Unless you’ve been on vacation somewhere off the grid, you’ve likely heard the news and read the headlines that the Department of Labor recently published new regulations that expand the availability of multiple employer plans. While that is true, what those new rules actually do is to change ERISA’s definition of the term “Employer” so that more types of organizations fit within it, thus allowing them to sponsor MEPs.
Yeah, we know…that probably sounds like an unnecessary nuance. The only reason we mention it is that as part of that change, the DOL is recognizing for the first time that an owner-only business can be considered an Employer. That’s kind of a big deal.
The Employee Retirement Income Security Act of 1974 (ERISA) is one of the primary laws that govern company-sponsored retirement plans, and it is the one that contains the definition of “Employer” which, in turn, drives which entities can sponsor benefit plans. Without getting into too much of a history lesson, one of ERISA’s key purposes is to govern the relationship between employers and their employees with regard to certain company-provided health and retirement benefits.
When a company has no employees other than the owner, there isn’t much of a relationship to govern. And there certainly isn’t a need to set ground rules to ensure that a business owner follows through on providing benefits to him or herself. For that reason, businesses without any employees have never been considered “Employers” for purposes of ERISA. That is why owner-only 401(k) plans do not have to file a full Form 5500 each year or provide all of the various fee disclosure notices, etc.
Since the E in MEP stands for Employer, past DOL Advisory Opinions have consistently held that owner-only companies could not participate in MEPs. Taking it a step further, if a MEP did allow such a company to join, it would torpedo the plan’s status as a MEP.
A New Definition
Bringing it full circle back to our opening nuance, the new MEP regulations tweak the definition of Employer so that it now includes working owners who meet certain conditions. That means owner-only businesses can now participate in multiple employer plans.
Before going any further, we should note a few caveats:
- This change only applies in the context of MEPs sponsored by bona fide groups or associations and not to those sponsored by PEOs.
- The DOL goes out of its way to indicate that this expansion is not meant to change or expand the classification of owner-only business with respect to any other laws that might come into play.
So, what are those “certain conditions” we referred to? In order to qualify, the individual must meet three conditions:
- He or she must have an ownership right in a trade or business. This includes anyone who holds a partnership interest in a partnership or membership in an LLC as well as someone who is a sole proprietor.
- He or she must earn income from providing personal services to that trade or business.
- He or she must work a minimum number of hours for that trade or business.
The first two are pretty self-explanatory, so we won’t belabor those points. However, there is a little more to the story for the third point.
Taken at face value, this requirement is satisfied if the individual works an average of at least 20 hours per week or 80 hours per month. Very straight-forward for those with consistent work schedules, but what about those who are in cyclical or seasonal industries? What averaging period must be used? Fortunately, the DOL provides some flexibility in making this determination, indicating that any reasonable averaging period could be used. They also note that the requirement may be satisfied by demonstrating “evidence of a work history or a reasonable projection of expected self-employment hours worked…”
In lieu of the hours-worked requirement, the new regulations provide an earned-income alternative. Note that this is an alternative means of satisfying the requirement and not an additional obligation. Working owners can decide on a case-by-case basis which option makes more sense in their situation.
The earned-income alternative comes into play when the group or association also offers an Association Health Plan. Consistent with the AHP regulations issued in 2018, a working owner is deemed to satisfy the hours-worked requirement if he or she earns enough income from providing services for the business in which s/he has an ownership stake to cover the cost of his/her medical benefits under the AHP.
The Gig Economy
These new rules certainly apply to traditional owner-only business. Think a sole practitioner attorney or accountant. However, they also extend to non-traditional arrangements like gig-economy workers, ride-share drivers, etc. as long as they meet the above requirements. Just to reiterate, it still is not possible to create an open MEP for these types of situations, so these working owners would need to be members of a bona fide group or association that offers a MEP in order to take advantage of it.
In addition, MEP participation could only be with respect to compensation earned from the trade or business in which the person has the ownership stake. In other words, someone who is a regular non-owner employee of another business cannot join a MEP in that capacity. If someone is both a non-owner employee of one company and a working owner of a separate company, only the compensation earned in the working-owner capacity can be counted.
Assume Raymond works as an employee for a retail department store with annual W-2 compensation of $45,000. He also works as a self-employed ride-share driver on evenings and weekends, earning an additional $25,000 per year.
As long as Raymond is a member of an association that offers a MEP and he meets the hours-worked requirement, he can join the MEP as a participating employer. All of his contributions to the MEP, however, will be based only on the $25,000 he earns from his ride-share driving. The other $45,000 is completely disregarded for purposes of the MEP.
As we have noted in previous posts on these new regulations, there is still the wildcard related to the Washington, D.C. federal district court’s decision back in March. In that opinion, the court struck down the DOL’s expansion of the term “Employer” to include working owners as an over-reach of regulatory authority. They didn’t leave much open to interpretation when they said, “And the contention that two working owners without employees, neither of whom is within ERISA’s scope alone, could associate with one another and thereby come within the statute’s reach is absurd.” Only time will tell how this will play out through the appeal process.