Definition of “Employer” Under Section 3(5) of ERISA – Association Retirement Plans and Other Multiple-Employer Plans, 29 CFR Part 2510, 84 Fed. Reg. 37508 (July 31, 2019); “Open MEPs” and Other Issues under Section 3(5) of the Employee Retirement Income Security Act, 29 CFR Part 2510, 84 Fed. Reg. 37545 (July 31, 2019); FACT SHEET: Final Rule on Association Retirement Plans (ARPs) (July 29, 2019)
The DOL has finalized its regulations clarifying when a group or association of employers, or a professional employer organization (PEO), can be treated as an employer for purposes of establishing a multiple employer defined contribution retirement plan (MEP). Like the DOL’s proposal (see our Checkpoint article), the final regulations will allow establishment of a MEP by “a bona fide group or association of employers” or “a bona fide professional employer organization.” Working owners with no employees who provide a specified minimum amount of personal services to their trade or business or have a specified minimum amount of wages or self-employment income can be treated as both an employer and employee by the MEP of a group or association (but not the MEP of a PEO). The final regulations supersede previous (and more restrictive) subregulatory guidance interpreting ERISA §3(5), but they have no effect on 2015 guidance regarding state-sponsored or facilitated MEPs (see our Checkpoint article). Here are highlights of the regulations, which are effective September 30, 2019:
Bona Fide Group or Association of Employers. The definition of a “bona fide group or association of employers” that can establish a MEP is essentially unchanged from the proposed regulations. The group or association must have at least one substantial business purpose unrelated to providing employee benefits, a formal organizational structure, and be controlled by its employer members. A substantial business purpose is presumed if the group or association would be a viable entity even if it did not sponsor a benefit plan. The members must share a “commonality of interest,”—i.e., they must be in the same trade, industry, line of business, or profession, or their principal places of business must be within a region that does not exceed the boundaries of the same state or metropolitan area. Members participating in the plan must control the plan and be the direct employer of at least one covered participant. Participation must be available only to employees and former employees of members, and their beneficiaries. Finally, the group or association must not be a bank, trust company, insurance issuer, broker-dealer, or other similar financial services firm. The preamble observes that these requirements generally mirror the DOL’s final association health plan (AHP) regulations (see our Checkpoint article), so any group or association that can establish a bona fide AHP should be able to establish a MEP.
Bona Fide Professional Employer Organization. PEOs can establish a MEP if they (1) perform “substantial employment functions;” (2) have substantial control over the MEP as plan sponsor, plan administrator, and a named fiduciary; (3) ensure that each client employer adopting the MEP is the direct employer of at least one participating employee; and (4) make the MEP available only to employees and former employees (and their beneficiaries) of the PEO, its client employers, and former client employers. (Employees and former employees must have become participants during a contract period between their employer and the PEO.) While these four requirements have been adopted essentially as proposed, the final regulations significantly modify the safe harbor structure for determining whether the PEO performs substantial employment functions. The safe harbor for “certified PEOs” has been eliminated, and the remaining safe harbor has been streamlined. To qualify, a PEO must demonstrate specified levels of responsibility for payment of employees’ wages; employment tax withholding and reporting; recruiting, hiring, and firing workers; and employee benefits. The final regulations also require that the PEO’s plan obligations to MEP participants continue after the client-employer ends its PEO contract.
EBIA Comment: These regulations are probably not the DOL’s final word on which MEPs can be treated as a single employer under ERISA. The preamble states that the DOL is not opining on whether other MEPs could qualify and identifies several issues that may be revisited, including the geographic test for commonality. And in a request for information (RFI) accompanying the final regulations, the DOL has asked for information and comments relevant to an even greater expansion of the employer concept to include so-called “open MEPs” (plans covering employers that have no relationship other than their participation in a MEP) and “corporate MEPs” (plans that cover employees whose employers are related, but not sufficiently related to be in the same controlled group or affiliated service group). Employers that cannot find acceptable MEP options under the final regulations should watch for further developments, including the multiple proposals circulating in Congress. Employers and MEP sponsors relying on these regulations should be sure to review the preamble, which offers a trove of guidance interpreting the regulations, including important clarifications regarding what constitutes an “industry” for purposes of the commonality requirement, and the DOL’s expectations regarding what should happen when an employer’s client relationship with a PEO ends. For more information, see EBIA’s 401(k) Plans manual at Section II.F.2 (“Multiple Employer Plan”).
Contributing Editors: EBIA Staff.