DOL Issues Proposed Regulations on Association Retirement Plans

Practical Law Legal Update w-017-1687 (Approx. 7 pages)

DOL Issues Proposed Regulations on Association Retirement Plans

by Practical Law Employee Benefits & Executive Compensation

Statutory and Regulatory Background

Retirement plans must be established or maintained by an employer, an employee organization, or both (29 U.S.C. § 1002(2)). ERISA Section 3(5) defines "employer" as "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity" (29 U.S.C. § 1002(5)).

In the context of MEPs, the question has been what constitutes an "employer" for purposes of maintaining a single employee benefit plan under ERISA, rather than a collection of separate employer plans.

To date, the DOL has taken the position that a group or association sponsoring a MEP must have a particularly close economic or representational nexus to the employers and employees participating in the plan, in order to be considered a single plan. If not, then each participating employer is treated as establishing its own separate plan covered by ERISA; as a result, each employer is responsible for individual Form 5500 filings, audits (if the plan has at least 100 participants), and bonding, among other administrative requirements.

Proposed Regulations

The DOL's proposal applies to defined contribution plans (such as 401(k) plans), but not defined benefit plans. The proposal does not cover:

"Open" or "pooled employer" MEPs, in which there is no employment-based nexus among the participating employers.
"Corporate" MEPs, which cover employees of related employers that are not within the same controlled group.

Under the proposal, a "bona fide" group or association of employers and a "bona fide" PEO are deemed to act in the interest of an employer within the meaning of ERISA Section 3(5) (29 U.S.C. § 1002(5)), and therefore could sponsor a MEP.

The proposed association retirement plan regulations are intended to facilitate the adoption and administration of MEPs, and to expand access to workplace retirement plans, especially for employees of small employers. The preamble to the proposed regulations indicates that the proposed regulations supersede subregulatory interpretive rulings under ERISA Section 3(5), and they would establish more flexible standards and criteria for sponsorship of these MEPs than provided in earlier guidance.

Bona Fide Group or Association of Employers

The proposed regulations permit a bona fide group or association of employers to sponsor a MEP, if the group or association meets the following requirements:

It may have a primary purpose of offering and providing MEP coverage to its employer members and their employees. However, the group or association also must have at least one "substantial business purpose" unrelated to offering and providing employee benefits to its employer members and their employees. Under a regulatory safe harbor, a substantial business purpose exists if the group or association would be a viable entity in the absence of sponsoring an employee benefit plan. A "business purpose":
- includes promoting common business interests of its members or the common economic interests in a given trade or employer community; and
- is not required to be a for-profit activity.
The employer members have a commonality of interest, which exists 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 that does not exceed the boundaries of a single state or a metropolitan area (even if the metropolitan area includes more than one state).
Each employer member of the group or association participating in the retirement plan is a person acting directly as an employer of at least one employee who is a participant covered under the plan.
It has a formal organizational structure with a governing body and by-laws or other indications of formality.
The employer members control the functions and activities of the group or association, and the group's or association's employer members that participate in the retirement plan control the plan.
Plan participation through the association is available only to employees and former employees of employer members and their beneficiaries.
The group or association is not a bank or trust company, insurance issuer, broker-dealer, or other similar financial services firm (including pension record keepers and third-party administrators), or owned or controlled by such an entity or any subsidiary or affiliate of such an entity, other than to the extent such an entity, subsidiary, or affiliate participates in the group or association as an employer member of the group or association.

A group or association that is sponsoring a MEP and is itself an employer member of the group or association is deemed to be in the same trade, industry, line of business, or profession as the other employer members of the group or association.

These criteria parallel the criteria for a bona fide group or association of employers in the association health plan regulations. The DOL intends for "trade," "industry," "line of business," or "profession," to be construed broadly to expand employer and employee access to MEP coverage.

Bona Fide PEOs

A PEO is a human-resource company that contractually assumes certain employer responsibilities of its client employers. Under the proposed regulations, a "bona fide" PEO can establish a MEP if it meets the following requirements:

The PEO performs substantial employment functions on behalf of its client employers, and maintains adequate records relating to such functions.
The PEO has substantial control over the functions and activities of the MEP, as:
- the plan sponsor (within the meaning of ERISA Section 3(16)(B) (29 U.S.C. § 1002(16)(B)));
- the plan administrator (within the meaning of ERISA Section 3(16)(A) (29 U.S.C. § 1002(16)(A))); and
- a named fiduciary (within the meaning of ERISA Section 402 (29 U.S.C. § 1102)).
The PEO ensures that:
- each client employer that adopts the MEP acts directly as an employer of at least one employee who is a participant covered under the defined contribution MEP; and
- participation in the MEP is available only to employees and former employees of the organization and client employers, and their beneficiaries.

