Aug 28, 2019
Helps Unrelated Employers Reduce Costs, Paperwork
Small and mid-size businesses now have greater access to defined contribution retirement plans under regulations issued by the Department of Labor (DOL) on July 31, 2019. The regulations, which loosen prior restrictions on multiple employer plans, take effect on September 30, 2019. The DOL regulations permit employers to connect with associations of employers in a city, county, state or multi-state metropolitan area in order to offer defined contribution retirement benefits to employees. Employers also have the option of banding together by industry to achieve the same purpose.
A Multiple Employer Plan (MEP)
is a retirement plan in which unaffiliated employers participate. It may be an “Open MEP” where participating employers are treated as sponsoring individual retirement plans. Or, it may be a “Closed MEP” that is treated as a single retirement plan.
A MEP is typically managed by professional fiduciaries. Businesses can offer their employees a retirement plan by joining the MEP rather than by establishing a plan on their own. The professionals that manage the MEP handle compliance with regulatory rules. Costs are lower, because the MEP sponsor is able to negotiate lower fees from service providers based on larger participant numbers and account balances. Much of the fiduciary and legal risk is transferred to the MEP sponsor and administrator. Employees who participate in the MEP have access to the same low cost investment funds that large employers can offer. And smaller businesses can more easily compete with larger companies in recruiting and retaining workers.
Regulations Treat “Association Retirement Plans” and Plans Sponsored by Bona Fide PEOs as Closed MEPs
Historically, if employers participating in the Multiple Employer Plan did not have employment- based common interests (“commonality”), the DOL viewed each participating employer as sponsoring its own retirement plan. This made the MEP (known as an “Open MEP”
) less attractive, because each participating employer would then have to file its own IRS Form 5500 (Annual Return/Report) and possibly engage an auditor to complete that filing, thereby driving up the costs that the MEP was intended to reduce. Where commonality did exist (known as a “Closed MEP”
), the MEP was treated as a single plan under ERISA that could file a single IRS Form 5500
and undergo only a single audit.
Under new DOL regulations, a Multiple Employer Plan sponsored by a “bona fide” group or association of employers whose participating employers all have principal places of business in the same geographic region (not exceeding a single state) or metropolitan area, and a MEP sponsored by a “bona fide” Professional Employer Organization (PEO), is treated as a Closed MEP (i.e., can file a single IRS Form 5500 and undergo a single audit) even if commonality is lacking. MEPs sponsored by a “bona fide” group or association of employers whose participating employers do not all have principal places of business in the same geographic region or metropolitan area are also treated as a Closed MEP if there is commonality (i.e., if the participating employers are all in the same trade, industry, line of business, or profession).
In commentary that accompanied the regulations, the DOL noted that MEP sponsors would generally serve as the named fiduciary of the MEP, with all of the responsibilities associated with that role, and that fee disclosures required under § 2550.408b-2 of ERISA regulations would generally be provided to the MEP sponsor and not the participating employers (although the MEP sponsor may need to provide a disclosure to the participating employers if it is a covered service provider as defined in those regulations). However, participating employers continue to have fiduciary responsibility to choose and monitor the MEP, to forward contributions to the MEP, to get periodic reports on the management and administration of the MEP, and to select investment options (if participating employers have that duty under the MEP).
The DOL also noted that the MEP plan document should address how participant accounts will be handled if the relationship between a participating employer and the MEP sponsor ends. In that regard, it noted that if active participation continues indefinitely and no party takes steps to transfer the assets to a new plan, the MEP will no longer constitute a single plan under ERISA with respect to the former participating employer.
Bona Fide Groups or Associations of Employers (Association Retirement Plans)
To be a bona fide group of association of employers:
- 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 member employers and their employees (this rule is deemed satisfied if the group or association could be viable even if it did not sponsor a MEP).
- Each participating employer must have at least one employee who is a participant covered under the MEP (“working owners” such as sole proprietors are allowed to participate if they satisfy certain criteria – they are treated both as a participating employer and as a covered employee – but the MEP would be subject to the rules of ERISA).
- The group or association must have a formal organizational structure with a governing body and by-laws or similar indications of formality.
- Member employers must control the functions and activities of the group, and member employers that participate in the MEP must control the activities of the MEP, both in form and substance.
- Member employers must either (i) be in the same trade, industry, line of business or profession, or (ii) have a principal place of business that is in the same region (not exceeding the boundaries of a single state) or metropolitan area.
- The group or association cannot allow persons other than employees and former employees of employer members, and their beneficiaries, to participate in the MEP.
- The group or association cannot be established by a bank, trust company, insurance issuer, broker-dealer, or other similar financial services firm (including a pension record keeper or a third-party administrator), unless it is a group maintained solely for entities of that type.
Examples of groups or associations that would likely satisfy the above conditions are a Better Business Bureau, a local Chamber of Commerce, etc.
Due to the above requirements, it would not appear that a state would qualify as a bona fide group or association of employers by itself. However, under guidance issued by the DOL in Interpretive Bulletin 2015-02, a state is permitted to offer a MEP that is treated as a single plan under ERISA, because it has a “unique representational interest in the health and welfare of its citizens” such that the DOL considers it to be acting in the interest of participating employers.
