Those who have been concerned about the Labor Department’s recent extension of authority to state governments to run so-called “open” MEPs may now have an opportunity to compete more effectively with that alternative.
In November, the Department of Labor (DOL) issued Interpretive Bulletin (IB) 2015-02, which took the position that a state’s “unique representational interest in the health and welfare of its citizens” is a sufficient nexus to allow the state to operate a multiple employer plan (MEP) for private employers. This week, Congress is poised to level the playing field for private providers. The tax extenders package includes a provision creating “pooled employer plans” (PEPs), which are effectively multiple employer plans with no required nexus for participating employers other than the adoption of the same plan.
What Is a PEP?
A PEP is a single IRC section 401(a) individual account plan with a tax exempt trust that provides benefits for employees of 2 or more employers. A PEP’s plan document must designate a “pooled plan provider” (PPP) to act as the section 3(16) plan administrator and a named fiduciary of the plan. In addition, one or more trustees responsible for collecting contributions, as well as holding plan assets must also be named in the plan document. The responsibility for contribution collection gets more than passing mention – that trustee must have and follow written procedures that are “reasonable, diligent and systematic.” Additionally, only a bank or other institution that satisfies the requirements of section 408(a)(2) to qualify as an IRA trustee/custodian can serve as a PEP trustee. The plan document not only imposes on the PPP the obligation to make required disclosures to participating employers, but also for the employers to provide the PPP with the information necessary to keep the plan running properly. Those disclosures and other information may be provided in electronic form.
Finally, some have suggested that the plan sponsor’s selection of a MEP provider is a settlor function and therefore free of any fiduciary liability. Although that position is questionable, the legislation makes it clear that the selection of a PEP and its provider is a fiduciary act under ERISA. Participating employers retain fiduciary responsibility for the selection and monitoring of the PPP as well as any other designated named fiduciary of the plan. Further, participating employers are responsible as fiduciaries for the investment and management of assets attributable to employees of that employer unless the PPP has delegated that responsibility to another fiduciary allowing for the participating employer to select their own advisor. The PEP is also prohibited from imposing unreasonable restrictions, fees or penalties upon withdrawal from the plan or otherwise distributing or transferring assets.
A plan established before January 1, 2016 is not a PEP unless the plan administrator specifically elects to be treated as a PEP and the plan otherwise meets the requirements of a PEP. Note that Multiple Employer Plans (MEPs) (under DOL’s interpretation of ERISA) are not PEPs. The law specifically provides that plans with participating employers that share a common interest other than participation in the plan, and that control the plan, are not PEPs.
PPP Responsibilities
The PPP is responsible for performing all administrative duties of the plan – specifically including testing that is “reasonably necessary” to ensure the plan remains qualified under IRC section 401(a), as well as ensuring that the participating employers provide the necessary information to keep the plan in compliance. The PPP must:
DOL and IRS/Treasury Guidance Forthcoming
DOL and IRS may audit the PPP, and the Secretaries of Labor and of Treasury are directed by the legislation to issue guidance identifying the duties of the PPP. DOL also has been given authority to determine disclosures the PPP must make to participating, or prospective, employers, as well as information to be provided by an employer to the PPP. To address the so-called “bad apple” rule, the Secretaries are also to promulgate guidance providing that if a participating employer fails to do what is necessary to maintain a qualified plan, the portion of the plan attributable to that employer will be spun off, and that employer will be responsible for any liabilities. (DOL and IRS also have the right to determine if it is in the best interest of participants to not spin off the plan.)
IRS or DOL may also determine the PPP is not carrying out its responsibilities. Treasury is to provide guidance on procedures to be taken to terminate a plan that has failed to meet the requirements of a PEP. The extent to which the failure by the PPP or a participating employer to disclose or provide necessary information has “continued over a period of time that demonstrates a lack of commitment to compliance” is to be taken into account.
Treasury, in consultation with DOL, is to publish model language that can be adopted for a plan to be treated as a PEP. There is no specified timeline for the model amendment or any of the other required guidance. However, there is no technical restriction on the adoption of a PEP in advance of the guidance.
Reporting Requirements
The annual report for a PEP is to include a list of participating employers, and a good faith estimate of the percentage of total contributions for the year attributable to each employer. The Secretary of Labor may extend the small plan audit rules to a PEP with fewer than 1000 total participants, provided no participating employer has more than 100 participants covered by the plan.
Effective Date
The provision is effective for plan years beginning after December 31, 2015. However, since PPPs must register with both DOL and IRS in advance of operating a PEP, and guidance on the registration process is needed, it is not clear at this time what the practical effective date will be.
Implications
The DOL position espoused in IB 2015-02 effectively puts state governments in the business of promoting open MEPS in competition with the retirement plan providers in their own state. Unfortunately, prior DOL guidance limits the ability of the private sector to offer these same services. The true benefit of the PEP legislation is that it will allow retirement plan professionals, with years of knowledge and experience in serving employers (and their employees), to offer a plan option that would otherwise only be available under a state government program.
Craig Hoffman is the American Retirement Association's Director of Regulatory Affairs. Judy Miller is the American Retirement Association's Director of Retirement Policy.
