Insights / Employment Advisor
An ARP Is Not an Open MEP – but New DOL Rules Offer Limited Expansion of Retirement Plans for Small Employers
By Jeff Belfiglio
11.05.18
Following closely along the path blazed by the new Association Health Plan (AHP) rules (see our detailed advisories here and here), the Department of Labor (DOL) has issued proposed regulations to allow multiple employers to join in an Association Retirement Plan (ARP) or a plan sponsored by a Professional Employer Organization (PEO). The rules do not allow “open MEPs,” that is, a multiple employer plan where the only thing the employers have in common is participation in the plan (pending legislation would have to be passed to take that step); but, they do offer a limited expansion of the opportunity for small employers and self-employed “working owners” to join together to participate in plans with the benefits of economies of scale, lower investment fees, and professional management—goals that have bipartisan support given that many small employers do not offer any retirement plan.
As with AHPs, the DOL rules focus on the definition of “employer” in ERISA, which includes an “association of employers.” Multiple employer plans (MEPs) sponsored by associations already exist, but the new rules are designed to expand the type of associations that may sponsor them. They also provide assurance that the MEP will be treated as a single plan, rather than a bundle of employer plans, for DOL purposes such as reporting and disclosure. The proposed rules closely follow the requirements under the AHP rules, allowing a “bona fide” association based on an industry group or an association of any employers in the same state or metropolitan area. The association must have a formal organization, controlled by its members, and at least one substantial business purpose unrelated to providing multiple employer coverage.
The association cannot be controlled by a bank, insurer, or other financial services firm. As in the AHP rules, a “working owner” can be treated as an employer and join an association if the owner works at least 20 hours per week at his or her business, or earns wages or self-employment income that at least equals the cost of coverage of the association’s health plan. In other words an individual who works less than 20 hours per week but earns enough to participate in an AHP would also qualify to participate in an ARP. Presumably the Code provisions that limit retirement plan contributions based on a participant’s compensation or self-employment income would still apply. Thus the working owner would not be able to contribute more than the amount he or she earns to any association MEP.
For PEOs, the DOL rule focuses on the part of the ERISA definition of employer that includes an entity acting “in the interest of” other employers. A PEO is a company that has an agreement with a client employer to perform most payroll, tax withholding, and reporting functions for the client’s employees. Usually the PEO will act as the joint employer of the employees and may take on other Human Resources functions, and offer benefits to the employees. The rule allows a PEO to act on behalf of its client employers in serving as the sponsor of a MEP. The IRS has long had a procedure under which PEOs can offer a MEP to their clients, and the preamble to the new rule states that most PEOs already do so. Thus this part of the new rule seems mainly designed to give “bona fide” PEOs comfort that they can act as sponsors of a MEP. The MEP must be sponsored by a PEO that provides substantial employment functions and offers the plan only to its client companies and their employees. It creates two safe harbors for bona fide PEOs, one based on whether the PEO participates in the IRS “certified PEO” program, and the other based on whether it provides more than half of a list of services that PEOs typically provide.
These DOL rules have been on a very fast track. We expect them to be finalized quickly after the public comment period closes December 24, 2018. But the proposed rules only go so far. As noted above, the rules only allow MEPs sponsored by associations or PEOs, which must also exist for other purposes (although they do ask for comments regarding future proposals for open MEPs or “pooled employer plans”). Thus some associations that have been interested in sponsoring AHPs may also be interested in sponsoring ARPs covering small companies, and more small companies could turn to PEO-sponsored plans. But real growth in the area is not expected until financial firms are able to offer “open MEPs” to any employers who want to participate and pool their plan assets. Finally, current IRS regulations pose obstacles to forming MEPs. In particular, the so-called “one bad apple” rule says that if any employer in a MEP fails the qualified plan rules (such as by failing to cover enough employees), the entire MEP can be disqualified. The IRS has yet to propose changing that rule; pending legislation would also eliminate it. Thus it will be just as important to watch what Congress does in the coming lame duck session as to watch for DOL to finalize these rules.
As with AHPs, the DOL rules focus on the definition of “employer” in ERISA, which includes an “association of employers.” Multiple employer plans (MEPs) sponsored by associations already exist, but the new rules are designed to expand the type of associations that may sponsor them. They also provide assurance that the MEP will be treated as a single plan, rather than a bundle of employer plans, for DOL purposes such as reporting and disclosure. The proposed rules closely follow the requirements under the AHP rules, allowing a “bona fide” association based on an industry group or an association of any employers in the same state or metropolitan area. The association must have a formal organization, controlled by its members, and at least one substantial business purpose unrelated to providing multiple employer coverage.
The association cannot be controlled by a bank, insurer, or other financial services firm. As in the AHP rules, a “working owner” can be treated as an employer and join an association if the owner works at least 20 hours per week at his or her business, or earns wages or self-employment income that at least equals the cost of coverage of the association’s health plan. In other words an individual who works less than 20 hours per week but earns enough to participate in an AHP would also qualify to participate in an ARP. Presumably the Code provisions that limit retirement plan contributions based on a participant’s compensation or self-employment income would still apply. Thus the working owner would not be able to contribute more than the amount he or she earns to any association MEP.
For PEOs, the DOL rule focuses on the part of the ERISA definition of employer that includes an entity acting “in the interest of” other employers. A PEO is a company that has an agreement with a client employer to perform most payroll, tax withholding, and reporting functions for the client’s employees. Usually the PEO will act as the joint employer of the employees and may take on other Human Resources functions, and offer benefits to the employees. The rule allows a PEO to act on behalf of its client employers in serving as the sponsor of a MEP. The IRS has long had a procedure under which PEOs can offer a MEP to their clients, and the preamble to the new rule states that most PEOs already do so. Thus this part of the new rule seems mainly designed to give “bona fide” PEOs comfort that they can act as sponsors of a MEP. The MEP must be sponsored by a PEO that provides substantial employment functions and offers the plan only to its client companies and their employees. It creates two safe harbors for bona fide PEOs, one based on whether the PEO participates in the IRS “certified PEO” program, and the other based on whether it provides more than half of a list of services that PEOs typically provide.
These DOL rules have been on a very fast track. We expect them to be finalized quickly after the public comment period closes December 24, 2018. But the proposed rules only go so far. As noted above, the rules only allow MEPs sponsored by associations or PEOs, which must also exist for other purposes (although they do ask for comments regarding future proposals for open MEPs or “pooled employer plans”). Thus some associations that have been interested in sponsoring AHPs may also be interested in sponsoring ARPs covering small companies, and more small companies could turn to PEO-sponsored plans. But real growth in the area is not expected until financial firms are able to offer “open MEPs” to any employers who want to participate and pool their plan assets. Finally, current IRS regulations pose obstacles to forming MEPs. In particular, the so-called “one bad apple” rule says that if any employer in a MEP fails the qualified plan rules (such as by failing to cover enough employees), the entire MEP can be disqualified. The IRS has yet to propose changing that rule; pending legislation would also eliminate it. Thus it will be just as important to watch what Congress does in the coming lame duck session as to watch for DOL to finalize these rules.