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Much Ado About MEPs

by W. Andrew Larson, CPC

Multiple employer plans (MEPs) are consistently in the news. Their proponents, which include a bi-partisan Congressional group, claim MEPs can offer small and mid-sized employers the advantage of lower administrative and investment costs as they relate to offering employer-sponsored retirement plans, and would expand worker access to such savings arrangements. One would think that an arrangement that helps expand affordable, employer-sponsored retirement plan coverage would be a no-brainer and encouraged at all levels. Alas, policy issues are rarely this simple.  In light of the heightened level of industry interest, we thought it timely to discuss MEPS, including what they are, where they came from and prognosticate on where they might be going.

A MEP is a retirement plan adopted by multiple employers. (Not to be confused with a multi-employer plan, which is a plan maintained pursuant to a collective bargain agreement between more than one employer and a labor union. These plans are sometimes referred to as “Taft-Hartley” plans. Please see our “Case of the Week” Multi and Multiple Employer Plans–What’s the Difference? for a more in-depth comparison.)

A MEP is a qualified plan adopted by multiple business entities none of which are part of a “controlled group of businesses.” Understanding the controlled group dimension is important because multiple businesses may adopt a plan and yet the arrangement would NOT be considered a MEP if the businesses where part of a controlled group of businesses. Essentially, a controlled group of businesses exists when multiple business entities have a certain level of common ownership among them.

Another element in understanding the MEP environment relates to the various Federal entities involved with MEP oversight and regulation. Retirement plans are subject to oversight by the IRS, the Department of Labor (DOL) and, in some cases, the Securities and Exchange Commission (SEC). Each agency is focused on its own policies and rules, and coordination is often lacking. Much MEP confusion (and contention) occurs because of the lack of regulatory coordination between these entities. This results in odd situations; for example, a MEP arrangement can satisfy IRS rules and, simultaneously, run afoul of DOL or even SEC requirements. Next, let’s explore how the confusion with the rules that govern them arose and what might be some possible resolutions.

Traditionally, the IRS was comfortable with, if not supportive of, MEP arrangements. In fact, this author was involved in obtaining approvals from the IRS for MEPs in the 1980s. If certain criteria were met, the IRS considered a MEP a single plan requiring one Form 5500 filing and audit despite the fact many employers were participating in the arrangement.

Historically, the DOL had little involvement with MEPs. Things changed, however, starting around 2010. The DOL became increasingly concerned about MEP arrangements and possible abuses. It didn’t help MEP supporters when, at about the same time, a high-profile, politically-connected, California-based MEP provider was found guilty of embezzling MEP assets.

In 2012, the DOL issued MEP guidance that had a major impact on these arrangements (see Advisory Opinion 2012-04A). First, the DOL decreed that a MEP arrangement must have a “nexus” or commonality between the adopting employers in order to be considered a single plan. For example, if all adopting entities were dental offices a nexus would exist. The origination of the nexus requirement is obscure as nexus is neither mentioned nor alluded to in the IRS MEP code or regulations [under IRC Sec. 413(c)]. I have heard it said the nexus requirement is important to prevent abuses yet, when pressed, the proponents of this view could neither articulate the abuses nor explain how nexus would solve them. For terminologies sake, a MEP without a nexus is commonly called an “open MEP,” and a MEP with a nexus is a “closed MEP.”

Why is open or closed MEP status important? Recall the IRS considers a MEP a single plan and subject to a single Form 5500 and audit requirement. The DOL’s view is, unless a nexus exists, the arrangement is considered a combination of single employer plans and each employer would need to file its own Form 5500 and audit report, when applicable. The IRS was comfortable with treating a MEP as a single plan regardless of nexus, while the DOL insists on nexus if the arrangement is to be considered a closed MEP and treated as a single plan.

And let’s not forget about our friends at the SEC. They may want to play in the MEP regulatory sandbox. Recall that under a MEP, unrelated employers pool their retirement assets in the plan’s trust. This pool of assets might be considered a mutual fund for purposes of the Investment Company Act of 1940, and subject to registration and reporting requirements.

