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Small Business Employees Gain More Retirement Options

The Department of Labor, through the Employee Benefits Security Administration, issued a final rule on July 29, 2019 that expands retirement options for millions of workers employed by small businesses.

The rule, which takes effect on September 30, 2019, clarifies the definition of “employer” under Title 1, Section 3(5) of the Employee Retirement Income Security Act (“ERISA”) to allow “multiple employer plans” or “MEPs” and “association retirement plans” or “ARPs.”

There has been confusion in the definition of an “employer” in regard to its ability to act “directly as an employer” or “indirectly in the interest of an employer, in relation to an employee benefit plan.” The rules establish the right to offer retirement plans across employers under certain circumstances.

The government is attempting to make it easier for small businesses to offer retirement planning services to the estimated 38 million private sector workers who do not have access to an employer-sponsored retirement plan.

Employer groups, associations, and professional employer organizations (PEOs) will be able to offer the new multiple employer plans as a result of the ruling if certain criteria are met. Working owners without employees will also be able to participate in a MEP as part of an employer group or association under the ruling.

Employers could be grouped into retirement plan offerings based on connections by location (city, county, state or multi-state) or industry.

Groups or associations within the meaning of ERISA section 3(5) are referred to as “bona fide” employer groups or associations. In order to qualify as a MEP provider, the entity “must exercise control over the amendment process, plan termination, and other similar functions of the plan on behalf of the participating-employer members with respect to the plan and any trust established under the program.”

Retirement service providers—including banks, insurance companies, broker-dealers, record keepers, and others—are expected to be impacted by the ruling as well.

While Individual Retirement Accounts (IRAs) are available to most Americans as a savings tool, only about 13 percent maintain regular IRA contributions. Retirement plans available through a work setting are viewed as being more favorable for the following reasons:

• Higher contribution limits
• Lower investment management fees as plan assets increase
• Clearly defined consumer protections through regulations and compliance requirements
• Automatic enrollment
• Enhanced protection against creditors

The DOL initiative reflects a continuing emphasis by the current administration to expand retirement saving options for working Americans. As one example, President Trump signed Executive Order 13847, titled “Strengthening Retirement Security in America,” in August, 2018.

Recent Congressional actions, including the “Setting Every Community Up for Retirement Enhancement (SECURE) Act” that favor “open” MEPs, are distinct from the DOL rule. The DOL effort is more limited than legislative initiatives, since it only relates to the agency’s authority to promulgate rules under ERISA.

Multiple employer pension plans are also not to be confused with multi-employer pension plans, which involve unions and are defined under the Labor Management Relations Act of 1947, known as the Taft-Hartley Act. Multi-employer union plans are commonly found in the hotel, trucking, and construction industries. They are also governed by ERISA.

The new DOL rules require careful analysis and interpretation beyond the scope of this article. Pension plan and service providers evaluating the new retirement regulations will want to seek qualified legal advice to understand how the rules apply to their specific circumstances.

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.

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