Volume 41 | Issue 85 | October 30, 2018
Employers of all sizes that provide retirement plan coverage for all or a portion of their workforce through an association or leasing organization may benefit from new options presented by proposed DOL regulations. The proposal would simplify Form 5500 filing requirements and clarify fiduciary responsibilities.
Background
Employers of all sizes may be concerned about how workers who are not covered by an employer-sponsored retirement plan prepare for retirement. In addition to the paternalistic element and the possible impact on current productivity, even employers that provide a retirement plan have reason to pay attention if they utilize the services of an employee leasing organization, such as a Professional Employer Organization (PEO).
Consider IRS Revenue Procedure 2002-21. If worksite employees are actually the employees of a PEO, it is fine that the PEO operates a plan for these workers — there is no violation of the exclusive benefit rule that says a qualified retirement plan is a plan maintained for the exclusive benefit of the employees of the employer. The client employer of these leased employees counts them as employees and counts the PEO plan benefits as having been provided by the client employer for purposes of assessing compliance with coverage and nondiscrimination rules under the client’s retirement plan. On the other hand, if the workers are actually employees — not leased employees — of the client employer, the PEO plan fails the exclusive benefit rule. The procedure offers several options: transfer benefits to the client employer’s plan, have the client employers adopt the PEO plan as a multiple employer plan (MEP), terminate the PEO plan, or spin off and terminate the portion of the PEO plan attributable to the worksite employees. The procedure explains how the tax rules in IRC Section 413 apply to a MEP.
The DOL subsequently, in Advisory Opinions 2012-03A and 2012-04A, addressed the ERISA implications of a MEP where there is no commonality of employers participating in the plan (“sufficient common economic or representational interest or genuine organizational relationship for there to be a bona fide employer group or association capable of sponsoring an ERISA plan on behalf of its employer members”). In such case, the arrangement is viewed as a collection of individual plans maintained by the separate employers. Consequently, the separate employers must:
- File Form 5500s for their own plan
- Obtain annual plan audits (assuming there are 100 or more employees participating in the plan)
- Obtain a fidelity bond for their plan
Observing mounting support in Congress to fix MEPs through legislation, and support from the administration in the form of Executive Order 13847, Strengthening Retirement Security in America, nudging DOL and IRS to address the situation, it was time for a change.
DOL Proposes Modification to ERISA Employer Definition
DOL observed that GAO has identified four types of MEP sponsors:
- PEO MEPs, such as the ADP Totalsource Retirement Savings Plan and the Gevity 401(k) plan
- Association MEPs, such as the YMCA Retirement Plan and NRECA 401(k) Plan
- Corporate MEPs that cover employees of related employers that are not sufficiently related to constitute a controlled group
- Open MEPs that cover employees of employers with no relationship other than their joint participation in the MEP
DOL’s proposed regulation would refine the definition of employer to accommodate defined contribution Association Retirement Plans and PEO MEPs. Although corporate MEPs are not directly addressed in the guidance, the DOL indicated that they do not intend to convey that a corporate MEP could not be a single employee benefit plan under ERISA. As to Open MEPs, the DOL asked why “such an arrangement should be treated as one employee benefit plan within the meaning of Title I of ERISA rather than as a collection of separate employer plans being serviced by a commercial enterprise that provides retirement plan products and services,” perhaps suggesting that they would continue to hesitate supporting those arrangements absent legislation from Congress.
Professional Employer Organization
PEO plans for client employers who are the common law employer of worksite employees, as noted above, are required to have those employers adopt the plan (or take other action) under IRS rules (Rev. Proc. 2002-21 and IRC Section 413). DOL’s proposed regulation would allow a bona fide PEO to act as an “employer” under ERISA if the organization:
- Performs substantial employment functions (such as payment of wages; reporting and withholding of taxes; recruiting, hiring and firing; determining compensation) on behalf of client employers
- Has substantial control over the functions and activities of the MEP as the plan sponsor, the plan administrator, and a named fiduciary
- Ensures that each client employer that adopts the MEP is the employer of at least one employee-participant in the MEP
- Ensures that participation in the MEP is available only to employees and former employees of the organization and client employers and their beneficiaries
The requirement to perform substantial employment functions does not require that all listed criteria be met. Based on facts and circumstances, a single criterion can meet the test; a safe harbor uses the status of a certified professional employer organization under IRS rules; a second safe harbor requires meeting five of the eight listed criteria.
Association Plans
DOL’s proposed regulation would allow a bona fide group or association of employers to act as an “employer” under ERISA if seven criteria are met:
- The primary purpose of the group or association is to offer and provide MEP coverage; however, the group or association also must have at least one substantial business purpose unrelated to offering and providing MEP coverage or other employee benefits
- Each employer member of the group or association participating in the plan has at least one employee covered under the plan
- There is a formal organizational structure with a governing body and by-laws or other similar indications of formality
- The employer members control the functions and activities of the group or association and the employer members that participate in the plan control the plan
- The employer members have a commonality of interest (either they are in the same trade, industry, line of business or profession; they meet a single state or metropolitan area geographic test; or they are the sponsor)
- Only employees and former employees of employer members and their beneficiaries participate in the plan
- The group or association is not (nor controlled by) a bank or trust company, insurance issuer, broker-dealer, or other similar financial services firm (including pension record keepers and third-party administrators), other than to the extent participating as an employer member of the group or association
“Working Owners” can qualify as both employee and employer for purposes of the association rule if they are self-employed and either work an average of 20 hours per week or 80 hours per month OR have income at least equal to the cost of medical coverage for the owner and covered beneficiaries in a group health plan.
Note. This working owner rule may be problematic for “gig workers” who work on a less structured basis.
Unresolved Issues
The DOL’s preamble, but not the proposed regulation, mentions the use of a participation agreement by employers choosing to participate in a MEP. Keep in mind that the IRS exclusive benefit rule will still apply, as will the rule that employers need to adopt a plan to obtain deductions. If the employers more formally adopt the MEP in a manner that meets IRS requirements, will they be ERISA “employers” with fiduciary responsibility despite the intent to leave that role in the PEO’s hands? Furthermore, the proposed regulation did not address the “one bad apple” rule that could still pose a stumbling block to adoption. IRS is said to be preparing its own response to the executive order, so presumably they will fill in the blanks on that score.
In Closing
Employers will want to continue monitoring developments about MEPs if they have nontraditional workers providing services. Hopefully the team effort by the agencies, Congress, and the administration will point to better options for these workers to address their retirement dreams. Comments are due on the proposed regulations by December 24.