On Monday of this week—the same day that kicked off National Retirement Security Week—the Department of Labor (DOL) published a complex set of proposed regulations under Title 29 of the Code of Federal Regulations, with the stated goal of “expanding access to retirement saving options by clarifying the circumstances under which an employer group, association, or professional employer organization [PEO] may sponsor a workplace retirement plan.”
In particular, the proposed regulations seek to clarify that employer groups, associations and PEOs can, when satisfying certain criteria, constitute “employers” within the meaning of Section 3(5) of the Employee Retirement Income Security Act (ERISA) for purposes of establishing or maintaining an “individual account employee pension benefit plan” within the meaning of ERISA Section 3(2). Colloquially, these plans are referred to as “MEPs,” or multiple employer plans.
Given the President’s recent executive order talking explicitly about “open MEPs,” some retirement industry stakeholders say they were surprised to see the regulations hold short of creating a new framework to promote this flavor of MEP. Such plans, as the name suggests, would not require employers to have any links related to industry or geography. The new proposal’s framework for PEO-administered MEPs still seems to require that those employers who buy into the PEO’s MEP must have fairly extensive contractual relationships with the PEO, which itself must meet a number of criteria, so in this sense they are not really “open” MEPs.
Open MEPs have long been a focal point for the retirement plan industry; supporters say open MEPs are one of the primary ways to address the retirement plan coverage gap among employees of small businesses. This step comes after, earlier this month, the Office of Management and Budget finished its review of DOL’s MEP proposal, calling it “major” and “economically significant.”
At this early stage, it is important to note that this proposal is just the first iteration in what could be a long rulemaking process. Those industry stakeholders disappointed the proposal does not address open MEPs can take heart in the fact that, directly in the text of the proposal, DOL staff calls for detailed commentary on ways the proposal could be expanded, including into the area of “open MEPs” and “corporate MEPs.” Comments are due within 60 days of the publication of the regulation in the Federal Register.
As the DOL itself points out, also relevant is the fact that Congress has been kicking around the open MEP issue, both in the Retirement Enhancement and Savings Act and more recently in the Family Savings Act. The latter was actually already passed earlier this year by the House—though most experts expect Senate action on the legislation this close to the midterm elections is quite unlikely.
ERISA Attorneys Weigh In
So, what exactly is contained in the DOL’s proposal? Detailed commentary prepared by attorneys with the Wagner Law Group points to important regulatory changes that may in fact allow providers with the capability of serving as a bona fide PEO to dramatically expand the MEPs they offer.
At a high level, the Wagner attorneys say the proposal modifies the rules for so-called “closed MEPs” run by employer groups or associations, while it also clarifies rules with respect to MEPs sponsored by a professional employer organization. The proposed regulations “provide that a bona fide group or association of employers and bona fide PEOs are deemed to be acting in the interests of an employer, and thus, can establish a pension plan so long as they satisfy the DOL’s regulatory requirements.”
The first part of the proposal, pertaining to employer groups and associations, still requires that employers share a common “nexus” allowing the plan to be treated as a MEP for the purposes of compliance with the Employee Retirement Income Security Act (ERISA). This is why they are called “closed MEPs.” According to the Wagner attorneys, the advantages of a closed MEP structure are still significant and include the requirement of only a single audit, bond and Form 5500 Annual Returns/Report.
Under the proposed regulations, the group or association of employers is considered “bona fide” if seven requirements are met—although some safe harbors are programmed in to ease these requirements. The Wagner attorneys note the requirements are “substantially the same as the requirements applicable to association health plans under recently issued final DOL regulations.”
On the Wagner attorneys’ reading, the new regulation’s conditions for a proving an entity is a bona fide PEO are different than those for closed MEPs in two chief respects.
“First, the PEO must have substantial control over the functions and activities of the MEP as the plan sponsor, plan administrator, and named fiduciary,” they say. “Second, the PEO must perform ‘substantial employment functions’ on behalf of the employers. Whether a PEO meets this requirement is based on a facts and circumstances test under which nine criteria are considered, but not all must be satisfied.”
As the attorneys point out, the DOL also proposed two safe harbors in order provide more certainty with respect to the substantial employment functions test.
Fiduciary Considerations and Other Matters
“The preamble to the proposal makes it clear that MEP participating employers would retain limited fiduciary responsibilities,” the Wagner attorneys warn. “Employers would be required to be prudent in the selection and monitoring of service providers and would also be responsible for the timely remittance of contributions to the plan.”
The Wagner attorneys suggest one related and important issue not addressed in the proposed regulations—as it is a Treasury Department rather than a DOL issue—is the “one bad apple rule.” As they attorneys explain, this is the rule under which the action of one participating employer with respect to the MEP can jeopardize the tax qualified status of the MEP for all other participating employers.
“The Treasury Department is expected to modify this rule,” the Wagner attorneys say. “The DOL indicated in the preamble that nothing in the proposed regulations has any effect upon joint employer issues.”