In a surprise development, Department of Labor representatives recently noted to a group of retirement plan practitioners that a multiple-employer plan (MEP) may not satisfy the requirements of ERISA if there is not a sufficient "connection" between the plan sponsor and the participating employers.
The DOL reps stated that MEPs should be analyzed in the same manner as multiple-employer welfare arrangements (MEWAs), which generally require participating employers to be members of a bona-fide association or otherwise have a "commonality" requirement in order to be ERISA-compliant.
If these comments crystallize into DOL policy, they represent a troubling development for MEP sponsors and participating employers, since MEPs are viewed by employers as a cost-effective way to outsource ERISA fiduciary responsibilities. Moreover, the DOL comments are confusing in light of the language of the ERISA statute and lack of guidance issued by DOL on this unique retirement vehicle. Accordingly, this author believes it is important for employer plan sponsors (particularly their CFOs) to understand the most salient issues involved in defining, establishing and operating a MEP.
Section 413(c) of the Internal Revenue Code (Code) provides the legal basis for MEPs. This section details the rules for this type of plan with regard to participation, vesting, funding, deductions, and compliance with the Code's exclusive benefit rule. These provisions are addressed below.
Definition of MEP
Under the Code, a MEP is maintained by more than one employer. Under ERISA, the definition of "employer" includes a group or association of employers acting for an employer in such capacity." The IRS regulations provide that employers related through a controlled group of corporations, or that are part of a trade or business under common control, are considered a single employer. Thus, Code Section 413(c) applies only to a plan maintained by unrelated employers.
Operation of a MEP
Due to a MEP's unique status under the Code, some of the qualification rules, such as participation and vesting rules, apply to the MEP as a whole, while others apply on an employer-by-employer basis. However, under IRS regulations, the minimum-coverage rules apply on an employer-by-employer basis. For purposes of funding, the Code states that in the case of a MEP established after December 31, 1988, each employer shall be treated as maintaining a separate plan and that the deduction limitations shall be applied on an employer-by-employer basis. Finally, for purposes of the Code's exclusive benefit rule, the IRS regulations provide that all of the employees participating in the MEP are considered employees of each employer.
Accordingly, it is clear that under the IRS rules, a MEP can exist with unrelated employers and that the IRS regulations treat participating employers as maintaining separate plans only for testing purposes under the Code's qualification rules.
ERISA "Employer" Requirement
The DOL representatives expressed their concern over the lack of "connection" between a third-party administrator (TPA) sponsoring a MEP and the participating employers. At first glance that raises an important issue, since a plan must be sponsored by an employer for its employees in order to satisfy ERISA. A TPA is not the employer of the participants in a plan sponsored by the TPA, and therefore a TPA-sponsored MEP appears to violate the Code's exclusive benefit rule, since the sponsor has established a plan that is not benefiting its own employees.
However, a different conclusion may result from a closer examination of this issue. Code Section 413(c) makes a reference to "in the case of a plan maintained by more than one employer ..." (emphasis added). "Employer" as defined by ERISA means "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan and includes a group or association of employers acting for an employer in such capacity" (emphasis added). Arguably, a simple interpretation of the ERISA statute suggests that a "person" (defined in ERISA Section 3(9)) may act in the interest of an employer, notwithstanding that such "person" is not the employer, so long as the person acts indirectly on behalf of the employer.
Further, the IRS has determined that a MEP maintained by a professional employer organization (PEO) may benefit workers who are not employees of the PEO, so long as the company that employs the workers adopts the PEO's MEP.
Thus, based on the guidance promulgated by the IRS and the meaning of "employer" under ERISA, it appears that an outside TPA (the "person acting indirectly in the interest of an employer") may sponsor a multiple-employer plan, so long as the plan is adopted by participating employers (the actual employers).
Nonetheless, that conclusion will most likely be challenged by the DOL and the courts. Specifically, with respect to the "indirect employer" requirement under ERISA, the DOL has opined that in relation to an employee welfare benefit plan, the plan must be tied "to the employers and employees that participate in the plan by some common economic or representation interest or genuine organizational relationship unrelated to the provision of benefits."
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