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 the Employee Retirement Income Security Act (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 the 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 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 for participation and vesting, 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.”
Further, the Fifth Circuit has determined that where a third party established a welfare plan for the benefit of unrelated employers, the plan was merely an “entrepreneurial venture” and could not qualify as a person acting indirectly on behalf of the employer under ERISA Section 3(5).
Accordingly, should the DoL contest TPA-established MEPs, these plans may face a significant challenge to their validity. Specifically, the DoL will argue that a TPA does not satisfy the “indirect employer” requirement under ERISA, although, as indicated earlier, this is not clear from a plain reading of the language of the statute. Moreover, if the DoL were to actually adopt this view, it would be particularly troublesome in light of the IRS position that a MEP can exist with unrelated employers.
In addition, under the current Form 5500 reporting requirements, participating employers in a MEP are not required to file a separate Form 5500; only one form is filed by the sponsor of a MEP. However, if the DoL was to actually prevail in its argument that a TPA does not satisfy the “indirect employer” requirement under ERISA, participating employers in a MEP may be required to file their own Form 5500. In a most extreme case, if the DoL were to decide that MEP-participating employers are considered sponsors of their own plans, and these participating employers were required to file separate Form 5500s for past years, these employers would face draconian penalties for their failure to timely file Form 5500s.
As mentioned above, the comments of the DoL representatives suggest that the participating employers in a MEP must have a connection to each other in order to establish a MEP. The DoL’s concerns appear to be a result of the its longstanding views regarding employer welfare plans and the regulation of MEWAs.
As noted, under the definition of “employer” in ERISA, an employee-benefit plan can be established by a group or association of employers acting on behalf of its employer-members with respect to the plan. In determining whether a particular group or association constitutes an “employer,” the DoL has said that in order for a group or association to constitute an “employer” within the meaning of Section 3(5), there must be a bona fide group or association of employers acting in the interest of its employer-members to provide benefits for their employees.
According to the DoL, where no bona fide group or association of employers exists, each of the employer-members that utilizes the group or association benefit program to provide (welfare) benefits to its employees is considered as having established separate, single-employer welfare benefit plans subject to ERISA. Note that the DoL has applied these concepts to pension plans, as well.
However, an important distinction can be drawn between the DoL rulings and an employer-sponsored MEP. The issue addressed in the relevant DoL rulings involved the establishment of an employee-benefit plan by unrelated employers. The employer group requested a ruling from the DoL that it constituted a “group or association” acting as a single employer in satisfaction of ERISA, with the ability to sponsor a plan for the benefit of all of the employers’ employees. In this regard, the DoL reviewed the facts to determine whether there existed a “bona fide” relationship between the employers to create a group or association in order to satisfy the definition of “employer” under ERISA.
However, in the context of a MEP, the participating employers are not necessarily establishing a plan as a group or association under ERISA. Quite the contrary; employers establishing a MEP are unrelated parties and are not involved in creating a group or association as a single employer. The IRS regulations specifically provide that a plan is a “Section 413(c)” plan if it is a single plan and the plan is maintained by more than one employer. In fact, under the IRS rules, commonality, at least in the form of a business relationship between employers, is not required to satisfy MEP status.
What’s the DoL’s Real Concern?
In this author’s view, the real issue that appears to be troubling the DoL is that employers are adopting MEPs to relieve themselves of fiduciary responsibility under ERISA. It is clear that the adoption of a MEP is merely a “settlor” function not subject to ERISA’s fiduciary standards.
However, in adopting a MEP, participating employers normally agree in the adoption agreement to be bound by the acts and determinations of the MEP’s Named Fiduciary and Plan Administrator who is delegated the responsibility to (1) operate the MEP in accordance with the code’s qualification and ERISA requirements and (2) prudently hire and monitor the performance of the TPA, investment manager, and other service providers and to make sure their compensation and other fees are reasonable.
This agreement is, in effect, a fiduciary decision and, accordingly, the participating employers have a responsibility to monitor the prudence of their “appointment” of the MEP’s Named Fiduciary and Plan Administrator.
However, employers substantially limit their ERISA fiduciary responsibilities by adopting a MEP. Although they retain the residual fiduciary responsibility to prudently select and monitor the performance of the Named Fiduciary and Plan Administrator, they have this limited fiduciary responsibility that is satisfied only if the MEP is properly operated with expert professionals running the plan.
That, of course, would include periodic reports by the MEP’s Named Fiduciary and Plan Administrator to the participating employers demonstrating that they are prudently operating the plan and monitoring its service providers in accordance with best-practice governance standards.
Jeff Mamorsky is co-chair of the global benefits practice at law firm Greenberg Traurig. He extends his appreciation to his associate Ira Reifer in the preparation of this article.