Hot topics in employee benefits: Multiple employer plans
MEPs could emerge as a disrupter in the retirement industry, affecting plan sponsors, advisors, and providers alike.
The current administration has set one of its regulatory objectives to make retirement plans more accessible to the general workforce. As a result, multiple employer plans have received renewed focus from both the Department of Labor and Congress.
A MEP is a plan maintained by two or more employers that are not part of a “controlled group” under Internal Revenue Code rules.
This is different from “multiemployer” plans, which cover employees of more than one unaffiliated employer but are jointly sponsored by employers and a labor organization.
MEPs can be attractive to small and midsized businesses that identify cost and administrative complexity as barriers to offering a workplace retirement plan.
MEPs can provide economies of scale created by pooling assets for investment, potential limits on fiduciary responsibilities for participating employers, and potentially reduced reporting and disclosure costs.
In August 2018, President Trump issued an Executive Order directing the DOL to develop proposals to expand workplace access to retirement plans. It specifically directed the DOL to “clarify and expand” the circumstances under which small and midsized businesses may sponsor or adopt a MEP.
The DOL took its first stab at this mandate by issuing proposed regulations in late October that defined “employer” for purposes of “Association Retirement Plans and Other Multiple Employer Pension Benefit Plans.”
Under currently applicable DOL guidance (in the form of a series of Advisory Opinions spanning several years), the DOL requires a group or association of employers to be a “cognizable group or association of employers, acting in the interest of its employer members” in order to join together in a MEP.
Currently, the DOL guidance does not allow a group of employers with no nexus to join together and offer a MEP.
So, for example, a group of 20 employers with no nexus that adopt the same plan are simply 20 different plan sponsors with 20 different plans—not one MEP with 20 participating employers.
The DOL’s proposed regulations elaborate on the definition of “employer” in three specific circumstances, but the basic concept of a “nexus” remains.
The proposed regulation, which called for comments by December 24, sets out criteria for a group of employers to be considered a “bona fide group or association.” The group must meet the following requirements:
- Have a formal organizational structure and be controlled by its employer members.
- Have at least one substantial business purpose unrelated to offering and providing employee benefits.
- Limit plan participation to employees and former employees of members.
- Have members with a commonality of interests that are either the same industry or the same geographical area.
- Ensure that each employer member acts directly as an employer for at least one employee participating in the plan.
- Not be a financial services firm (in other words, a plan administration business cannot sponsor a MEP).
The proposed regulation also sets out criteria for when a “professional employer organization” can sponsor a MEP. The PEO must do the following:
- Perform “substantial employment functions” on behalf of the client employer.
- Have substantial control over the MEP and be its sponsor, named fiduciary, and plan administrator.
- Ensure that each client employer that adopts the MEP has at least one employee covered by it.
- Ensure that participation in the MEP is limited to employees and former employees of the client employer.
The proposed regulation also sets forth factors for determining when a PEO performs “substantial employment functions,” as well as “safe harbors” that a PEO could rely on if a certain number of those factors are met.
Finally, the proposed regulations offer some clarification about the ability of sole proprietorships, and the self-employed person himself or herself, to participate in a MEP.
There are certain minimum thresholds of compensation received and/or hours worked for the sole proprietorship, but the proposed regulations would generally provide an avenue for sole proprietorships to offer the MEP and for the self-employed individual to participate in it.
There are also bills pending in Congress with very similar language concerning MEPs that would, in many respects, go further than the DOL’s proposed regulations because the legislation dispenses with the nexus requirement.
The House passed the Family Savings Act of 2018 (which would take effect in 2020) and the Senate passed the Retirement Enhancement and Savings Act (to take effect in 2022), which both allow for “pooled employer plans” with no common interest required and require each pooled employer plan to have a “pooled plan provider.”
They also address the “one bad apple” problem by protecting participating employers from losing tax-qualified status if one participating employer fails to meet the requirements.
And Representative Kevin Brady, outgoing Chair of the Ways and Means Committee, recently proposed a lame-duck session tax bill: The Retirement Savings and Other Tax Relief Act of 2018, which contains generally the same terms on MEPs as the FSA and RESA with a 2020 effective date.
MEPs may be the rare issue to have some bipartisan traction in the coming year. If this expansion of MEPs does occur, it could affect plan sponsors and service providers alike, and emerge as a “disrupter” in the retirement industry.
Morgan, Lewis & Bockius LLP partner Julie Stapel helps employee benefit plan sponsors and financial service providers with the investment, and management of employee benefit plan assets. This article is for informational purposes and should not be relied on as legal advice.
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