Article – The Current Evolution of MEP Guidance

Publication:      NIPA:  Strictly Business Website

Date/Volume/Issue:  August 15, 2019            

The Current Evolution of MEP Guidance

Ilene H. Ferenczy, Esq.

July was a good month for multiple employer plans (MEPs) and those who favor them.  Three pieces of guidance were issued by the Internal Revenue Service (IRS) and the Department of Labor (DOL) making MEPs more attractive and accessible to interested employers.  All three reflect the Administration’s position (as expressed by President Trump’s Executive Orders to the IRS and the DOL in August of 2018) that MEP creation and maintenance should be encouraged.

Unfortunately, however, the DOL still stopped short of considering all plans that are MEPs for IRS purposes to be MEPs under the DOL rules. It appears that this change will need to await legislation, which is still a possibility in 2019.  The DOL did request additional comments on the issue.

In this article, we will give a relatively quick review of each of these three pieces of guidance and their impact on the MEP world:

IRS Action Re One Bad Apple Rule

In July 2019, the IRS issued a proposed regulation that would modify the treatment of MEPs in the event of a disqualification failure by one of the adopting employers.  This regulation, if adopted, would eliminate one of the significant impediments to employers joining MEPs.

Under the general IRS approach to plan qualification, if an error occurs in a plan that violates any of the Internal Revenue Code (Code) Section 401(a)-related rules, the entire plan is subject to disqualification.  If the plan is a MEP, an error by one employer affects the qualification of the entire plan (not just that employer’s portion).  This is commonly referred to as the “one bad apple” rule (after the adage that “one bad apple spoils the whole barrel”), although the IRS has coined a new phrase for the rule: the “unified plan” rule.

The proposed regulation [Prop. Treas. Reg. §1.413-2(g)], if finalized, would provide a procedure for the Plan Administrator of a MEP to work with an adopting employer that has violated the Code to repair the problem.  The regulation outlines a procedure for the MEP Plan Administrator to initiate if the adopting employer is uncooperative in taking corrective action.  Under this procedure, the Plan Administrator for the MEP is responsible for issuing a series of three increasingly threatening notices to the uncooperative adopting employer, with successive 90-day periods during which the adopting employer can work with the Plan Administrator to fix the problem.  The last of the three notices is sent, not just to the adopting employer, but to the participants and the DOL. If that notice does not lead to the required action by the adopting employer, the Plan Administrator will spin off the offending portion of the plan, terminate that plan, and pay out the participants.

Although the entire spun-off plan is subject to disqualification, the procedure allows the innocent participants to roll their distributions into IRAs.  However, the accounts of those whom the IRS considers to be responsible for the problems are not so generously treated:  the IRS reserves the right to take punitive action, including denying such participants the right to make an eligible rollover of their funds.

These regulations are only proposed, and the preamble is explicit that they cannot be relied upon until they are finalized.  When they are final, amendments likely will be needed to the MEP to permit this process to take place.

DOL Resolution of 5500 Reporting Issues for Closed MEPs

In 2014, ERISA Section 103(g) was added by the Cooperative and Small Employer Charity Pension Flexibility Act (CSEC) which changed the reporting needed for MEPs on Form 5500.  In particular, the new rules required that Forms 5500 filed for MEPs include identifying information for each adopting employer, as well as the percentage of total MEP contributions made for the year by such employer.

Because the DOL does not consider MEPs that cover unrelated employers with no significant business affiliations (so-called “Open MEPs”) to be single employer plans (requiring separate Form 5500 reporting for each employer), this reporting failure applies only to those plans that the DOL agrees are multiple employer plans.  These plans are commonly referred to as “Closed MEPs.”

The DOL reviewed nearly 300 Forms 5500 filed by large Closed MEPs and discovered significant noncompliance with this new reporting requirement. In response, the DOL issued Field Assistance Bulletin (FAB) 2019-01 on July 14, 2019, to provide transitional relief through which MEP sponsors could resolve their noncompliance for years 2014-17.

The DOL’s solution is that, if a MEP sponsor who did not comply with Section 103(g) in prior years files a fully compliant 2018 Form 5500 or 5500-SF, no enforcement action would be taken in relation to any of the prior noncompliant years to which these rules applied.

Calendar year plans that did not file their Forms 5500 before July 31, 2019, are given an automatic 2½-month extension to October 15, 2019, to file compliant forms.  No Form 5558 is needed for this extension; simply check the “special extension” box under Part 1, Line D on the 2018 Form 5500 or 5500-SF and put “FAB 2019-01” on the associated description line.  Sponsors of calendar year plans for which Form 5500 was already filed may amend those forms before October 15 to include the required information to take advantage of the transitional relief.

The transitional relief will apply to non-calendar year plans, so long as their 2018 Forms 5500 are compliant with the Section 105(g) disclosures and are filed timely.  The language of the FAB does not make it clear whether these plans also receive an automatic special extension of their Form 5500 filing deadline.  Sponsors of fiscal year plans needing an extended deadline may want to file Form 5558 for the extension to be sure that they have the extra time.

Keep in mind, however, that Form 5558 is needed to extend the deadline for Form 8955-SSA, regardless of whether the plan has a calendar or fiscal year end.

