When the Department of Labor’s new multiple employer plan regulations take effect later this year, we will have three types of MEPs:
- Association MEPs,
- PEO MEPs, and
- Corporate MEPs.
Although there is still a lot of talk about open MEPs, those are not covered in the new regulations and will require legislative action by Congress.
In this post, we are going to cover Association MEPs, which have been referred to by some as Association Retirement Plans or ARPs.
Before diving in, let’s quickly recap what a multiple employer plan is. In short, it is a single plan that covers more than one unrelated employer. When we refer to employers being unrelated in this context, we mean that they are not part of the same controlled group or affiliated service group.
Although they sound similar, MEPs are not the same thing as multi-employer plans, which are union plans that are subject to collective bargaining.
Let’s start with what is required to be a “bona fide group or association.” According to the regulations, there are essentially four criteria:
Formal Organizational Structure
This is one of the more straight-forward of the requirements. It simply requires the group or association to have “indications of formality.” These might include bylaws and/or a governing body. The objective of this requirement is to ensure the organization is genuine and has the structure necessary to act on behalf of the participating employers. It also serves to protect against fraud and insolvency.
Substantial Business Purpose
The group or association must have at least one substantial business purpose that is not related to benefits. The idea is to distinguish true associations from purely commercial enterprises that sell benefits to employers.
With that said, the regulations make it clear that it is acceptable for benefits to be the primary purpose of the association as long as it also has at least one other significant purpose. This is a facts and circumstances determination, but it is deemed satisfied if the association would still be a viable operation even if it did not sponsor the contemplated benefit plan.
The DOL further attempts to explain this standard in several ways. They indicate that it should not be interpreted as a lenient standard, but they also acknowledge that factors that contribute to an organization’s viability may change from year to year. They go on to say, “…a purpose other than MEP sponsorship does not have to be the lifeline of the organization in order to be ‘substantial.’ It must, however, be of considerable importance to the existence of the organization – not merely ‘important,’ but of ‘considerable’ importance.”
Cannot Be A Financial Service Firm
The regulations do not leave this point open to interpretation. Since that language explains this as well as we could, we will quote it here.
“The group or association is not a bank or trust company, insurance issuer, broker-dealer, or other similar financial services firm (including pension recordkeeper or third-party administrator), or owned or controlled by such entity or any subsidiary or affiliate of such an entity…”
The DOL explains this position by noting that allowing such entities to sponsor MEPs in this context would effectively remove the employment-based limitation from ERISA. As alluded to above, changing a law in that manner requires legislation (by Congress) rather than regulation (by the DOL).
Employer Member Control of the Organization
The employer members of the organization must control it in both form and substance. The DOL is quick to point out that this is a facts and circumstances determination and does not necessarily require the members to manage the actual day-to-day operations of the group or association. They go on to provide a couple of factors that are relevant to the review:
- Whether the employer members regularly nominate and elect those that comprise the governing body of the association, and
- Whether they have the authority to remove any such people either with or without cause.
Note that this requirement refers to employer members rather than individual members. While a sole proprietor/business owner with no employees could be an employer member, an individual who is employed by a company in which he or she has no ownership stake is not.
If a group or association meets the above requirements, it is permitted to offer a multiple employer plan to its employer members. That leads us to the additional requirements that apply to the plan itself. We will start with the two easier requirements before digging into the more detailed third one.
Limited to Employer Members
The preamble to the regulations points out that ERISA’s focus is on employment-based benefits and that DOL lacks the authority to extend those provisions to benefit arrangements outside of that context. To that end, the regulations make it clear that in order for an association member to participant in the MEP, that member must directly employ at least one employee. Similar to the comment above about employer members controlling the organization, this means that an individual who is employed by another company and who does not have any ownership in that company is not permitted to participate in the ARP.
As we will explore in a later post, these regulations did make an important change with regard to owners of business that do not have any employees. Such owner-only companies (think those that might presently sponsor a solo 401(k) plan) that meet additional requirements are considered “working owners” and are permitted to participate in the association MEP. More on this later.
Participating Employer Control of the Plan
In addition to the organization being controlled by its employer members, the plan itself must be controlled by the participating employers. Per the DOL’s exact wording, “whether employer members that participate in the plan have the authority and opportunity to approve or veto decisions or activities which relate to the formation, design, amendment, and termination of the plan, for example, material amendments to the plan, including changes in coverage, benefits, and vesting” is the driver here.
This requirement is consistent with what DOL has articulated in the myriad Advisory Opinions it has issued on the matter over the years, so it doesn’t really break any new ground.
Similar to the requirement that participating employers control the plan, the requirement that those employers also share some commonality of interest has been around for years. However, these new regulations make some pretty substantial changes to what that actually means. Without going into too much of a history lesson, past guidance has been that all participating employers in a MEP of any type were required to share some kind of organizational bond that more or less rose to a level of having a vested interest in each other’s success.
There is a whole series of DOL Advisory Opinions that shot down things like geographical proximity or being in the same industry as insufficient to establish the required “organizational nexus.” That all changes with these new regulations. In fact, the DOL specifically identifies geography and industry as satisfying the commonality requirement.
DOL indicates that businesses in the same state or metro area (even if it crosses state lines, think Kansas City) satisfy the commonality requirement based on geography. They cite the number of chambers of commerce in the country as a basis that geography is clearly a factor around which business organize themselves.
Some argue that one need look no further than a state like New York where there is such a huge difference from Manhattan to the mountain regions upstate as evidence that geography does not equal commonality. The DOL, however, notes in the preamble to the regulations that, “…employers in the same geography share common interests concerning employee’s education and workforce development, taxation, transportation and commuting networks, the legal and regulatory environment…” and other factors affecting business. The regulations do stop short of recognizing regional commonality that extends beyond state or metro area.
DOL now also accepts that employers satisfy the commonality requirement by virtue of being in the same “trade, industry, line of business, or profession.” They go on to say that these terms be broadly construed to extend MEP access, and they specifically note that they will not “challenge the inclusion of ‘support’ or ‘allied’ businesses as members or the group or association if they share a genuine economic or representational interest with the other members.”
Several parties that submitted comments on the proposed regulations asked the DOL to also recognize commonality based on businesses being of similar sizes; however, the DOL rejected that request as being overly broad.
Interestingly, the expansion of the commonality requirement to include geography was summarily rejected by a Washington, D.C. federal district court back in March as being beyond the scope of the DOL’s authority. Pulling no punches, the Court said “that the geography standard under the Final Rule fails to account in any way for employers’ commonality of interest. This standard effectively eviscerates the genuine commonality of interest required under ERISA, thereby expanding the scope of the statute beyond what ERISA intended.”
Granted that decision was in the context of association health plans, but the DOL goes out of its way in these new MEP regulations to indicate that their goal is to align these provisions regardless of whether we are talking about health or retirement plans. We will explore this in more detail in a future post, but suffice it to say that the outcome of the appeals process in that court decision is a bit of a wildcard.
So, there you have it…starting September 30, 2019, groups or associations that meet these requirements will be able to offer multiple employer plans to their employer members. If you work with a group or association that might be interested in setting up a MEP for its members, give us a call. We have been following the ups and downs of MEP-related developments for over a decade, and we are glad to help you navigate your options to arrive at a plan structure that works for your situation.
Tune in next time…same MEP time, same MEP channel!