Another MEP requirement that draws concern is the “bad apple” rule. The bad apple rule calls for disqualification of the entire MEP if just one of the adopting employers fails to satisfy the IRS compliance rules. Losing qualified status means the participants are taxed on vested benefits and plan sponsors may lose deductions. Yes, the “bad apple” rule sounds scary, but let’s consider what has happened in the real world. It is not the policy of the IRS to disqualify plans except in the most egregious situations of plan sponsor malfeasance. The IRS prefers plan problems be fixed via its Employee Plans Compliance Resolution System (EPCRS). To my knowledge, a MEP disqualification because of the bad apple rule hasn’t yet occurred and I don’t think that it will.

It seems clear MEPs have the potential to create economy of scale and help place small employers on more equal footing with larger employers in terms of administrative costs and features. Industry benchmarking data is clear that small employers’ plan operation costs are higher than larger employers’ costs, and one solution could be a MEP. A MEP allows employers who were not part of a controlled group to participate in a single retirement plan and save money on plan costs and get better pricing from investment providers.

Clearly challenges remain. For example, several years ago a large trade association was fined millions of dollars by the IRS because the IRS contended the nature of the  MEP arrangement was such that the trade organization was in control of the MEP and could, and did, set its own compensation from the arrangement. This was clearly abusive, yet solutions exist to mitigate these types of abuses.

In this era when expansion of retirement plan access and coverage is becoming a common call in public policy, and many efforts are being made to expand retirement plan availability while reducing costs to employers, the author is perplexed at the seemingly artificial impediments to MEP creation. In fact, several bills before Congress would enhance the attractiveness of MEPs. The bills make it clear no nexus would be required, and they would also do away with the all or nothing bad apple testing requirements. At the time of this writing, the fate of these bills is unclear. We sincerely hope legislation that expands retirement coverage and reduces costs for small employers and their participants can be something both political parties support.

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How do the IRS and DOL determine whether a closed MEP exists?

“What criteria do the Internal Revenue Service (IRS) and Department of Labor (DOL) consider when determining whether a single multiple employer plan (MEP) exists for an association of employers?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Oregon is representative of a common inquiry involving multiple employer plans.

