Previous regulatory actions by the Department of Labor have made open multiple employer plans a less attractive option for employers, but legislative fixes proposed by Congress could significantly improve the overall appeal of MEPs, a speaker explained at ASPPA’s 2017 Annual Conference.
Noting that there are challenges and opportunities with MEPs, David Schultz with FIS Relius explained that the DOL has taken a hostile position toward open MEPs through its advisory opinions that reject them as being a single plan under ERISA.
Open or Closed?
In looking to whether a MEP is open or closed, Schultz noted that a key issue centers on a common “nexus” and whether employers are part of a bona fide group or an association. In particular, Schultz explained that DOL Advisory Opinion 2012-04A holds that an open MEP is not established by a bona fide group or association of employers, and as a result, the MEP is considered to be a series of individual ERISA plans rather than a single plan.
One current issue with an open MEP is the requirement that each employer must file a Form 5500, instead of just filing one form under a controlled group (closed MEP), he noted. Moreover, the nondiscrimination and top heavy provisions are tested together under a controlled group, but under an open MEP each employer would be tested separately.
Another impediment to MEPs is the “one bad apple” rule, where noncompliance by a single employer can bring the whole plan down, and thus “spoils the barrel,” Schultz explained. He noted that the IRS has generally been friendly to MEPs, but it has to follow the law in enforcing this rule, such that the entire plan must be qualified or the plan as a whole is disqualified.
Despite some of these drawbacks, Schultz notes that MEPs are still very much alive and there is value to those who want third-party management and economies of scale in buying power.
MEPs, PEPs and PPPs
Meanwhile, Schultz emphasized that Congress recognizes that MEPs are not as user-friendly as they should be and there is bipartisan support for legislation to address the short comings.
He pointed to Senate Finance Committee Chairman Orrin Hatch’s (R-UT) Retirement Enhancement and Savings Act (RESA) introduced in the last Congress that would take an important step in overcoming some of the current issues. Among other things, the legislation would establish pooled employer plans (PEP) to the marketplace – effectively “MEPs 2.0.” Schultz noted that the legislation was approved by the committee, but it was never considered by the Senate.
One benefit of a PEP is that it would statutorily eliminate the one bad apple rule under the legislation. In addition, many legal responsibilities would be transferred to a third-party pooled plan provider (PPP) that would serve as the named fiduciary and administrator. Other advantages would be that only a single plan document would have to be maintained and only a single form 5500 would have to be filed.
Similar legislation was introduced in February 2017 by Rep. Buchanan (R-FL), but he noted that there has not been much legislative action in the current Congress. Schultz believes that more employers would sponsor retirement plans if the legislation is approved.
Schultz also addressed the “mental gymnastics” the DOL undertook in rationalizing its position that a private employer setting up a MEP without nexus is an open MEP with multiple ERISA plans, but a similar state MEP is considered “closed” and only considered a single plan.
Schultz explained that, in the DOL’s view, a state has a “unique representational interest” in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP and their employees. He emphasized that having this unique nexus distinguishes the state MEP from other business enterprises that underwrite benefits or provide administrative services to several unrelated employers.
Despite Congress overriding the Obama administration’s ERISA safe harbor for such programs, Schultz noted that some states are still moving forward, adding that he is not sure how far these efforts will go, but the industry certainly does not want to compete with states.