Substantial Employment Functions

Proposed 29 C.F.R. Section 2510.3-55(c)(2) provides criteria for determining whether a PEO performs substantial employment functions on behalf of its client employers. Depending on the facts and circumstances of the particular situation, a single factor alone may be enough to consider a PEO as performing substantial employment functions on behalf of its clients.

The proposed regulations also provide two safe harbors separate from the facts and circumstances test, under which an organization shall be considered to perform substantial employment functions on behalf of its client employers if either:

The PEO:
- is a "certified professional employer organization" (CPEO) as defined in Section 7705(a) of the Internal Revenue Code (Code) (26 U.S.C. § 7705(a)), and Treasury Regulations thereunder;
- has entered into a "service contract" within the meaning of Code Section 7705(e)(2) (26 U.S.C. § 7705(e)(2)) with respect to its client-employers that adopt the defined contribution MEP with respect to their employees, under which it satisfies the criteria with respect to client-employer employees in paragraphs (A), (B), and (C) below; and
- meets any two or more of the criteria with respect to client-employer employees in paragraph (D) though (I) below.
The PEO meets any five or more of the following criteria (which are listed with the same paragraphs as in the proposed regulation) with respect to client-employer employees participating in the plan. In particular, the PEO is responsible for:
- (A) the payment of wages to employees of its client employers that adopt the plan without regard to the receipt or adequacy of payment from those client-employers;
- (B) reporting, withholding, and paying any applicable federal employment taxes for its client employers that adopt the plan, without regard to the receipt or adequacy of payment from those client-employers;
- (C) recruiting, hiring, and firing workers of its client employers that adopt the plan, in addition to the client-employer's responsibility for recruiting, hiring, and firing workers;
- (D) establishing employment policies, establishing conditions of employment, and supervising employees of its client-employers that adopt the plan, in addition to the client-employer's responsibility to perform these same functions;
- (E) determining employee compensation, including method and amount, of employees of its client-employers that adopt the plan, in addition to the client-employers' responsibility to determine employee compensation;
- (F) providing workers' compensation coverage, as required by state law, to employees of its client-employers that adopt the plan, without regard to the receipt or adequacy of payment from those client-employers;
- (G) integral human-resource functions of its client employers that adopt the plan, such as job-description development, background screening, drug testing, employee-handbook preparation, performance review, paid time-off tracking, employee grievances, or exit interviews, in addition to the client employer's responsibility to perform these same functions;
- (H) regulatory compliance of its client-employers participating in the plan in the areas of workplace discrimination, family-and-medical leave, citizenship or immigration status, workplace safety and health, or Program Electronic Review Management labor certification, in addition to the client-employer's responsibility for regulatory compliance; or
- (I) employee-benefit-plan obligations to MEP participants after the client employer no longer contracts with the organization.

Dual Treatment of Working Owners as Employers and Employees

The proposed regulations also provide that a working owner of a trade or business (e.g., sole proprietors and other self-employed individuals) without common law employees may qualify as both an employer and as an employee of the trade or business for purposes of the requirements governing bona fide groups or associations of employers. The proposed regulations also define specifically who is considered a working owner under this section.

Comment Request

The DOL invites the public to submit comments on all aspects of the proposed regulation. The DOL is seeking comments on a number of specific issues, including whether other types of entities should be treated as an employer for purposes of sponsoring a MEP, and whether corporate MEPs and open MEPs should be addressed. Comments are also sought on joint employment issues, whether notice or reporting requirements are necessary, and the interaction of the proposal with state and federal laws. Comments are due on December 24, 2018.

Practical Implications

It is clear that revising the MEP rules is a priority of the Administration. The DOL issued the proposed regulations less than two months after President Trump's executive order directing the agency to consider issuing MEP guidance. Additional guidance is expected from the Department of Treasury on the qualification of MEPs. Small employers, PEOs, and their counsel should continue to monitor the developments around MEPs given these initiatives and the relatively quick pace at which they are moving.

In addition to the agency proposals, a number of legislative proposals have been introduced that could broaden the use of MEPs beyond the DOL's proposed regulations. For example, the Family Savings Act of 2018 (H.R. 6757) was passed by the House of Representatives on September 27, 2018 and is currently with the Senate Finance Committee. That Act would amend ERISA to provide for "pooled employer plans" without a common interest requirement.

DOL Issues Proposed Regulations on Association Retirement Plans | Practical Law