L.P., on behalf of the
Texas Association of Life and Health Insurers, to Nancy S. Fuller, Chair, Opinion Committee, Office of the Attorney
General ofTexas, at 7(Mar. 18,2008) (on file with the Opinion Committee) [hereinafterTALHI Brief]. Dnder TALHI'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 of section 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 2510.3-1 G),'); 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 as the "safe harbor" exclusion and, as you point out, rather
than providing what constitutes an "employee welfare benefit plan" it explains what type 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 of Labor 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), it may 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). If the individual health benefit plan 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 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 of plan 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
of individual 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 contracts included 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).

         70 ne briefreceived in our office seems to argue that individual health benefit plans are not encompassed within
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 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 of each of the 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 of the 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 cafeteria plan 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 of the 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 of plan 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, if that 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 prohibitions for 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 access to 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 of individuals 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).


         9 An 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 eligible for health benefit p1an ll 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, if an 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, if the plan (1)
              is a health benefit plan that provides health care benefits (2) to the
              requisite employees and (3) is an employee welfare benefit plan under
              29 C.F.R. section 25 10.3-1 G) (i.e., does not fall within the safe harbor
              exclusion). Whether any particular plan meets these requirements
              involves questions of fact.

                      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 of the 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
