Growth in Multiple Employer Plans Depends on Regulatory Conflict Resolution
Although multiple employer pension plans (MEPP) have been around for decades, many employers have left them largely untapped. Diverse viewpoints between the IRS and Department of Labor (DOL), both of which have regulatory control over these plans, have created a divide. Many—especially small and midsize businesses—are discouraged because of greater costs compared to larger companies, in addition to feeling a general lack of guidance and confusion in administering MEPPs.
Legislators in Washington have redoubled efforts to persuade more employers to offer retirement plans; as a result, this endeavor has raised awareness about MEPPs as a plan option to offer to employees. Four senators have sponsored bills in hopes of addressing issues, clarifying the regulatory requirements and simplifying the process of forming MEPPs.
Multiple Employer vs. Multi-Employer
A multiple employer pension plan (MEPP) is different from a multi-employer pension plan. Although both are governed by ERISA, a MEPP is a qualified retirement plan, such as a 401(k) plan, sponsored by two or more separate employers who do not want the administrative and fiduciary responsibilities of sponsoring a plan themselves. Examples of connected or affiliated employers that often comprise a MEPP include farmers cooperatives; business franchises; religious, charitable and educational institutions; and Chambers of Commerce.
In contrast, a multi-employer pension plan often involves labor unions and is commonly found in the hotel, trucking, and construction industries.
A MEPP’s principal plan sponsor is a single entity that establishes the pension plan. Day-to-day operational and associated fiduciary responsibility is held by this principal plan sponsor. An adopting employer who joins the plan, also known as a plan co-sponsor, relies on the principal plan sponsor for pension plan administration and asset oversight.
Because the co-sponsor generally does not bear any fiduciary responsibility or liability in regard to the MEPP, it can be quite enticing to employers since they can offer the benefits of an employee pension plan without incurring the fiduciary risk.
There are three types of MEPPs:
• Sponsored by a professional employer organization such as an employee leasing company, which can offer it to clients
• Sponsored by a trade group for its members
• Co-sponsored by employers with no business connection, also known as “open” MEPPs
The Internal Revenue Service, which has authority over the tax status of retirement plans, and the Labor Department, which enforces the participant protections of ERISA, do not always see eye to eye. In fact, the Labor Department has made known that it has concerns about these plans, especially “open” MEPPs. Legislative proposals aim to align the sometimes incompatible viewpoints.
According to a March 17 article in the online edition of Pensions & Investments, one sticking point is the Labor Department’s stance that companies participating in a MEPP must share commonalities. Officials with the American Society of Pension Professionals & Actuaries (ASPPA) in Arlington, Va., reported that there were two advisory opinions issued by the Labor Department in 2012. Both expressed objections to certain individual plans being considered one plan under ERISA because there was not a common connection with the employers participating in the plan.
The DOL fears that ERISA reporting and fiduciary obligations will get lost in the process if employers do not have direct involvement and oversight. This opinion could stall the progress made by legislative proposals.
Another legal hurdle pertains to the IRS and how its “one bad apple” rule is applied. Basically, the rule can wipe out an entire MEPP’s tax-qualified status with just one employer failing to meet tax-qualified criteria. Other employers in the plan are then vulnerable, even if they have met the tax criteria.
In July, the Government Accountability Office (GAO) examined businesses with fewer than 100 employers to determine what they considered roadblocks to offering retirement plans to employees. The GAO found that executives felt overwhelmed by the number of retirement plan options and the administrative and fiduciary accountability. In addition, they were unhappy about paying higher fees than larger firms for record keeping and investment management.
The Devil is in the Details
Despite this being an election year, Congress is pulling together on both sides of the aisle to improve MEPPs. There are several proposals heading through legislative committees, and each has been created to help clear up the confusion and make it easier to form multiple plans, especially for smaller employers.
Several of the pending bills call for the Treasury Department to remove the “one bad apple” rule by way of regulations. In addition, a bill introduced by Rep. Richard Neal, D-Mass., would also have the Labor Department issue guidance to eliminate the liability of other employers for acts or omissions by one employer in the plan under ERISA.
In January, Sen. Tom Harkin, D-Iowa—also the chair of the Senate Committee on Health, Education, Labor and Pensions—included collective employer plans as part of a universal retirement concept he introduced. The bill would require that independent trustees would provide money management of privately run plans, which would be subject to Labor Department oversight.
According to wording in a bill sponsored by Sen. Orrin Hatch, R-Utah, the ranking member of the Senate Finance Committee, the upshot of encouraging more small employers to join MEPPs is “to obtain more favorable pension investment results and more efficient and less expensive management services.”
Also in January, Senate Special Committee on Aging Chairman Bill Nelson, D-Fla., and ranking member Susan Collins, R-Maine, introduced their own retirement proposal.
“Given the bipartisan interest in this area, I'm optimistic we can reach an agreement in the Senate that will help employers pool their resources without compromising the participant protections under the law,” Mr. Harkin is quoted as saying.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.