Publication: 401(k) Advisor
Volume/Issue: Vol. 23, No. 11, November 2016
Revisiting MEPs … Again
Ilene H. Ferenczy, Esq.
Over recent years, multiple employer plans (MEPs) have been discussed several times as a way to simplify plan administration, particularly for small employers. If you are keeping score, it’s baaaaaack.
What Is a MEP?
A multiple employer plan is any plan that covers at least two unrelated employers. Plans sponsored by controlled or affiliated service groups are not MEPs, as the companies constitute one “employer” for ERISA and Code purposes.
DOL rulings have made MEPs more complex. These rules provide that a plan covering several unrelated employers may actually be a group of individual plans that simply use common documentation and funding. The DOL criteria for being a MEP consider the relationship between the employers. If the sole relationship between the employers is to use the same service providers, the MEP is an “Open MEP” and will not qualify as a MEP under DOL rules. If the employers are involved with each other in another manner—such as through an association—a complex analysis ensues to determine whether the plan will be a MEP. If a plan is not a MEP under the Labor rules, a separate Form 5500 must be filed by each employer. Also, ERISA audit requirements are applied on an employer-by-employer basis.
Why the Interest in MEPs?
Employers became and continue to be interested in MEPs despite the challenges because many want to reduce the burden and liability they face in administering their plan. Most plan sponsors are not plan specialists and find ERISA’s arcane rules to be hard to master. Therefore, a MEP is commonly presented to these employers as a way to turn the whole shebang over to someone who is an ERISA specialist.
The Second MEP Drawback
There is a second albatross carried by MEPs under current rules that worries many employers—at least, those who are in the know. This second issue, called “The One Bad Apple Rule,” involves the IRS.
Under this rule, if there a plan violates the tax qualification requirements, the entire plan may be disqualified. It is not hard for an employer in Atlanta to be worried that another employer in Seattle may do something to put the plan at risk. The risk that someone the employer does not know could affect the tax qualification of its employees’ benefits is hard to swallow.
Why the Renewed Interest in MEPs?
Congress has embraced MEPs as a way to make plans more attractive to employers, and to increase employee coverage nationwide. There have been several Congressional proposals intended to solve both the DOL and IRS MEP problems in a single swoop.
One such proposal, the Retirement Enhancement and Savings Act (RESA), was just released by the Senate Finance Committee for Congressional consideration.
- There would be a procedure whereby the MEP could dump the plan assets of a noncompliant employer out of the MEP and place them in a new plan, leaving the rest of the plan intact and in compliance. This solves the One Bad Apple Rule.
- A sponsor of an Open MEP would need to be a “pooled plan provider”—i.e., one that registers with the DOL and is an identifiable audit target. The plan would then be a true MEP, solving the DOL’s conundrum.
RESA also would:
- Require a plan to designate a trustee who is responsible to collect contributions under procedures that are reasonable, diligent, and systematic;
- Ensure that the participating employer and the participants do not face unreasonable restrictions or charges when they leave the plan;
- Require disclosures regarding costs.
Under RESA the MEP sponsor (called a “pooled plan provider”) must:
- Register with the DOL; and
- Make certain disclosures.
RESA requires the DOL to assist pooled providers to understand their roles and to have procedures to help toss bad employers from the plan. RESA also would require that the DOL consider whether there was an inadvertent error or a pattern of noncompliance behavior when it assessed penalties.
RESA would require that the DOL simplify Form 5500 so that no audit would be required if the plan has fewer than 1,000 participants and no employer has more than 100 participants.
So, Would RESA Make MEPs More Popular?
Even with RESA, impediments to MEPs would remain. An employer entering a MEP loses the control over the plan that they would have in their own plan. Single plan sponsors choose their own service providers and can fire them if they are not responsive. In a MEP, employers are powerless in this regard, with the only option to change being leaving the MEP. That requires that the employer’s portion of the MEP be spun off to a new MEP or individual plan—much more complex, time consuming, and expensive than simply changing providers. Nothing in RESA changes this.
Terminating its MEP is also a complex process for a given employer. The employer must spin off its portion of the MEP into a separate plan and then terminate that plan.
The plan provider in a MEP may be anything from cooperative to abusive to felonious. Some claim that those wanting to leave certain MEPs face uncooperative providers. Further, there have been situations where a MEP provider embezzled plan funds. As the employer is responsible as a fiduciary for choosing the MEP, participants can claim that joining the bad MEP was a breach for which the employer is financially responsible.
These issues may still cause employers to question whether MEPs are for them, even if RESA passes.
Will RESA Pass?
It is unlikely that any legislation will get through Congress before the election. RESA may pass during the lame duck Congressional session.
Will Employers Choose MEPs?
If Congress makes MEPs more attractive, we will likely see more MEP activity.
MEPs are a solution for employers who worry about their responsibilities for plans. Congressional action could simplify the rules, improving these plans’ operations and ease of use. RESA would therefore encourage MEP use. However, it remains to be seen if mainstream employers take advantage of MEPs’ positive attributes despite the loss of control over the plan.