Jul 31, 2019

New Access to Multiple Employer Retirement Plans and Potential New Protections for Participating Employers

Retirement Plan Puzzle

On July 29, 2019, the Department of Labor (DOL) issued new rules expanding the availability of multiple employer retirement plans (MEPs).  In addition, earlier in July, the IRS proposed new rules that, when finalized, will provide greater protection for participating employers in a MEP.

DOL Expands Employers Who Can Participate in a Single MEP

Background.  Under ERISA, a MEP is a single plan that covers multiple unrelated employers.  To be considered a single plan, a plan must be established by one or more related employers or by a “group or association” of unrelated employers.  If a plan covers unrelated employers that the DOL determines is not a group or association, instead of being treated as a single MEP, the plan is treated as a separate plan for each of the unrelated employers.  Among other things, failing to be treated as a single plan would require the failed MEP to file separate Forms 5500 for each of its unrelated participating employers.

Final DOL Regulations Define Eligible MEP Participating Employers.  On July 29, 2019, the DOL released final association retirement plan regulations.  The regulations clarify when unrelated employers will be treated as a group or association and are intended to expand the availability of MEPs for small employers.

Requirements for a Group or Association to Establish a MEP.  Under the new regulations a group or association of employers will be able to establish a MEP if:

  • The group has at least one substantial business purpose unrelated to offering a retirement plan (although offering a retirement plan may be its primary purpose);
  • The group has a formal organizational structure with a governing body;
  • The group’s functions and activities, including the establishment and maintenance of the plan, are controlled by its employer members (either directly or indirectly);
  • The employer members have a commonality of interest by either (i) being employers in the same trade, industry, line of business, or profession; or (ii) having a principal place of business in the same state or metropolitan area (even if the metropolitan area includes more than one state);
  • The plan is available only to employees (including certain working owners) and former employees of employer members and their family members and other beneficiaries; and
  • The group is not a bank or trust company, insurance issuer, broker-dealer, or other similar financial services firm (or owned or controlled by one).

In addition, the new regulations provide a separate safe harbor for plans established by professional employer associations (PEOs) for their client employees.

Possible Further Expansion in the Future.  The DOL also requested information about (i) whether the regulations should be amended in the future to permit financial services firms to offer MEPs, and (ii) whether it should be necessary for employer members of a group or association to have a commonality of interest.

Potential Legal Challenge.  The new association retirement plan regulations are similar to the DOL’s association health plan regulations issued in 2018 that were struck down by a federal district court earlier this year.  Those regulations were struck down on both Affordable Care Act (ACA) and ERISA grounds.  The ACA issues would not apply to these regulations, but they potentially raise the same ERISA issues.

IRS Proposes to Mitigate Compliance Risks of Participating in a MEP

Background.  Under existing law, a qualification defect relating to one employer in a MEP can jeopardize the qualified status of the entire plan and have adverse tax consequences for all participating employers.  Because of the significance of this tax risk and the fact that actions of one participating employer may be entirely outside the control, or even knowledge, of the other participating employers, many employers have been hesitant to participate in MEPs in the past.

IRS Proposes Limiting Qualification Risks.  On July 3, 2019, the IRS proposed regulations that would mitigate some of these compliance risks.  Under the IRS’s proposed guidance, if a single employer (i) experiences a qualification error that it refuses to correct, or (ii) fails to provide information to the plan administrator about a possible qualification error, the portion of the plan covering employees of the offending employer could be spun off and terminated and the remainder of the plan, and its other participating employers, would be shielded from the qualification defect.

Requirements for Relief.  To take advantage of this proposed relief, the MEP must satisfy several specific administrative requirements, including the following:

  • The plan administrator of the MEP must have established practices and procedures that are reasonably designed to promote overall compliance, including procedures for collecting compliance data from the participating employers;
  • The plan document for the MEP must specifically provide for the process of addressing a noncompliant or nonresponsive participating employer, including the ultimate spinoff of that employer’s portion of the plan;
  • Various specific notices to the noncompliant or nonresponsive participating employer must be provided before the a spinoff is initiated; and
  • The IRS cannot have initiated an audit or examination of the MEP prior to the date the first required notice is provided to the noncompliant or nonresponsive participating employer.

Conclusion

The new guidance from the DOL and the proposed compliance relief from the IRS have the potential to increase both the availability and the attractiveness of MEPs as an opportunity for small employers to pool retirement plan resources and collectively negotiate for better fees and services.

For more information and guidance, please contact your Executive Compensation and Employee Benefits Counsel at Smith, Gambrell & Russell.