BOSTON—Massachusetts regulators are moving to implement the next stage of the state's universal health care law after defusing a short but intense controversy over applying coverage mandates to self-funded plans.

This week, regulators are expected to propose for comment the minimum health insurance coverage state residents must have to avoid being hit with fines under the 2006 law, which is intended to help the Bay State achieve near-universal coverage within a few years.

While the criteria set by the Health Insurance Connector, the state agency that was created to implement key provisions of the reform law, are relatively modest, an earlier memo detailing the criteria aroused enormous concern among employer groups and others.

That memo--which has since been corrected--suggested that all the criteria, including providing coverage for the state's mandated benefits, would apply to employees in self-funded plans.

Few, if any, self-funded plans are designed to cover all the state's dozens of benefit mandates, which include such benefit areas as infertility treatment, said Cathy Stamm, a consultant with Mercer Human Resource Consulting in Washington.

Indeed, employers with self-funded plans don't concern themselves with the mandates because pre-emption provisions of the Employee Retirement Income Security Act prevent states imposing them on self-funded plans.

Had Massachusetts pressed ahead with the mandate provision, hundreds of thousands of state residents in self-funded plans would have been slapped with special taxes because their plans didn't meet the minimum coverage criteria.

"Employees would have been penalized to their great surprise," said Andy Anderson, of counsel with Morgan, Lewis & Bockius L.L.P. in Chicago.

"Health reform in Massachu-setts was supposed to be about providing coverage to the relatively small percentage of residents without coverage, not penalizing those with already good coverage," said Bill Vernon, state director of the National Federation of Independent Business in Boston.

But Connector officials said it never was their intent to require self-funded plans to provide state mandated benefits in order for employees to have creditable coverage.

"I believe that we do not have the authority, nor would I consider it wise, to try to enforce state mandates on ERISA-exempt (self-insured) plans," Connector Executive Director Jon Kingsdale said in a memo to the Connector's Board of Directors.

Mr. Kingsdale said the problem occurred because standards the staff had proposed for insurers to provide coverage to the uninsured through a Connector program were mistakenly included in the memo on what would constitute minimum creditable health insurance coverage for state residents.

Benefit experts say such a requirement surely would have triggered litigation, charging that such a requirement ran afoul of ERISA pre-emption. "You are going after the design of employer plans and that would be ripe for an ERISA challenge," said J.D. Piro, an attorney with Hewitt Associates Inc. in Norwalk, Conn.

Meanwhile, the proposal to be presented to the Connector Board next week strips out an earlier recommendation that, in order for enrollees not to be penalized, health plans have no lifetime limits on covered expenses. The change was made after state officials learned that more than 350,000 state residents are in plans with such limits.

Criteria that the board is expected to propose for minimum coverage include no annual limits on expenses covered, with a maximum deductible of $2,000 for individual coverage or $4,000 for family coverage, while the maximum out-of-pocket limit for services delivered in-network could not exceed $5,000 for individual coverage and $10,000 for family coverage.

Additionally, high-deductible health insurance plans linked to health savings accounts would automatically be considered to have met the minimum coverage standards.

Mr. Kingsdale said these requirements should comply with ERISA since they would apply to health plan enrollees and not to employers or the plans themselves.

Others aren't sure, but clearly the new criteria would have much less of an impact than if enrollees--to have creditable coverage--had to be in plans that offered all Massachusetts mandated benefits, said Rich Stover, a principal with Buck Consultants L.L.C. in Secaucus, N.J.