What The Future of Multiple Employer Plans Looks Like

On October 22, 2018 the U.S. Department of Labor announced about the Notice of Proposed Rulemaking. The Proposal was a response of the DOL to the President’s Executive Order signed on August 31, 2018 and aimed at liberalization of the Multiple Employer Plan (MEP) rules. In the Executive Order the President asked the DOL to consider issuing new rules and guidance to make it easier for businesses to participate in Association Retirement Plans (the term the Executive Order uses to refer to MEPs).  Furthermore, new policies should expand access to retirement plans for part-time workers, sole proprietors, working owners allowing them to participate in MEPs. (Be sure to read what experts have to say about the newly proposed rule and its impact on retirement plans.)

A Positive Outlook

This is a great initiative that will help small businesses strengthen retirement security by making it easier to offer retirement savings plans to their workers through Association Retirement Plans, which allow small firms to group together to offer 401k plans to their employees. In the past it was a difficult undertaking for small firms because the cost and the complexity of running their own plans. For instance, approximately 38 million private-sector employees in the United States do not have access to a retirement savings plan through their employers. The small businesses can band together to offer plans based on associations of employers in a city, county, state, or a multi-state metropolitan area, or in a particular industry nationwide. Sole proprietors, as well as their families, would also be permitted to join such plans. In addition to association sponsors, the plans could also be sponsored through Professional Employer Organizations (PEO).

With the Proposal these employees will be able to access the opportunity for the retirement savings and take care of themselves in their retirement years. Moreover, the Proposal would enable small businesses to offer benefit packages comparable to those offered by larger employers. The ability of small companies to group together will reduce the administrative cost of the plans and provide with the additional leverage when negotiating with various service providers.

Need for Improvement

However, The Proposal should be dealing with complex issues inherited in regulations of MEP plans. There are two main laws affecting retirement plans, the IRS which regulates tax benefits and the ERISA which describes labor law. For MEP plan to receive tax benefits it must be treated as a single plan. In general, it is a good thing, but there is one exception, the “one bad apple rule”. This rule is applied when one participating employer is no longer able to comply with all rules necessary to be part of the group. For example, failing nondiscrimination testing can expel participating employer from the group and result in the entire plan to be disqualified and lose the tax-exempt status.

Under ERISA, the issue is more confusing. In some situations, a MEP is treated as a single plan. This means the plan needs only one Form 5500, one audit, one bond, etc. However, if the adopting employers aren’t sufficiently related to each other, the MEP is treated as a series of separate plans, each sponsored by an adopting employer, and each of which needs a separate Form 5500, a bond, etc.

The Proposal does not solve the “one bad apple” rule. Hopefully, there will be more guidance from the IRS and Treasure regarding the situation. It also deals only MEPs that are defined contribution plans. In the Proposal of the DOL, if the plan is sponsored by companies that have some ownership relationship (but not enough to be considered to be one “employer” under tax laws) or are sponsored in limited situations by associations of employers, the plan would be a single plan under DOL rules. However, if the plan is sponsored by organizations that have members that are not employers, the DOL considers the arrangement to be a grouping of plans individually sponsored by the client-companies. However, to clear some of the ambiguity the Proposal addresses a few situations where the MEP can be qualified as a single plan. These are plans of Professional Employer Organizations (PEOs) and plans of bona fide associations or groups, meaning if you are in the same industry or geographic region.

As it can be seen, the Proposal will provide a lot of value to the American people and help to save money for retirement but it still needs to be improved upon to make it strong and long lasting. Overall, I think it is a great opportunity for plan advisers to dive into new spectrum of the retirement business.