Yesterday morning while we were all sipping our first cup of Monday morning coffee, the Department of Labor published its much-anticipated final regulations expanding the availability of multiple employer plans to associations, PEOs, and self-employed individuals.
At more than 130 pages, there is a fair amount of ground to cover. Rather than asking you to slog through a really long post all in one shot, we will hit the high points here and follow up with several additional posts over the next couple of weeks to further explore the details. This one will be more a “just the facts” type presentation with our follow up posts providing more commentary.
If you are familiar with what was in the proposed version of these regulations, you are already pretty far ahead of the game, as the final version does not make many changes.
The final regulations seek to expand the availability of MEPs in 3 primary areas – bona fide groups or associations, self-employed individuals (referred to as working owners), and bona fide PEOs.
No Open MEPs
Before diving in, let’s first touch on several things that the final regulations do not do.
- Open MEPs DOL has maintained that it lacks the authority to allow open MEPs via regulation. Instead, a change like that would require Congress to act via legislation. While the House passed the SECURE Act earlier this year, it is unclear if/when any MEP-related provisions will make their way through the rest of the process due to all the distractions in Washington, D.C. these days.
- One Bad Apple Rule The IRS recently published proposed rules that would provide some relief to the current provisions that jeopardize the tax-favored status for an entire MEP when just a single one of the participating employers has a failure. Since the so-called One Bad Apple rule falls under IRS jurisdiction, these final DOL regulations do not stray into that territory.
- Form 5500 Requirements Last week, the DOL provided some temporary relief, via Field Assistance Bulletin 2019-01, from certain penalties for MEPs that failed to attach the required list of participating employers. That relief, however, is very limited, and these final regulations do not expand on it in any way. That means the filing attachment will continue to be required, and the requirement for plans with more than 100 participants in total to go through an annual CPA audit continues to apply.
- Court Challenges Back in March, a federal district court pulled no punches in ripping apart language in a DOL regulation on Association Health Plans. The catch is that DOL uses identical wording in these MEP regulations, which begs the question of whether these new rules will be allowed to stand as things work through the appeals process. With the significance of that ruling, it is somewhat surprising that the only mention of it in these regulations is in footnote 36 on page 49 of the preamble.
Employer Groups or Associations
Under the final rules, there are essentially five requirements that a group or association must satisfy in order to offer a multiple employer plan to its employer members:
- The association must have at least one substantial business purpose other than the provision of benefits such that the association would still be viable if it did not offer the benefit plan.
- The activities of the association must be controlled by its employer members, and the employers that participate in the MEP must control the MEP in substance and in form, either directly or indirectly.
- The association must have a formal organizational structure, including a governing body, bylaws, etc.
- Participation in the plan must be limited to the employees of the association’s employer members and certain working owners (more on these individuals later).
- The participating employers must have some commonality of interest, which could include being in the same industry or geographic region (state, city, or metro area). This represents one of the most significant changes, as the DOL had previous indicated that neither industry nor geography was sufficient to create the required commonality.
Like the proposed regulations, the final regulations make it clear that a financial services firm such as a recordkeeper, investment advisor, insurance company, etc. cannot be treated as a bona fide group or association that can offer a MEP for its clients’ participation.
Historically, companies that do not have any employees other than the working owners have not been considered “employers” for purposes of ERISA. That law is meant to govern relationships between employers and employees. These regulations change that for the purpose of allowing working owners to participate in MEPs offered by groups or associations. This is a significant change from existing guidance, which has specifically ruled to the contrary.
In order for a working owner to qualify for this special classification, there are a few requirements:
- The individual must have an ownership stake in a trade or business, which could also include being a partner in a partnership.
- The individual must earn income from providing personal services to that trade or business.
- The individual must work in that trade or business for an average of 20 hours per week or 80 hours per month. If that working owner participates in a health plan sponsored by that same association, he or she is deemed to meet the hours requirement as long as he or she earns enough to cover the cost of the insurance premium in that association health plan.
Although this change does apply for associations, working owners are still not permitted to join PEO MEPs as adopting employers.
Under existing guidance, the determination of whether a PEO could offer a MEP was made using the same standards that applied to groups and associations. These regulations change that and provide a separate set of requirements to analyze.
The requirements are more or less the same as those included in the proposed regulations, with one important difference:
- The PEO must perform substantial employment functions.
- The PEO must have substantial control over the MEP as the plan sponsor, plan administrator, and named fiduciary.
- All participating employers must have at least one employee other than the owner.
- The PEO must ensure participation is limited to only employees of client employers.
The difference is in that first bullet point. In the proposed rules, DOL provided two safe-harbor standards to demonstrate performance of substantial employment functions. The final rule condenses that to a single safe harbor with requirements. The PEO must:
- Assume responsibility to pay wages to employees,
- Assume responsibility to handle withholding, remittance, and reporting of federal payroll taxes,
- Play a “definite and contractually specified role in recruiting, hiring, and firing workers,” and
- Assume responsibility and have control over any employee benefit plans which the client contracts may require the PEO to provide.
Effective Date & Conclusion
The final regulations are effective September 30, 2019, but there are quite a few details to work out between now and then, including the possibility of some required plan document changes. We also have the appeal from the federal district court decision that could still throw a monkey-wrench into the roll-out. Not to mention, these final regulations could present some challenges to certain existing multiple employer plans that have some overlapping ownership but not enough to be considered technically related.
Just about every item we have discussed in this post has enough detail to make it a post unto itself, but you would get carpel tunnel from scrolling by the time you got to the end. Over the next couple of weeks, we will dissect each of these provisions, explain some of the details, and provide you with our commentary along the way.
Tune in next time…same MEP time, same MEP channel!