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When Is a Group Not a Group?

The Labor Department issues important guidance on what constitutes a valid multiple-employer 401(k) plan.
Jeff Mamorsky, CFO.com | US
June 13, 2012

Last summer we reported in this space that Department of Labor representatives had said at a conference that a multiple-employer 401(k) plan (MEP) may not satisfy the requirements of ERISA if there is not a sufficient "connection" between the plan sponsor and the other participating employers. The DoL folks stated that MEPs should be evaluated 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.

The DoL has now made that point of view official. On May 25, it concluded that arrangements under which an entity sponsors and administers a single multiple-employer 401(k) profit-sharing plan covering employees of unrelated employers (commonly referred to as Open MEPs) are not single retirement plans for purposes of ERISA. Rather, the DoL concluded that these arrangements are collections of separate retirement plans established and maintained by the individual employers for the benefit of their employees.

That conclusion is troubling for employers that participate in Open MEPs because, among other potential consequences, each employer participating in such an arrangement would be required to separately file Form 5500 for its plan, engage in annual plan audits (assuming there are 100 or more employees participating in the plan), and obtain a separate fidelity bond for each plan.

Accordingly, it is important for employers (particularly their CFOs) who have adopted Open MEPs to consider the extent of their potential liability for failure to file Form 5500 and to engage in annual plan audits during the time in which they believed the arrangement satisfied the requirement of a single plan under ERISA. It is difficult to predict whether the DoL will apply this enforcement position only to new MEPs or also to existing ones.

Taking Advantage?
The DoL issued an advisory opinion in response to a request for its view on whether an Open MEP operated by an entity called 401(k) Advantage (Advantage) constituted a single employee pension benefit plan under ERISA. The plan was intended to be a single MEP covering employees of Advantage, as well as employees of more than 500 unrelated employers that adopted the plan. Advantage is a limited-purpose corporation formed solely to operate the plan. TAG Resources LLC (TAG), a registered investment advisory firm, was designated as the administrator of the Advantage Plan.

Advantage signed the Forms 5500 filed for the plan as the "plan sponsor," represented that it was the "named fiduciary" for the plan, and "assume[d] the risk and liability associated with the trustee role and remove[d] every adopting employer from the liability associated with that role." According to the plan's 2010 Form 5500, it had more than 9,800 participants in the 2010 plan year and $63 million in net assets.

Each employer adopted the plan by signing a participation agreement under which the employer:

  1. agreed to act "indirectly as an employer" and as a "co-sponsor" of the plan;
  2. represented that it independently exercised fiduciary judgment in selecting the plan and the initial offering of investment options; and
  3. delegated the "full responsibility of Plan Administrator" to TAG, which included resolving beneficiary disputes, interpreting plan terms, completing audited financial statements, and appointing investment advisers and investment managers.

Each employer also acknowledged that:

  1. it had ongoing fiduciary responsibility to periodically review the performance of TAG and whether to continue the arrangement;
  2. Advantage, as plan sponsor, retained complete authority regarding amending and restating the plan document; and
  3. Advantage and TAG each retained the authority to terminate any employer's participation in the plan and that any employer could revoke participation by providing 60 days' written notice.

In analyzing this arrangement, the DoL stated that although the plan appeared to provide the benefits of an "employee pension benefit plan" under ERISA, it also had to be established or maintained by an "employer." ERISA provides that "employer" 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." Regardless of the terms of the participation agreements describing Advantage as the sponsor of the plan, the DoL did not agree that Advantage was acting as an "employer" or as a bona fide employer association.

The DoL emphasized that in the absence of an employee organization's involvement, a single "multiple employer" plan (i.e., a plan to which more than one employer contributes) may exist where a cognizable group or association of employers establishes a benefit program for members' employees and exercises control of the amendment process, plan termination, and other similar with respect to a trust established under the program.

An Organization or Not?
Under the facts in play in a prior DoL advisory opinion, the Department of Energy (DoE) had hired contractors to conduct select operations under its oversight at a certain site. Although the contractors and subcontractors were separate companies, each company was bound by the DoE contracts to provide its employees with similar employee benefits.


The managing contractor for the operations at the site was also charged with providing welfare benefits to the employees and retirees (and their dependents) of the contractors and subcontractors. The managing contractor established a trust available only to those contractors. The board of trustees had sole authority to control and manage the operation and administration of the trust, such as making eligibility determinations, paying claims, and interpreting the terms of the trust, as well as authority to amend or terminate the trust.

The DoL determined that since the group of employers who subscribed to the trust were limited to DoE contractors at the site and were not eligible to continue to participate in the trust beyond the term of their DoE contract, the employers had a commonality of interest and genuine organizational relationship beyond the trust. The provision of benefits was based on the fact that the employers were all DoE contractors engaged in interconnecting operations of waste cleanup and security at the same site with a history of organized cooperation on workplace-related matters at that worksite.

Moreover, said the DoL, the employers, through their representation on the board of trustees, appeared to control and direct the activities and operations of the trust. Accordingly, the DoL held that the employers were a bona fide employer group or association under ERISA and therefore the trust constituted a single plan.

With regard to the Advantage plan, the DoL concluded, similar facts did not exist. There was no genuine organizational relationship between the employers, and therefore no employer group or association existed. Advantage and TAG appeared to be acting more as service providers to the plan, much like third-party administrators or investment advisers. Each employer's mere execution of an identically worded participation or trust agreement as a means to fund or provide benefits to their employees, said DoL, was not a sufficient basis for concluding that the employers established or maintained a single plan for purposes of ERISA.

Jeff Mamorsky is co-chair of the global benefits practice at law firm Greenberg Traurig.




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