If a noncompliant Form 5500 is filed for 2018, the DOL intends to treat the Form 5500 for the 2018 year, as well as the prior years to the extent that they, too, were noncompliant, as a filing failure.  This could subject the sponsor of the plan to penalties of up to $2,194 per day per form. Therefore, if this deadline is missed, it would behoove the plan sponsor to file a fully compliant amended Form 5500 for all years from 2014 forward before the DOL identifies the plan for has review.

DOL Finalizes Association Retirement Plan Regulations

In October of 2018, the DOL issued proposed regulations that permitted a wider range of MEPs to be classified as “Closed MEPs” than previously has been the case.  These regulations followed on the heels of finalized regulations issued by the DOL in relation to multiple employer health plans (commonly referred to as “Association Health Plans” or AHPs).  The DC Circuit Court struck down the AHP regulations in March of this year, bringing into question whether the proposed retirement plan regulations would be finalized, notwithstanding the fact that the DOL is appealing the AHP case.  This question was answered favorably when the DOL finalized the retirement plan regulations on July 29, 2019. [Labor Reg. §2510.3-55]

Under these regulations, certain MEPs previously treated by the DOL as Open MEPs (and, therefore, considered to be a group of single employer plans for DOL purposes) will now be treated as one plan by the DOL.  The regulations affect MEPs sponsored by either bona fide groups or associations (G/As) or by PEOs.

The New Group/Association MEP Rules

To fall within the G/A classification, the plan and the G/A must meet these specific requirements:

1. The G/A must have a substantial business purpose that is unrelated to the plan. While this purpose may not be the “primary” purpose for the G/A, it must be considerably important.
2. Each participating employer in the MEP must have at least one employee participating in the plan.
3. The G/A must be controlled by its employee members, and the plan must be controlled by the participating employers.
4. The G/A must have a formal organizational structure with a governing body and bylaws or similar indications of formality.
5. Plan participation must be offered only to employees or former employees (and their beneficiaries) of members of the G/A.

In a clear statement that service-provider-sponsored Open MEPs are not covered under these regulations, the DOL specifically stated that these rules do not apply to plans sponsored by banks, trust companies, insurers, broker-dealers, similar financial entities, TPAs, or recordkeepers (or by an entity that is owned or affiliated with these types of companies).

Once the above requirements are met, the G/A members must have a commonality of interest.  This is shown by a demonstration that the G/A either: (a) covers employers in the same trade, industry, line of business, or profession; or (b) covers employers with a principal place of business in the same state or within the same metropolitan area (even if such area crosses state lines).

The New PEO MEP Rules

The second category of MEPs that will be considered to be Closed MEPs by the DOL are PEO (professional employer organization) Plans. The proposed regulations contained complex rules that distinguished between different types of PEOs. The final regulations are simplified, and require that the PEO:

1. Performs substantial employment functions on behalf of its client-employers and maintains adequate records relating to those functions. The determination of whether such functions are performed is based on facts and circumstances, although the regulation provides a safe harbor to make this determination easier;
2. Has substantial control over the functions and activities of the MEP, as the plan sponsor, administrator, and named fiduciary of the MEP, and continues to have responsibilities for MEP participants after the client-employer no longer uses the services of the PEO;
3. Ensures that each client-employer that adopts the MEP acts directly as the employer of at least one employee who is a participant in the MEP; and
4. Ensures that participation in the MEP is available only to employees and former employees of the PEO and its client-employers.

The New Working Owner Rules

Last, the regulations outline that “working owners” can be employees of their companies for purposes of participating in one of the Closed MEPs covered by the regulations.  Working owners are people who:

1. Have an ownership interest in the company, whether or not incorporated;
2. Earn wages or self-employment income from the company for providing services to the company; and
3. Either: (a) work at least 20 hours per week or 80 hours per month providing such services; or (b) in the case of a G/A MEP, have wages or self-employment income from the company that at least equals the working owner’s cost of coverage for participation by the working owner and his/her covered participants in any group health plan covered by the G/A in which the working owner may participate.

The Working Owner Rules apply only to G/A MEPs and not to PEOs, unless there is at least one rank-and-file employee of the working owner in the PEO MEP.

Other Issues Addressed by the Regulations

The regulations make it clear that the employer adopting a MEP is responsible as a fiduciary for deciding to provide benefits through the MEP and for monitoring the MEP, generally by obtaining and reviewing periodic reports from the MEP administrator. They also clarify how the employer’s portion of a PEO MEP is treated if the employer ceases to be a client of the PEO.

The regulations fail to address whether so-called “corporate MEPs” are Closed or Open MEPs.  These plans cover a group of employers that have common ownership that is insufficient to constitute a controlled group.

The preamble of the regulations specifically mentions Chamber of Commerce MEPs as potential examples of G/A MEPs, giving assurance to those organizations that have already adopted or are considering adopting MEPs for their members.

Finally, the regulations make it clear that many of the issues still open are being considered by the DOL, who has requested comments from the public about those issues.  Most importantly, the DOL is looking for input on whether Open MEPs and corporate MEPs should constitute multiple employer plans under DOL rules.