Highlights of discussion

  • A single MEP, otherwise known as a “closed MEP,” is a single employee benefit plan maintained by two or more employers that meets the requirements of Internal Revenue Code Section (IRC §) 413(c), where the employers are not related under IRC §414(b) (regarding a controlled group of employers), IRC §414(c) (regarding trades or businesses under common control), or IRC §414(m) (regarding affiliated service groups).
  • The IRS has put together a chart that indicates how specific IRC provisions apply to closed MEPs (Internal Revenue Manual, Part 7, Chapter 11, Section 7 Multiple Employer Plans).
  • The failure of one participating employer or the failure of the plan itself to satisfy an applicable qualification requirement will result in disqualification of the multiple employer plan for all participating employers [Treasury Regulation 1.413-2(a)(3)(iv)]. For example, the failure of any participating employer to satisfy the top-heavy rules disqualifies the entire multiple employer plan for all of the employers maintaining the plan (Treasury Regulation 1.416-1, Q&A G-2).
  • The DOL categorizes plans covering more than one employer as either a single employee pension benefit plan, or a combination of separate, individual plans. If the MEP is a single plan under ERISA (i.e., a closed MEP), then the plan administrator files a single Form 5500, which requires only one independent audit for the group. Similarly, the ERISA §412 fidelity bonding requirements for a closed MEP apply as if to a single plan, rather than independently as to a series of individual plans.
  • Pursuant to § ERISA §3(5) , the DOL requires that the employers in a closed MEP must be part of a bona fide group or association that has something in common besides cosponsoring one or more plans. It is the DOL’s view that where several unrelated employers merely execute identically worded trust agreements or similar documents as a means to fund or provide benefits, in the absence of any genuine organizational relationship between the employers, no employer group or association exists for purposes of ERISA §3(5).
  • In DOL Advisory Opinion 2012-04A , the DOL opined that determining whether a bona fide employer group or association exists for purposes of maintaining a closed MEP depends on all of the facts and circumstances involved. Relevant factors in judging whether a plan sponsor is a bona fide group or association of employers include the following:
  1. How members are solicited;
  2. Who is entitled to participate and who actually participates in the association;
  3. The process by which the association was formed,
  4. The purposes for which it was formed, and what, if any, were the preexisting relationships of its members;
  5. The powers, rights, and privileges of employer members that exist by reason of their status as employers; and
  6. Who actually controls and directs the activities and operations of the benefit program.
  • The employers that participate in a closed MEP must, either directly or indirectly, exercise control over the program, both in form and in substance, in order to act as a bona fide employer group or association with respect to the program.
  • Courts have ruled that the entity or group maintaining a closed MEP must be tied to the employees or the contributing employers by genuine economic or representational interests unrelated to the provision of benefits [MDPhysicians & Associates, Inc. v. State Bd. Ins., 957 F.2d 178,185 (5th Cir.), cert. denied, 506 U.S. 861 (1992) and Wisconsin Educ. Assoc. Ins. Trust v. Iowa State Bd., 804 F.2d 1059, 1063 (8th Cir. 1986)].
  • In DOL Advisory Opinion 94-07A the DOL emphasized it is the commonality of interest among the individuals that benefit from the plan and the party that sponsors the plan that forms the basis for sponsorship of a closed MEP.
  • As a rule of thumb, examples of employer associations that are likely to qualify to maintain closed MEPs include
  1. Well-established associations whose members are very similar (e.g., members of a particular trade possibly within a specific geographic region);
  2. Employers related by common ownership (but where ownership does not reach the level to require aggregation under the controlled group rules);
  3. Employers who regularly and closely cooperate in serving a particular group of clients (but do not aggregate under the affiliated service group rules); and
  4. Certain Professional Employer Organizations (PEOs).

Conclusion

Under the current regulatory framework, whether several independent employers represent a bona fide employer group or association that is eligible to maintain a closed MEP depends on the facts and circumstances of the particular situation, taking into consideration a number of factors as identified by the DOL in several of its advisory opinions on the topic.

 

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Multi and Multiple Employer Plans: What’s the Difference?

“I’ve heard the terms ‘multiemployer plan’ and ‘multiple employer plan;’ is there a difference?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • Yes, there is a difference, and knowing the distinction is important. The two terms are often confused.
  • A multiemployer plan refers to a collectively bargained plan maintained by more than one employer, usually within the same or related industries, and a labor union. These plans are often referred to as “Taft-Hartley plans” [(ERISA §§ 3(37) and 4001(a)(3)]. Multiemployer plans must comply with the qualification rules under IRC §414(f).
  • Multiemployer plans allow employees who move among employers within unionized industries – such as trucking, construction and grocery-store chains – to participate in the same retirement plan negotiated under either separate or common collective bargaining agreements.
  • For in-depth guidance on multi-employer plans, please refer to the IRS’ Internal Revenue Manual, Part 7, Chapter 11, Section 7.11.6
  • In contrast, a multiple employer plan is a plan maintained by two or more employers who are not related under IRC §414(b) (controlled groups), IRC §414(c) (trades or businesses under common control), or IRC § 414(m) (affiliated service groups). Multiple employer plans must comply with the qualification rules under IRC §413(c).
  • The Department of Labor provided some important guidance on the treatment of multiple employer plans in Advisory Opinion 2012-04A .
  • For in-depth guidance on multiple employer plans, please refer to the IRS’  Internal Revenue Manual, Part 7, Chapter 11, Section 7.11.7

 

Conclusion

The terms multi- and multiple employer plans are often confused. Knowing the difference is important as they refer to two completely different types of plans that involve more than one employer.

 

 

 

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