DOL Expands MEP Availability in Final Regulations on Association Retirement Plans

Practical Law Legal Update w-021-5058 (Approx. 7 pages)

DOL Expands MEP Availability in Final Regulations on Association Retirement Plans

by Practical Law Employee Benefits & Executive Compensation

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)).

Under prior DOL guidance, a group or association sponsoring a MEP had to 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 was treated as establishing its own separate plan covered by ERISA; as a result, each employer was responsible for individual Form 5500 filings, audits (if the plan had at least 100 participants), and bonding, among other administrative requirements.

In August 2018, President Trump issued Executive Order 13847, which directed the DOL to consider proposing new regulations that would expand employer access to MEPs ( (Aug. 31, 2018); see Legal Update, President Trump Issues Executive Order to Encourage Small Employers to Sponsor Retirement Plans).

In October 2018, the DOL issued proposed regulations designed to expand access to defined contribution MEPs (see Legal Update, DOL Issues Proposed Regulations on Association Retirement Plans).

Final Regulations

The final regulations, which largely adopt the proposed regulations, apply to defined contribution plans (such as 401(k) plans), but not defined benefit plans. The final regulations also supersede interpretive rulings relating to "bona fide" groups or associations of employers under ERISA Section 3(5). The final regulations do not cover open MEPs (where there is no employment connection among the participating employers) or corporate MEPs (which cover employees of related employers in different controlled groups) but invite comments regarding these arrangements in response to the RFI.

Bona Fide Group or Association of Employers

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

The group or association has a substantial business purpose unrelated to offering and providing employee benefits to its employer members and their employees (see Substantial Business Purpose).
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.
The group or association has a formal organizational structure with a governing body and by-laws (or other similar indications of formality) that is appropriate for the legal form in which the group or association is operated.
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 (see Control By Employer Members).
There is a commonality of interest among the employer members (see Commonality of Interest).
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, trust company, insurance issuer, broker-dealer, or other similar financial services firm, and is not owned or controlled by a financial services firm.

Substantial Business Purpose

The final regulations adopt without changes the requirement that the group or association have at least one "substantial business purpose" unrelated to offering and providing employee benefits to its employer members and their employees. The regulations provide, however, that a primary purpose of the group or association may be offering and providing MEP coverage to its employer members and their employees. The DOL also adopted the proposed safe harbor under which a substantial business purpose exists if the group or association would be a viable entity in the absence of sponsoring an employee benefit plan.

In adopting this requirement, the DOL disagreed with commenters who argued that the substantial business purpose standard is "too lenient" or "perfunctory." In the DOL's view, the standard adequately balances the commenters' concerns regarding fraud and abuse with the intended benefit of expanding access to MEPs.

Commenters requested clarification on whether a group or association of employers could create a wholly owned subsidiary to administer the MEP. According to the DOL, this arrangement would not cause the group or association of employers to fail the substantial business purpose test, even if the subsidiary's only purpose was to administer the MEP.

Control By Employer Members

Under the final regulations, the employer members must 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 must control the plan. In adopting the control requirement, the DOL declined to specify in the final regulations the particular activities that would satisfy the control test. It noted in the preamble, however, that it would find the following factors relevant:

Employer members' nomination and election of directors, officers, trustees, or similar persons.
Employer members' authority to remove individuals from the governing body.
Employer members' authority to approve or veto certain decisions, including plan design and termination decisions.

Commonality of Interest

The final regulations also require the employer members to have a commonality of interest, which exists if either:

The employers are in the same trade, industry, line of business, or profession.
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).

In adopting this requirement as proposed, the DOL considered, but declined to adopt, suggestions that it:

Expand the commonality test to allow commonality to be based on employers' small size or regions larger than a state or metropolitan area.
Remove the option to establish commonality of interest based on geographic area.

Some commenters asked the DOL to clarify whether businesses that support or are allied with a particular industry are considered to be in the same industry (for example, plumbers and home builders). The DOL reiterated its intent that the regulations be broadly construed and indicated that it would not challenge a group's or association's "reasonable and good faith industry classification or categorization."

Bona Fide PEOs

The final regulations permit a bona fide PEO to 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 administrator, plan sponsor, or named fiduciary (29 U.S.C. §§ 1002(16)(A), (B), and 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.

(See generally Standard Document, PEO Client Service Agreement.)

A facts and circumstances test is generally used to determine whether a PEO has met the "substantial employment functions" requirement. The proposed regulations included separate safe harbors for PEOs and certified PEOs (CPEOs) apart from the facts and circumstances test. PEOs had to satisfy at least five out of nine criteria to take advantage of the relevant safe harbor (see Legal Update, DOL Issues Proposed Regulations on Association Retirement Plans: Substantial Employment Functions). In response to public comment, the DOL adopted one safe harbor for both CPEOs and PEOs. Under the safe harbor, a PEO shall be considered to perform substantial employment functions on behalf of its client employers if the PEO is responsible for:

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.
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.
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.
Employee-benefit obligations without regard to the receipt or adequacy of payment from those client-employers.

Dual Treatment of Working Owners as Employers and Employees

The final regulations adopt without change the provisions allowing a working owner of a trade or business (e.g., sole proprietors and other self-employed individuals) without common law employees to 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 DOL declined to expand the working owner provisions to MEPs sponsored by PEOs.

Effective Date

The final regulations are effective 60 days after they are published in the Federal Register.

Practical Implications

It is clear that MEPs are on the mind of both regulators and legislators. In May 2019, the "Setting Every Community up for Retirement and Enhancement Act of 2019" (SECURE Act, H.R. 1994) overwhelmingly passed in the House, one of many bills addressing MEPs that have been introduced in the 116^th Congress. The SECURE Act would expand MEP availability more broadly than the DOL's final regulations by facilitating open (or pooled) MEPs.

The DOL's final regulations also come just days after the transition relief relating to MEP Form 5500 reporting failures (see Legal Update, DOL FAB 2019-01 Provides Form 5500 Transition Relief for MEPs) and within weeks of the IRS proposed regulations addressing the "bad apple" problem (see Legal Update, IRS Issues Proposed Regulations Providing an Exception to the Unified Plan Rule for Multiple Employer Plans (MEPs)).

The final regulations' preamble also includes numerous references to the DOL's companion regulations governing association health plans (AHPs). Key provisions of the AHP regulations, which were finalized in June 2018, were challenged by several states on Administrative Procedure Act (APA) grounds and vacated by court order earlier this year in a ruling that the DOL has since appealed (see Practice Note, Association Health Plans and Legal Updates, Federal Judge Vacates Association Health Plan Provisions as Unreasonable Under ERISA and DOL Announces Nonenforcement Policy and Appeal of District Court Ruling Vacating Final Association Health Plan Rules). For example, the final regulations' provisions defining what is a bona fide group or association of employers permitted to establish a MEP generally mirror the related provisions under the AHP final regulations. The DOL noted that many of the same types of employer groups or associations that sponsor AHPs for their members also may want to sponsor MEPs.

Given the number of initiatives in play, it is important for small employers, PEOs, and retirement plan service providers to closely monitor MEP developments occurring not just at the DOL, but with IRS and Congress.

DOL Expands MEP Availability in Final Regulations on Association Retirement Plans | Practical Law