DOL Proposal Seeks to Expand Use of Multiple-Employer Plans

The Department of Labor (DOL) recently proposed a rule revising the definition of “employer” under Section 3(5) of the Employee Retirement Income Security Act of 1974 (“ERISA”) for purposes of sponsoring a multiple-employer plan (MEP). The proposed rule, which is in response to President Trump’s August 31, 2018 Executive Order directing the DOL to examine policies expanding access to MEPs, would make it easier for small businesses who meet certain requirements to pool their resources to form a MEP, thereby reducing administrative costs.

In order to be covered by ERISA, a retirement plan must be established or maintained by an “employer.” “Employer” is defined by Section 3(5) of ERISA to include “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.” See 29 U.S.C. 1002(5). When a “group or association” of employers establishes a MEP, the MEP constitutes a single employee benefit plan for purposes of ERISA. Accordingly, the MEP sponsor is responsible for compliance with ERISA reporting, disclosure, and fiduciary obligations, as opposed to the individual employers.

Historically the DOL has taken a narrow view on the issue of when a “group or association of employers” may act “in the interest of” its employer members to establish a MEP within the meaning of ERISA. DOL guidance generally stated that a MEP could be established by a “bona fide” group or association of employers exercising control over the amendment process, plan termination, and other similar functions of the plan on behalf of the employer. See, e.g., DOL Advisory Opinions 2008-07A, 2003-17A and 2001-04A. Whether a group or association of employers is “bona fide” depends on all the facts and circumstances. Id. Factors to consider include how members are solicited, who is entitled to participate, and who actually participates, among other things. Id.

The proposed rule clarifies the criteria for a “bona fide” group or association of employers by providing seven requirements that must be met by the group or association. The group or association must: 1) have at least one substantial business purpose unrelated to offering and providing employee benefits to its employer members; 2) be comprised of employer members who each act directly as an employer of at least one employee participating in the MEP; 3) have a formal organizational structure; 4) be controlled by its employer members; 5) have a commonality of interest (including same industry or same geographic location); 6) limit plan participation to employees and former employees of employer members; and 7) not be a bank or trust company, insurance issuer, broker-dealer, or other similar financial services firm, or be owned or controlled by such an entity or affiliate of such an entity.

These proposed criteria are intended to distinguish “bona fide” group or association MEPs from products and services offered by purely commercial pension administrators, managers, and record keepers, which would not fall under the definition of “employer.” This is because the DOL’s authority under ERISA only extends to benefits provided within the employment context.

The proposed rule also sets forth requirements for a Professional Employer Organization (“PEO”) to be treated as an “employer” under Section 3(5) of ERISA for purposes of establishing a MEP.  PEOs are organizations hired by employers to provide federal employment tax withholding, reporting, and payment services to employees. PEOs also generally provide retirement plan services to their client-employers. In order to qualify as an “employer,” the proposed rule would require the PEO to perform “substantial employment functions” on behalf of its client-employers. Substantiality depends on the facts and circumstances, although the proposed rule lists nine relevant functions that could be considered.

The DOL requested comments on all aspects of the proposed rule. The DOL also requested comments on whether businesses or organizations other than groups or associations of employers or PEOs should be permitted to sponsor a MEP. Specifically, the DOL requested comments on whether “corporate MEPs” or “open MEPs” should be added to the rule. “Corporate MEPs” are plans that cover employees of related employers which are not in the same controlled group or affiliated service group. “Open MEPs” are plans that plans that cover employees of employers with no relationship other than their joint participation in the MEP. Comments are due by December 24, 2018.

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