Multiple Employer Pension Plan Update
On October 22, 2018, the DOL issued a proposed regulation in response to the August 31, 2018, Executive Order by President Trump to remove regulatory burdens faced by defined contribution multiple employer pension plans ("MEPs"). On July 31, 2019, final DOL regulations on the definition of "Employer" were published in the Federal Register. While there are several possible types of MEPs, the DOL defers action on so-called "open" MEPs, and solicits additional information regarding what should be done to allow them. (It is noteworthy that the proposed SECURE Act is before Congress; if enacted, it could specifically authorize open MEPs.) The final regulation is limited to bona fide groups or associations of employers, and bona fide professional employer organizations ("PEOs"), which are deemed to be acting in the interests of an employer, and thus can establish a defined contribution pension plan so long as they satisfy the DOL's regulatory requirements.
The final regulation is effective as of September 30, 2019, so affected groups should consider whether changes are needed by the end of this month.
Bona Fide Employer Groups or Associations
A "closed" MEP refers to a MEP for which the participating employers have a sufficiently close economic or representational nexus allowing it to be treated as a single MEP for ERISA purposes. The advantages of a plan sponsored by a bona fide employer group or association include a single audit, bond and 5500. Under the final regulation, the group or association of employers is considered bona fide if seven requirements are met. The requirements are substantially the same as the requirements applicable to association health plans under recently issued final DOL regulations. They are:
(1) The primary purpose of the group or association may be to offer and provide MEP coverage to its employer members and their employees provided, however, the organization must have at least one substantial business purpose unrelated to the offering and providing of MEP coverage and benefits. A business purpose includes common business interests of its members or the common economic interests in a given trade or employer community. The final regulation contains a safe harbor: a substantial business purpose exists if the group or association would be viable entity in the absence of considering the establishment of a pension plan. Further, a business purpose includes promoting common business interests of the industry or employer community, whether or not those interests are for-profit activities.
(2) Each employer member of the group participating in the plan is a person acting directly as an employer of at least one employee participating in the plan, including a working owner.
(3) The group or association has a formal organizational structure with a governing body and has by-laws or other similar indications of formality.
(4) The functions and activities of the group or association are controlled by its employer members, and the group's or association's participating employers control the plan.
(5) The employers have a commonality of interest. A commonality of interest exists if the employers either (i) are in the same industry, trade, line of business or profession, or (ii) have a principal place of business that does not exceed the boundaries of a single state or metropolitan area.
(6) Participation in the plan is restricted to employees and former employees of the employer members, and their beneficiaries.
(7) The group or association is not a bank, trust company, insurance issuer, broker-dealer, or other similar financial services firm, other than participation in the group or association as an employer member.
Bona Fide PEOs
The conditions for a bona fide PEO are different than that for bona fide employer groups or associations in four respects. First, the PEO must have substantial control over the functions and activities of the MEP as the plan sponsor, plan administrator, and named fiduciary. Second, the PEO must perform "substantial employment functions" on behalf of the employers. Third, the PEO must ensure that each client employer adopting the MEP does so directly on behalf of at least one employee. Fourth, the PEO must ensure that MEP participation is only available to the employees and former employees (and their beneficiaries) of the PEO and current and former client employers. Whether a PEO meets this requirement is based on a facts and circumstances test. The DOL also adopts a safe harbor in order provide more certainty with respect to the substantial employment functions test. The safe harbor as articulated in the final regulation simplifies and streamlines the two separate safe harbors in the proposed regulations.
The preamble to the final regulation makes it clear that MEP participating employers would retain limited fiduciary responsibilities. Employers would be required to be prudent in the selection and monitoring of service providers and would also be responsible for the timely remittance of contributions to the plan.
As mentioned above, the final regulation does not address two other types of MEPs: "open" MEPS and "corporate" MEPs. An "open" MEP is a MEP that covers employees of employers with no relationship other than their joint participation in the MEP. "Open" MEPs are not single retirement plans for ERISA purposes; each adopting employer is treated as having established a separate ERISA plan. Consequently, audit, bond an annual reporting requirements apply to each ERISA plan. A "corporate" MEP covers employees of related employers that are not in the same controlled group or affiliated service group. In a separate request for information, the DOL solicited comments as to whether additional regulations should in fact address one or both of these types of MEPs.