In our newsletter last month, we described proposed regulations issued by the IRS that are intended to make it easier for plan sponsors to establish and operate multiple employer plans (“MEPs”) [See –Multiple Employer Retirement Plans-Saving the Barrel from the One Bad Apple]. A MEP is a single tax qualified retirementplan1that is maintained by two or more employers that are not part of the same controlled group of employers.
As we discussed last month, MEPs have been in the news lately because they are being viewed as a way to expand the number of employees covered by retirement plans, particularly employees who work for small businesses. MEPs have the potential to reduce the costs and ease the administrative burdens on small businesses operating a single employer retirement plan. In an effort to encourage expanded access to MEPs, on August 31, 2018 President Trump issued Executive Order 13847 which, in part, directed the Secretary of Labor to: “...expand the circumstances under which U.S. employers, especially small and mid-sized businesses, may sponsor or adopt a MEP as a workplace retirement savings option...”.
The Department of Labor (“DOL”) has in its past guidance on the subject interpreted ERISA’s definition of “employer” narrowly to limit the groups of employers that could band together to form a MEP. The DOL has mandated that the employers forming a MEP be a “bona-fide group or association of employers” and that they share an economic interest other than merely the provision of employee benefits. If the employers did not meet the DOL’s requirements, each employer was considered to have established an individual plan. The DOL has acknowledged that many employer groups and associations have viewed its guidance as too restrictive, limiting the adoption of MEPs to the detriment of plan sponsors. Therefore, in response to the Executive Order, in October, 2018 the DOL issued proposed regulations expanding, to a certain degree, the types of groups or associations that can sponsor MEPs. These regulations were finalized on July 31, 2019. (The regulations also considered the treatment of MEPs sponsored by a professional employer organization (“PEO”), but we will discuss those rules in a future article).
In the regulations, the DOL has clarified and somewhat expanded the interpretation of the term “employer” in ERISA. The statute provides that an employer includes a “group or association of employers”, but that phrase is not further defined. Under the new regulations, if the group meets certain criteria, it will qualify as a “bona fide group or association of employees”, meeting the statutory definition of employer and thus being eligible to sponsor a MEP. This interpretation represents an extension of the DOL’s previous position of what types of employer groups could form a MEP.
The regulations include the following criteria necessary for the group or association to be considered a bona fide group or association of employees:
It must have at least one substantial business purpose unrelated to offering and providing MEP coverage or other employee benefits to its employer members and their employees; This means that the main purpose of the group or association could be the formation of the MEP, as long as the group would be a “viable entity” even if it didn’t provide the plan;
Each employer that is a member of the MEP must be a direct employer of at least one employee who is a MEP participant;
The group or association has a formal organizational structure, with a governing body and by-laws; and
The group or association is controlled by the employer members, and the employer members control the plan.
In addition, the group or association must have a “commonality of interest”. The regulations consider there to be a commonality of interest if:
The employers are in the same trade, industry, line of business or profession; or
Each employer has a principal place of business in the same region. A “region” is a single state, or a metropolitan area even if it includes more than one state.
There is one class of potential sponsors that cannot sponsor a MEP. The regulations provide that a group or association cannot be a bank, trust company, insurance issuer, broker-dealer, or similar financial firm, including a pension record keeper or a third-party administrator. The DOL explained that allowing these entities to sponsor a MEPwould not be consistent with the statute’s use of the term “employer”, as those companies are “merely selling” commercial products and services to employers.
The regulations do not change the current prohibition on “open MEPs”. An open MEP is a defined contribution plan consisting of employers that have no relationship other than their common participation in the MEP. The DOL has not recognized open MEPs as qualifying as a single plan. However, when it issued the proposed regulations in 2018 it requested comments on whether open MEPs should and could be operated as ERISA covered plans. After reviewing the comments and seeing significant interest in open MEPs, the DOL decided to defer issuing regulations but determined that the question of whether to permit open MEPs deserved additional consideration. To gather additional information about the issues, the DOL issued a Request for Information (“RFI”) at the same time as it issued the final regulations. The RFI asks for comments on the various issues related to open MEPs in advance of future possible guidance from the DOL. The DOL also said that it might revisit its prohibition on financial service companies sponsoring MEPs if it issues further guidance on open MEPs.
There is more activity relating to MEPs on the legislative front, with multiple bills introduced in Congress that address open MEPs. Most notably, the Secure Act, which was passed by the House in May, 2019, would amend both ERISA and the Internal Revenue Code to permit open MEPs. This legislation has not passed the Senate, so for the time being the employer groups that may avail themselves of MEPs are delineated by the DOL regulation. But given the level of interest and support in loosening the constraints on MEPs, it certainly seems that this regulation will not be the last word.
1 These new rules only apply to retirement plans, not to health or welfare plans. The DOL issued a similar rule for association health plans on June 21, 2018. This rule was successfully challenged in a lawsuit brought by various states in a case that is on appeal. Also note that combining multiple unrelated employers in the same health or welfare plan will result in a “MEWA,” which is a very different and highly regulated type of plan. [See–What is a MEWA?]
If you have any questions about this article, please contact a Boutwell Fay attorney.
© Boutwell Fay LLP 2019, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of August30, 2019.