Multiple employer plans (MEPs) are a hot topic of conversation both in government and with the small businesses and business associations hoping to benefit from new regulations. Over the course of the past year, new legislation and regulations from the IRS and the Department of Labor (DOL) have created a number of changes for MEPs with which plan sponsors should be familiar.
Department of Labor Regulations
Final regulations from the DOL issued on July 31, 2019 open up MEPs for bona fide groups of employers and employer associations. According to DOL regulations, employers can sponsor a benefits plan. The DOL has expanded this interpretation to mean that certain groups of employers can join together to sponsor plans. Employers can now group together based on a wider variety of criteria to achieve the needed economies of scale to negotiate better rates and reduce administrative costs of organizing the plans. Previously, there needed to be some “nexus” between the employers in the group, now they can simply belong to the same industry or work in a similar geographic area.
The final rules also provide a safe harbor definition, stating that if a group of employers satisfies the definition and passes the seven-factor test, then the DOL will deem the group an “employer” able to sponsor an ERISA pension plan. The seven factors include commonality of interest, a secondary business purpose, and employer control of the group.
Many employers are hesitant to embrace MEPs because of a previous rule the IRS had where “one bad apple” would cause problems for the entire association. If even one sponsoring employer failed to comply with the IRS requirements, the entire MEP would be disqualified, causing tax consequences for all participants.
New proposed IRS regulations provide an exception to the “one bad apple” rule. An MEP must satisfy the eligibility requirements and establishes practices to promote compliance across all employers. When an issue arises, the MEP administrator must provide a non-complying employer with notice. If the non-compliant employer fails to cure the issue after receiving notice, then the MEP administrator can spin off the assets attributable to each employer’s employees. The administrator must also work with the IRS to execute a spin-off plan that will protect the remainder of the employers from the “one bad apple” in their bunch.
While these regulations will ease some of the concerns and potential risks associated with MEPs, this is still a new landscape for businesses and benefits administrators to explore. Additional new legislation passed as part of the SECURE Act at the end of December 2019 includes additional guidance regarding “Open” MEPs or “pooled employer plans.” The SECURE Act does not include many of the conditions imposed under the DOL’s final regulations (described above). It also completely eliminates the “one bad apple rule,” Notably, the SECURE Act provides that the designated “pooled plan” provider must be the named fiduciary and plan administrator, must register with the DOL or IRS, and is subject to an increased ERISA bond of $1 million.