Multiple Employer Plans Could Change Retirement – Ask The Lawyer by Carol Buckmann
Multiple Employer Plans are making a comeback as Washington, DC regulators and legislators are focusing on methods for having more Americans gain access to retirement savings plans. Plan sponsors who don’t have a lot of time to devote to running their plans sometimes ask, “Should I consider a multiple employer plan?” Multiple employer plans are a way to make adopting a 401(k) plan more attractive to smaller businesses. While multiple employer plans can help to make life easier for smaller employers who want to offer a 401(k) plan by allowing them to offload responsibilities, they have disadvantages as well as advantages.
New rules could make the multiple employer plan (MEP) more attractive, though the extent remains to be seen. President Trump has issued an executive order directing the IRS and the Department of Labor to consider issuing rules easing the requirements to participate in multiple employer pension plans. We understand that proposed rules have been sent to the Office of Management and Budget for approval. Legislation that could be passed by Congress, including the Retirement Enhancement and Savings Act of 2018 (RESA), would also make it easier for employers to participate in MEPs.
How Does a MEP Work?
A MEP is a type of plan that allows employers to have a centralized administration of their plans and pooled investments. The MEP sponsor is responsible for getting the plan approved by the IRS and amending it to keep it in compliance. Currently, to file one 5500 for a MEP, there must be a connection linking the members, such as a common business association or geographic link. Otherwise, there is what is called an “open multiple employer plan” and each employer must file its own form 5500. Each participating employer in a multiple employer plan must also do separate nondiscrimination testing where required. So, under the current rules, participation in a MEP may still leave employers with responsibilities. And a rule, commonly, known as the “one bad apple rule” provides that a qualification problem in one employer’s group taints the qualification of the whole plan, even if other participating employers had nothing to do with the violation. Individual employers have limited flexibility in selecting the provisions of the plan, which they do not control.
What Could Change?
The big change is that a common business association or geographic link would no longer be required to get the full benefits of a multiple employer plan and file one Form 5500 for the entire plan. In addition, the proposed legislation would eliminate the “one bad apple” rule.
Will You Still have Fiduciary Responsibilities?
RESA legislation would provide that employers participating in open multiple employer plans (called PEPs) would have limited fiduciary responsibilities. The provider of such plans would be required to be a “named fiduciary” taking over much of the responsibility. However, employers could still have residual fiduciary responsibilities and should retain responsibility for prudently selecting the MEP and its providers. We don’t yet know what the administration’s proposal will provide.
An employer adopting an individual plan can get some of the same relief by hiring a Section 3(16) ERISA plan administrator and a Section 3(38) investment manager to take over its fiduciary administrative and investment functions. (Vendors who do your recordkeeping typically do not take over fiduciary responsibilities, which remain with the plan sponsor.)
What About Conflicts of Interest?
MEP fiduciaries will have to avoid using plan assets for their own benefit in operating the MEP. They will also need procedures to avoid non-exempt sales, exchanges, and extensions of credit with parties in interest, including the participating employers and their affiliates. The new proposals do not eliminate these responsibilities.
What About That One Bad Apple Rule?
Although the proposed legislation would eliminate this, we have heard that the Administration’s proposal would not change the rule. Treasury could still change it on its own. The rule’s existence is a deterrent, but the IRS does not appear to be actively enforcing the rule.
Are There Other Disadvantages?
Terminating participation in a multiple employer plan can be a complicated process compared with terminating a 401(k) plan that covers only employees of one employer. It typically requires setting up a new plan first to receive assets in a spinoff from the MEP. That plan would have no purpose other than to permit a complete termination of 401(k) contributions and cash-out to participants.
Where Do We Go From Here?
We need more incentives for small employers to adopt 401(k) and other qualified plans. While there appears to be strong support for liberalizing the multiple employer plan requirements, the devil is in the details. We need to see whether the will to enact changes will generate workable new rules.
Carol Buckmann is a founding partner at Cohen & Buckmann PC, and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues.
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