Note that while the DOL regulations do not permit financial services firms (e.g., broker-dealers, record keepers, third-party administrators, etc.) to sponsor a Closed MEP, those firms are presently able to sponsor Open MEPs. Additionally, there is pending legislation that would allow these types of businesses to sponsor Closed MEPs. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019
was passed by the House on May 23, 2019, and is expected to be passed by the Senate, possibly after the August recess. Under the SECURE Act, the IRS and DOL would be directed to permit all defined contribution retirement plans that have the same trustee, named fiduciaries, plan administrators,
plan years and investment menus, to file a single Form 5500.
Bona Fide PEO
To be a bona fide professional employee association:
- The PEO must perform substantial employment functions on behalf of client employers and maintain adequate records relating to such functions.
- A PEO is deemed to be performing substantial employment functions if it plays a contractually specified role in recruiting, hiring, and firing workers, and, without regard to the receipt or adequacy of payments from its client employers, it assumes responsibility for (i) payment of wages to employees, reporting and withholding of all applicable federal employment taxes for employees, and the functions and activities of any employee benefits which it has contracted to provide.
- The PEO must serve as plan sponsor, plan administrator, and a named fiduciary of the MEP.
- The PEO must ensure that each client-employer participating in the MEP has at least one employee who is a participant covered under the MEP (“working owners” cannot participate in a MEP sponsored by a PEO).
- The PEO must ensure that participation is limited to current and former employees of the PEO and current and former employees of current and former client employers, as well as their beneficiaries.
Additional Regulatory and Administrative Guidance Affecting MEPs
Proposed IRS Regulations:
In addition to the recent DOL regulations, the IRS issued proposed regulations on July 3, 2019, that, when finalized, will provide relief to qualifying MEPs from the so-called “one bad apple” rule. Under that rule, if one participating employer in a MEP fails to satisfy an applicable qualification requirement, the qualified status of the MEP for other participating employers is jeopardized. Recognizing that this rule may deter businesses from participating in a MEP, the proposed regulations provide that a defined contribution MEP will not be disqualified due to the actions or inaction of a participating employer if certain conditions are satisfied. Specifically, if a participating employer is unable or unwilling to correct a qualification failure for which the participating employer is responsible, or if the participating employer fails to comply with the
MEP administrator’s request for information about a qualification failure that the administrator reasonably believes exists, the qualified status of the MEP will be preserved if the MEP is eligible for relief and certain actions are taken.
A MEP is eligible for relief from the one bad apple rule if:
The actions a MEP must take include:
- The MEP administrator has established practices and procedures reasonably designed to promote compliance with Code requirements.
- The MEP plan document includes language describing the procedures that will be followed to address participating employer failures.
- The MEP is not “under examination” (i.e., under a current or impending employee plans examination, a criminal investigation by the IRS, etc.) as of the date it first provides notice to an unresponsive participating employer.
- Providing up to three notices to an unresponsive participating employer, at 90-day intervals (the third notice, if needed, would also be provided to employee-participants and the DOL).
- Taking any action necessary to facilitate/ implement remedial actions taken by the participating employer to address a known qualification failure or, if the employer instead chooses to initiate a spinoff, implementing and completing the spinoff within 180 days of the date it was initiated, and reporting the spinoff to the IRS on applicable IRS forms.
- If the employer neither takes remedial action nor initiates a spinoff, spinning off the assets of the participating employer’s plan to a separate plan and terminating that plan.
- Complying with any information requests that the IRS or a representative of the spun-off plan makes in connection with an IRS examination of the spun- off plan.
If a participating employer initiates a spinoff, any qualification failure that would have affected the MEP is a qualification failure of the spun-off plan, and may be correctable under the IRS’ Employee Plans Compliance Resolution System (EPCRS). Importantly, if a spinoff-termination is initiated by the MEP administrator, distributions are treated as being made from a qualified plan and are eligible for tax-deferred rollover; however, the IRS has the option to pursue appropriate remedies against any party (such as the owner of the participating employer) who was responsible for the qualification failure.
Form 5500 Requirements
For plan years beginning after December 31, 2013, MEPS that are required to file a 5500 have been required to include a list of participating employers on IRS Form 5500. The attachment must include each participating employer’s name, EIN, and a good faith estimate of the participating employer’s percentage of total contributions made by all participating employers for the plan year.
In Field Assistance Bulletin (FAB) 2019-01, issued July 24, 2019, the DOL noted that many MEP administrators were not including a list of participating employers in the required format. Under FAB 2019-01, the DOL will not reject a 5500 for the 2017 or earlier plan years, or seek civil penalties with respect to such filings, provided that the 5500s filed for 2018 and later plan years comply with the filing rules. MEPs have an automatic 2-1/2 month extension to file their 2018 5500s, without filing a 5558. To take advantage of the automatic extension, the special extension box under Part I, Line D should be checked and “FAB 2019-01” entered as the description. If the MEP has already filed, then it may file an amended return until 2-1/2 months after the due date to qualify for this relief.
Newport Group will continue to monitor the MEP landscape and update you as further substantive developments occur. We have extensive expertise in the design and administration of MEPs and are available to consult on any MEP initiatives you are considering. If you have any questions about the information provided in this article, please contact your Newport Group representative.
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Newport Group and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before making any decisions. 20190827-921194-2811493
To learn more about the Department of Labor loosening restrictions on MEP 401(k) Plans, contact your Newport Group representative.
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