On July 22, 2019, the Department of Labor published a final regulation on the definition of “employer” under ERISA, intended to expand the sorts of organizations that may sponsor a “multiple employer plan.”
In this article we briefly review the legal background and the final regulation. We then review DOL’s discussion, in the preamble to the final regulation, of the fiduciary obligations of an employer that adopts a multiple employer plan. We conclude with a brief discussion of the separate Request for Information (RFI) on Open MEPs also released on July 22, 2019.
Background – the MEP statutory/regulatory issue under ERISA
A MEP is a plan for employees of unrelated employers (other than a plan maintained pursuant to a collective bargaining agreement). Just who – what sorts of organizations – may maintain a MEP is an issue because, under ERISA, a retirement plan must generally be established by an “employer.” ERISA section 3(5) defines employer as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.”
Pursuant to “subregulatory” guidance, DOL has in the past taken the position that a MEP may exist under ERISA “where a cognizable group or association of employers, acting in the interest of its employer members, establishes a benefit program for the employees of member employers.” Under this guidance, “bona fide” MEPs may generally only be established where “the group or association has a sufficiently close economic or representational nexus to the employers and employees … that is unrelated to the provision of benefits.”
In recent years, there has been a movement in support of an expansion of the availability of MEPs and in support of (in effect) provider-based “Open MEPs” – multiple employer plans that are operated by, e.g., financial services institutions or recordkeepers, providing a retirement plan “solution” for adopting employers. Generally, however, a provider-based Open MEP would not qualify under DOL’s subregulatory guidance – they generally would flunk the “sufficiently close economic or representational nexus … etc.” test.
Final MEP regulation
DOL’s final regulation generally tracks its October 22, 2018 proposal and its prior subregulatory guidance, discussed in detail in our article on the proposal. It does not authorize Open MEPs. Instead, it adopts a set of rules for when a (non-provider-based) “bona fide group or association of employers” can offer a defined contribution MEP to its members. Those rules include:
That the group or association “have at least one substantial business purpose unrelated to offering and providing MEP coverage.”
That the employer members have a “commonality of interest” – they are either (1) in the same trade, industry, etc. or (2) in the same region of a single state or metropolitan area. The latter provision is a (marginal) expansion of earlier subregulatory guidance.
That the group or association is controlled by its employer-members, and the employer-members that participate in the plan control the plan.
In addition: each member-employer must have at least one employee who is a plan participant; the group or association must have a formal structure, with a governing body, by-laws, etc.; and plan participation must be limited to employees and former employees of employer members.
Finally, the group or association may not be “a bank or trust company, insurance issuer, broker-dealer, or other similar financial services firm (including a pension record keeper or third-party administrator).”
As noted – the regulation only covers defined contribution plan MEPs.
The regulation also clarifies the treatment of plans maintained by a professional employer organization (“PEO”).
Fiduciary obligations of an adopting employer
The preamble to the final regulation includes a discussion of the application of ERISA’s fiduciary rules to employers adopting a MEP that will be of interest to plan sponsors generally. DOL makes the following points:
The MEP sponsor is generally the ERISA plan Administrator and Named Fiduciary.
The adopting employers are, however, responsible under ERISA’s fiduciary rules for“choosing and monitoring the arrangement and forwarding required contributions to the MEP.”
Any decision with respect to plan investments – e.g., to include a fund in or delete it from the plan’s fund menu – would be subject to ERISA’s fiduciary rules, whether that decision is made by the MEP sponsor or by one or more adopting employers.
Disclosure requirements: If the MEP sponsor is a “covered service provider” within the meaning of DOL’s provider-to-sponsor disclosure regulations under ERISA section 408(b)(2), then it must provide disclosures required by that regulation (e.g., with respect to compensation and potential conflicts) when an employer is considering adopting the MEP and thereafter as specified. Moreover, the adopting employers’ duty to periodically monitor ongoing management and administration of the MEP “may be aided by the periodic receipt from the administrator or named fiduciary of the MEP of information similar to that described [DOL’S provider-to-sponsor disclosure regulations under ERISA section 408(b)(2)], with respect to other of the MEP’s service providers.” Failure to provide that information “must be taken into account by the participating employer when deciding whether to continue participating in the MEP and, in and of itself, may justify or require a decision to cease participation.”
These observations are of interest both as they pertain to “association” MEPs offered under the regulation and to any future rule authorizing Open MEPs.
Open MEP RFI
The regulation explicitly does not authorize provider-based “Open MEPs.” Instead, as noted, DOL also published an RFI requesting comments on issues related to Open MEPs. The RFI asks that commenters address one or more of eight questions, summarized below:
1. Should the ERISA definition of “employer” be amended to permit provider-based Open MEPs?
2. What type of entities, e.g., financial services companies and recordkeepers, should be permitted to establish an Open MEP and should there be any limitations on which entities may do so?
3. What conflicts of interest would an Open MEP provider have (e.g., with respect to its compensation), how could they be mitigated, and how effective would mitigation be? Would any prohibited transaction exemptions be necessary?
4. Are there any limiting principles needed for Open MEPs, similar to the commonality of interest and control principles in the current MEP regulation (see above)?
5. How should an Open MEP rule be implemented – as an exception to the “bona fide group or association” requirements (see above) or as an extension of the PEO rules?
6. How would authorization of Open MEPs affect existing MEP arrangements?
7. Does the cost of compliance with, e.g., Internal Revenue Code nondiscrimination rules for a large number of unrelated employers substantially offset the potential savings from the use of Open MEPs?
8. Would Open MEPs affect the “implementation, administration, or enforcement of any State or federal laws, apart from ERISA and the Internal Revenue Code, particularly including securities, insurance, and banking laws?”
Comments are due within 90 days.
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DOL’s new regulation can be seen as a small step away from a strictly employer-based retirement plan system. It remains to be seen whether associations (e.g., state and municipal Chambers of Commerce) will adopt this new model and how it will be implemented.
We will continue to follow this issue.