The DOL's proposal for retirement plans tracks closely with its regulation on Association Health Plans. (Photo: Shutterstock)

When President Trump signed an executive order making expanded access to workplace retirement plans an official policy of his administration, many in the retirement industry held out hope the Labor Department would draft a proposal certifying Open Multiple Employer Plans.

But the proposed regulation Labor released last week falls short of the bipartisan endorsement of Open MEPs in several legislative proposals currently in holding patterns on Capitol Hill.

Instead, the proposal merely loosens existing regulatory guidance on employer participation in MEPs, which allow groups of small employers to pool workers under one 401(k) plan.

That approach—call it MEP Lite—surprised many in industry, who were expecting regulators to fully lift the existing commonality, or nexus requirement, employers must share if a MEP is to be considered sponsored by a single employer.

But not Kent Mason, a Washington, D.C.-based attorney with Davis and Harmon.

“I've been telling clients this is exactly what they were going to get since the Executive Order came out in August—the same rules as the regulation on Association Health Plans,” said Mason, referencing Labor's final rule on pooled health care plans finalized last summer.

Labor's proposal for retirement plans tracks closely with its regulation on Association Health Plans: At each rule's essence is clarification on the definition of “employer” under the Employee Retirement Income Security Act.

The similarity is not a coincidence, explained Mason, but a manifestation of long-held views by some within Labor.

Mason first approached the Department almost a decade ago for clarification on which employers can join MEPs. Regulators explained that ERISA's statutory guidelines on which employers are considered sponsors are the same for retirement and health plans and thus there could be no material differences in the rules.

“Labor basically said 'we can't vary what we do.' That meant that what they were going to do with MEPs was going to follow to the letter what they have just done on health plans,” said Mason.

How limited is Labor under ERISA?

ERISA is a complex law. Were anyone to need evidence of that they could turn to Labor's proposal on Association Retirement Plans.

The proposal stops short of allowing fully Open MEPs because they “implicate different policy concerns,” Labor said. Moreover, the Department has the authority to issue regulations, but only Congress can make statutory changes to ERISA, according to the proposal.

“Due to the structure of ERISA, all retirement reform requires coordination between Congress, the Internal Revenue Service, and the Department of Labor,” explained Erin Turley, a Dallas-based partner with McDermott, Will, and Emery, in an email.

“A new regulatory definition is just one part of the retirement puzzle. Here the DOL has changed its definition of 'employer' for purposes of relaxing the commonality requirements–the 'common nexus' requirement. This alone does not impact the qualification rules or the fiduciary framework of the Internal Revenue Code and ERISA,” added Turley.

But the question of whether Labor is limited in its role to fully remove the commonality requirement in MEPs, as opposed to simply relaxing it, is open to debate, even within the Labor Department.

In its request for comments, Labor asks stakeholders to explain why sponsors of Open MEPs should be considered a single employer under ERISA.

“I don't think they are as bound as they say they are,” said Mason, noting that the proposal separates defined benefit plans from the relaxed commonality requirement, which would only apply to defined contribution plans as the proposal is written.

In separating DB plans from DC plans, Labor exercised an authority that could also translate to separating its approach on retirement reforms from the reforms made in its new rule on Association Health Plans, said Mason.

In effect, Labor contradicts itself by saying that retirement plan MEPs must be structured similarly to Association Health Plans, he added.

“The policy issues for DC plans are 100 percent different,” said Mason. “If policy issues are relevant, why was Labor compelled to apply the health plan structure to defined contribution retirement plans where the issues are very different? All I am doing is agreeing with Labor in its MEP proposal, which took a different approach for different retirement plans.”

Do MEWAs prove the risk for fraud in MEPs?

In its regulation on Association Health Plans, Labor noted the possibility for abuse among health plan “promoters” and the potential erosion of ERISA's consumer protections for group health participants.

That caution is rooted in the experience of Multiple Employer Welfare Arrangements, or MEWAs, which pool small businesses and their employers under one group health plan.

Since their inception after ERISA was first passed, MEWAs have been tarred by a progressive evolution of fraud. A 2004 Government Accountability Office report found 200,000 group health participants in MEWAs lost coverage between 2002 and 2004, amounting to $252 million in unpaid medical claims.

As recently as this month, Labor expanded its list of defendants in a claim against a MEWA that included 560 employers and 14,000 participants in 36 states. Egregious claims of alleged fraud have amounted in $50 million of unpaid medical claims, according to Labor's lawsuit.

But does that history of fraud in MEWAs translate to a potential threat to retirement savers in MEPs? At least some in the Labor Department have their doubts, or so the proposal for retirement MEPs suggests:

“The Department is aware that MEPs could be the target of fraud or abuse. By their nature, MEPs have the potential to build up a substantial amount of assets quickly and the effect of any abusive schemes on future retirement distributions may be hidden or difficult to detect for a long period. The Department, however, is not aware of direct information indicating that the risk for fraud and abuse is greater for MEPs than for single employer defined contribution pension plans. Furthermore, the Department has compliance assistance and enforcement systems in place to safeguard plan assets.”

“This is the first time DOL has said there is no greater risk of abuse in a MEP than in a single-employer retirement plan,” said Mason. “In recent years, some have argued that defined contribution MEPs pose greater abuse risks than single DC plans, but there has not appeared to be any basis for these arguments.”

In 2013, Matthew Hutcheson, a Utah-based fiduciary of MEP retirement plans, was sentenced to 17.5 years in federal prison for stealing $5.3 million of DC assets.

Grievous as the fraud was, Mason said the “Hutcheson” argument against using MEPs to expand access to workplace retirement plans amounts to a red herring.

“The 'Hutcheson' cause for abuse is a slogan with no slogan,” said Mason. “The risk of fraud in a MEP is indistinguishable from the risk in a single-employer plan. If a bad actor wants to steal, there is no difference between a MEP and a single-plan. Providers' roles to MEPs are the same as their roles to single plans—they have no extra ability to abuse a MEP.”

Mason said the limited approach to broadening access to retirement plans in the proposal has been met with some frustration throughout industry. Stakeholders have until December 24 to submit comments to Labor.

He also thinks the proposal, as written, would have a limited affect on meeting the mandate of increasing access to workplace retirement plans.

“The question is whether providers would build the machinery with the sort of small opening in the proposal,” said Mason.