DOL Proposes Regulations to Expand Access to MEPs

The DOL has issued proposed regulations that would interpret ERISA’s definition of “employer” to allow certain groups or associations of employers, and certain professional employer organizations (PEOs), to establish multiple employer defined contribution retirement plans (MEPs). Previous DOL guidance took a narrow view of the circumstances under which a group or association could be treated as “acting in the interest of” its employer members so it could establish and maintain an ERISA plan as the “employer.” MEPs operated by entities that are not employers are treated under ERISA as separate plans maintained by the various participating employers, each of which must separately satisfy ERISA’s requirements, e.g., by filing separate annual reports on Form 5500 and purchasing separate fidelity bonds. By clarifying and expanding the definition of employer, the DOL hopes to expand access to MEPs and allow small and midsize employers to benefit from the economies of scale, access to lower-cost funds, and other advantages typically available only to larger employers.

The proposed regulations would permit MEPs to be established and maintained by “a bona fide group or association of employers” or “a bona fide professional employer organization.” The proposed regulations also address MEP participation by certain working owners who have no employees. Here are highlights:

• Bona Fide Group or Association of Employers. Under the proposed regulations, a group or association of employers must meet seven requirements to establish a MEP as the employer. It must have at least one substantial business purpose unrelated to providing employee benefits, a formal organizational structure, and be controlled by its employer members. The members must share a “commonality of interest,” a requirement that would be satisfied if either—(a) they were in the same trade, industry, line of business, or profession; or (b) their principal places of business were within a region that did not exceed the boundaries of the same state or the same metropolitan area (even if the metropolitan area included more than one state). Each employer member must be the direct employer of at least one covered participant, and participation must be available only to employees and former employees of members. Finally, the group or association must not be a bank, trust company, insurance issuer, broker-dealer, or other similar financial services firm. Most of these requirements parallel those in the DOL’s final association health plan regulations (see our Checkpoint article).
• Bona Fide Professional Employer Organization. PEOs would be able to establish a MEP if they performed “substantial employment functions;” had substantial control over the MEP as plan sponsor, plan administrator, and a named fiduciary; ensured that each client employer adopting the MEP was the direct employer of at least one participating employee; and made the MEP available only to employees and former employees of the PEO and its client employers. The proposed regulations list nine criteria relevant to determining whether a PEO performs substantial employment functions, any one of which might—depending on the facts and circumstances—be sufficient. PEOs desiring greater certainty, however, could satisfy the requirement automatically by meeting any five of the nine criteria.
• Working Owners. The proposed regulations would allow working owners without common-law employees, such as sole proprietors and other self-employed individuals, to elect to act as employer members of an association and to be treated as employees of their businesses for purposes of being covered by the multiple employer plan of a bona fide group or association of employers. Working owners would have to provide a minimum amount of personal services to their trade or business, or have wages or self-employment income at least equal to the cost of coverage for any group health plan sponsored by the group or association maintaining the MEP.

EBIA Comment: The proposed regulations respond to the President’s executive order directing the DOL to consider expanding the circumstances under which employees of different private-sector employers may participate in a single plan (see our Checkpoint article), but they don’t go as far as some would like. The rules retain a nexus requirement and do not permit so-called “open MEPs” to be treated as one plan under ERISA (see our Checkpoint article). They also do not have any effect on issues under the Code, such as the “bad-apple” rule that causes an entire plan to be disqualified if the plan or any participating employer fails to satisfy a qualification requirement. Those issues, as the DOL observes, will require a legislative fix. For more information, see EBIA’s 401(k) Plans manual at Section II.F.2 (“Multiple Employer Plan”).

Contributing Editors: EBIA Staff.