In November, the Department of Labor (DOL) issued Interpretive Bulletin (IB) 2015-02, which took the position that a state’s “unique representational interest in the health and welfare of its citizens” is a sufficient nexus to allow the state to operate a multiple employer plan (MEP) for private employers. This week, Congress is poised to level the playing field for private providers. The tax extenders package includes a provision creating “pooled employer plans” (PEPs), which are effectively multiple employer plans with no required nexus for participating employers other than the adoption of the same plan.
What Is a PEP?
A PEP is a single IRC section 401(a) individual account plan with a tax exempt trust that provides benefits for employees of 2 or more employers. A PEP’s plan document must designate a “pooled plan provider” (PPP) to act as the section 3(16) plan administrator and a named fiduciary of the plan. In addition, one or more trustees responsible for collecting contributions, as well as holding plan assets must also be named in the plan document. The responsibility for contribution collection gets more than passing mention – that trustee must have and follow written procedures that are “reasonable, diligent and systematic.” Additionally, only a bank or other institution that satisfies the requirements of section 408(a)(2) to qualify as an IRA trustee/custodian can serve as a PEP trustee. The plan document not only imposes on the PPP the obligation to make required disclosures to participating employers, but also for the employers to provide the PPP with the information necessary to keep the plan running properly. Those disclosures and other information may be provided in electronic form.
Finally, some have suggested that the plan sponsor’s selection of a MEP provider is a settlor function and therefore free of any fiduciary liability. Although that position is questionable, the legislation makes it clear that the selection of a PEP and its provider is a fiduciary act under ERISA. Participating employers retain fiduciary responsibility for the selection and monitoring of the PPP as well as any other designated named fiduciary of the plan. Further, participating employers are responsible as fiduciaries for the investment and management of assets attributable to employees of that employer unless the PPP has delegated that responsibility to another fiduciary allowing for the participating employer to select their own advisor. The PEP is also prohibited from imposing unreasonable restrictions, fees or penalties upon withdrawal from the plan or otherwise distributing or transferring assets.
A plan established before January 1, 2016 is not a PEP unless the plan administrator specifically elects to be treated as a PEP and the plan otherwise meets the requirements of a PEP. Note that Multiple Employer Plans (MEPs) (under DOL’s interpretation of ERISA) are not PEPs. The law specifically provides that plans with participating employers that share a common interest other than participation in the plan, and that control the plan, are not PEPs.
PPP Responsibilities
The PPP is responsible for performing all administrative duties of the plan – specifically including testing that is “reasonably necessary” to ensure the plan remains qualified under IRC section 401(a), as well as ensuring that the participating employers provide the necessary information to keep the plan in compliance. The PPP must:
- register with both the DOL and IRS before beginning operations as a PPP,
- acknowledge status as the plan’s named fiduciary and plan administrator in writing, and
- ensure that fiduciaries and any other parties handling plan assets are properly bonded. (The cap on the required bond for PEPs is $1,000,000.)
DOL and IRS/Treasury Guidance Forthcoming
DOL and IRS may audit the PPP, and the Secretaries of Labor and of Treasury are directed by the legislation to issue guidance identifying the duties of the PPP. DOL also has been given authority to determine disclosures the PPP must make to participating, or prospective, employers, as well as information to be provided by an employer to the PPP. To address the so-called “bad apple” rule, the Secretaries are also to promulgate guidance providing that if a participating employer fails to do what is necessary to maintain a qualified plan, the portion of the plan attributable to that employer will be spun off, and that employer will be responsible for any liabilities. (DOL and IRS also have the right to determine if it is in the best interest of participants to not spin off the plan.)
IRS or DOL may also determine the PPP is not carrying out its responsibilities. Treasury is to provide guidance on procedures to be taken to terminate a plan that has failed to meet the requirements of a PEP. The extent to which the failure by the PPP or a participating employer to disclose or provide necessary information has “continued over a period of time that demonstrates a lack of commitment to compliance” is to be taken into account.
Treasury, in consultation with DOL, is to publish model language that can be adopted for a plan to be treated as a PEP. There is no specified timeline for the model amendment or any of the other required guidance. However, there is no technical restriction on the adoption of a PEP in advance of the guidance.
Reporting Requirements
The annual report for a PEP is to include a list of participating employers, and a good faith estimate of the percentage of total contributions for the year attributable to each employer. The Secretary of Labor may extend the small plan audit rules to a PEP with fewer than 1000 total participants, provided no participating employer has more than 100 participants covered by the plan.
Effective Date
The provision is effective for plan years beginning after December 31, 2015. However, since PPPs must register with both DOL and IRS in advance of operating a PEP, and guidance on the registration process is needed, it is not clear at this time what the practical effective date will be.
Implications
The DOL position espoused in IB 2015-02 effectively puts state governments in the business of promoting open MEPS in competition with the retirement plan providers in their own state. Unfortunately, prior DOL guidance limits the ability of the private sector to offer these same services. The true benefit of the PEP legislation is that it will allow retirement plan professionals, with years of knowledge and experience in serving employers (and their employees), to offer a plan option that would otherwise only be available under a state government program.
Craig Hoffman is the American Retirement Association's Director of Regulatory Affairs. Judy Miller is the American Retirement Association's Director of Retirement Policy.
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