Multiple Employer Plans and PEOs
In recent years, much activity has centered around the idea of open MEPs - that is, multiple employer plans that do not require any relationship among the participating employers in the plan. In 2018, bills were introduced in Congress to permit open MEPs, including the Retirement Enhancement and Savings Act in the Senate and the Family Savings Act in the House, and similar bills have already been introduced in the current session of Congress. While there appears to be widespread Congressional support for such legislation, it does not appear that passage of such legislation, which likely would be part of a package of benefit plan modifications, is likely. Therefore, focus has turned to a regulatory proposal - the recent DOL proposed regulation defining "employer" for purposes of determining if a multiple employer defined contribution pension plan is permissible.
Those DOL regulations are similar in many ways to the DOL regulations expanding association health plans. One very noticeable difference, however, was the treatment of PEOs in the proposed MEP regulations. That difference in treatment may have been the result of Revenue Procedures 2002-21 and 2003-86, in which the IRS addressed whether a PEO could have a single employer PEO plan. For a number of reasons, the IRS required 401(k) plans sponsored by PEOs to be structured as multiple employer plans under the Internal Revenue Code. However, unlike ERISA, the Code Section defining multiple employer plans does not require any relationship to exist among the participating employers in the multiple employer plan. Therefore, insofar as the IRS was concerned, a PEO-sponsored 401(k) plan would be treated as one plan. However, particularly after the issuance of DOL Advisory Opinion 2012-04A, it was not at all clear on what basis the DOL could continue to recognize PEO-sponsored 401(k) plans as a single plan, rather than as multiple plans. As a result, despite the DOL's apparent non-enforcement policy with respect to PEO-sponsored 401(k) plans, a number of practitioners have questioned how the PEO model could be reconciled with the DOL's advisory opinion.
The proposed DOL MEP regulation, which defines a group or association of employers for purposes of defining "employer" under Section 3(5) of ERISA, provides a distinct set of requirements for (i) a bona fide group or association of employers, and (ii) a bona fide professional employer organization, and the requirements for the latter are far less rigid than the requirements for the former. While a bona fide PEO must satisfy 4 conditions, 3 of them are easily satisfied by most PEOs. The only requirement that might present any issues for a PEO is the requirement that a PEO performs substantial employment functions on behalf of its client employers. While this is a facts and circumstances test, the DOL has also provided two safe harbors - one for a certified PEO under Code Section 7705(a), and the other satisfying 5 of the 9 criteria listed in the DOL proposed regulations. The structure of most PEOs should allow these requirements to be satisfied.
In contrast, among the requirements that a bona fide group or association of employers must satisfy is a commonality of interest. This means that either all the employers are in the same trade, industry, line of business or profession, or that each employer has a principal place of business in the same region that does not exceed the boundaries of a single state or metropolitan area. Second, while it is permissible for the primary purpose of the group or association to offer and provide MEP coverage to its employer members and their employees, and to exist primarily for the purpose of doing so, the group or association must have at least one substantial business purpose unrelated to offering and providing MEP coverage or other employee benefits to its employer members and their employees. Third, the group's or association's members that participate in the plan must control the plan--both in form and in substance.
While these MEP regulations are only proposed, and even when issued in final form they may be superseded by legislative action, they provide a basis for focusing on the legal permissibility of multiple employer defined contribution plans. Under these regulations, PEO 401(k) plans may provide the safest option from an ERISA Title I reporting and disclosure perspective if filing as a single multiple employer plan is an important consideration.
If you have any questions about the issues discussed in this alert, please do not hesitate to contact Barry Salkin.