'

Meaningful MEP Minutiae

by Robert Toth
Posted on April 16, 2012

 I have written often of the large impact of the small, the concept of  "minimum necessary change" to accomplish what needs to be done, and have noted a number of regulatory instances where this has been-and not-accomplished.

This whole idea of small rules meaning much also has relevance in the Multiple Employer Plan world, in some very key ways. Some meaningful MEP minutiae:
 
Employer responsibility. One of the ongoing concerns related to MEPs which has garnered much discussion is the level of responsibility which remains with the adopting employer, an issue noted by Ass’t Sec’y Borzi in her recent testimony before the Senate Aging Committee. Interestingly enough, the IRS Form 5330 also speaks to this point. This form, which s used to report and file prohibited transaction penalties related to the late deposit of elective deferrals into a 401(k) plan, is required to be filed and signed by the offending participating employer in the MEP, not the Lead Sponsor (though it must be reported on the 5500 by the Lead Sponsor). The 4975 penalty tax is on that participating employer which is mishandling the deferrals. 
 
An employee.  One of the more lively discussions had always been whether the lead plan sponsor of the MEP needs to have an employee covered by the plan.  Though some have legitimately taken the position that it should be possible under current law to not have an employee, a small rule seems to get in the way. A note on page 3 of the Form 5300 (used to file for an IRS determination letter for the plan) Instructions states "if an employer has no employees, the taxpayer cannot submit as the sponsor of the plan." This seems to require the Lead Sponsor of a MEP requesting the letter to have an employee as a condition of filing for the letter.
 
One bad apple.  One of the risks in adopting a MEP is that, under IRS rules, a single bad plan can disqualify the entire MEP. What minutiae is critical here, though, is Section 10.12 of EPCRS (the IRS’s correction programs): a MEP which has a violating plan sponsor is fixed by fixing only the broken portion of the MEP (of course), but the Plan Administrator may elect to have the compliance fee or sanction based only upon the offending plan, not based on the entire arrangement; while 14.03 permits similar treatment for "tainted" assets transferred into the plan from an offending plan (if the offense does not continue). As a practical matter, this means the risk of an economic catastrophe from a single employer disqualifying an entire MEP can be cost effectively managed.
 
On a personal note, an important milestone. The Toth Ft. Wayne Sourdough Starter had its 10th anniversary this past week, being cultivated from the wild yeast in our kitchen and first used by our daughter and I on April 11, 2002.  Looking, eventually, for it to be passed onto the grandkids for their eventual baking pleasure as well.  Life is good....
 
__________________
 
 
 
Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   
 
 
 
 
 
 
 
 
 
 
 
Tags: , ,

The Uncommon MEP

by Robert Toth
Posted on September 23, 2011

 Since we first published a MEP whitepaper with TAG Resources a few months back, where TAG coined the term “Open MEP,” much has happened in this marketplace. Most recently, Drinker Biddle published its own (very good) whitepaper on this topic, very much affirming, and going into closer detail on, many of the broad points we had raised in the TAG paper.  

As you can imagine, we have spent a lot of time working on this issue so as to come to a measure of comfort on how ERISA applies to multiple employer employee pension benefit plans ("MEPs"). I think we have.
 
ERISA and its regulations specifically lay out the rules which must be met for “an employer or employers” to adopt a single defined contribution multiple employer plan.These rules are extensive, effectively acting as a set of MEP qualification rules. Interestingly enough, in order to actually qualify as an ERISA MEP, the regs under ERISA Section 210 actually require that the plan first meet the rules under 413(c)-including being treated as a single plan under the Code. Here’s the “qualification” list:
 
  • More than one employer.
  • Single plan under the Code.
  • Non-collectively bargained.
  • Application of minimum coverage, vesting,  participation, non-discrimination, and benefit accrual rules in a particular way.
  • Entire plan must be able to be disqualified by one participating employer.
   
With a plan that meets the MEP rules, there are really two ways for an “employer or employers” to actually adopt it and still be honored as a single plan. 
 
The first is the Open MEP model, where an employer directly adopts the plan on behalf of its own employees.  Here, each employer adopting the MEP, including the Lead Employer, has employees who are covered by the plan.  Each employer is acting, under ERISA 3(5), on their own behalf, each for the benefit of their own employees. Simple and straight forward, no so-called "commonality" requirement to qualify as an employer. 
 
The second way to adopt a MEP, it seems to me, is the classic association model. A “person” which is not otherwise an employer adopting a plan for its own employees as an employer, adopts a MEP on behalf of other employers (with employees) that have authorized it to do so. This would not cause much of a problem under 3(5), as it is not such a stretch to recognize a “person” acting on behalf of a single employer. This is clearly permitted under ERISA Section 3(5).  But a single "person" acting on behalf of multiple employers for their employees seems to create an awkward problem:  can one "person" be seen acting as a single "employer" for many employers without there being some sort of common employment relationship between those employers appointing it? Though this may happen in other legal contexts, it is not something for which regulatory guidance has ever been developed under ERISA outside of the collectively bargained arena. Under these circumstances, then, the Advisory Opinions addressing who may act as an "employer"-and the "commonality rule"-make some sense. 
 
Does this mean, though, that all that one of those abusive MEWAs sponsors (upon which most of the DOL Advisory opinions on the definition of "employer" were based) would need to do is to cover an employee of their own organization in order to achieve ERISA MEWA status? I don’t think so. First, ERISA’s preemption rules have (since 1983) permitted state insurance rules to apply to insured MEWAs, thus eliminating the area of the most abuse. Achieving ERISA status for the abusive plans makes little difference anymore.  More importantly, though, ERISA SEction 514(b)(6) gives the DOL the authority to establish rules by which it would recognize (or not recognize) a non-insured MEWA  as a single plan under ERISA 3(1). Though the lead plan sponsor may be an employer under such an approach, there is nothing within the regs recognizing it as a single plan.
 
MEPs, however, are much different. There are regulations which establish a specific set of rules authorizing the adoption of a single employee pension benefit plan by multiple, unrelated employers under certain circumstances.  There are no such specific rules for adopting a welfare plan for multiple employers.  In the absence of such specific rules, MEWA promoters have to resort to cobbling together  the general rules of ERISA to justify such an arrangement.  It appears that, at least from one of the Advisory Opinions, the DOL may well treat any group of multiple employers which attempt to adopt a single welfare plan as an association which must meet the "employer" rules.  This seems well within the DOL's authority to do (at least they have the authority to establish regulations on this point) particularly as an anti-abuse rule.
 
It seems that, after working it through a bit,  the DOL's approach to multiple employer arrangements are generally well founded, particularly as they apply to MEWAs.  Under the analysis above, an Open MEP can and should be accorded much different treatment than MEWas, and can be adopted by employers acting on their own behalf. An association, however,  may need to continue to comply with the "commonality" rules if they are not operating under an Open MEP.  
 
As an aside, something to note: ERISA Section 210 and Code Section 413(c) do not apply to 403(b) plans, which then may mean that it would  require an association of sorts to be able to adopt a single, multiple employer 403(b) plan. It would not, otherwise, be an ERISA MEP (a MEP under ERISA must fall under Code Section 413(c)).   It may be that the plan will need to be organized around the concept of employers actively governing the plan, belong to a bona fide association, or have employment bonds beyond the plan itself, unless the DOL issues other guidance.  
 
 
Tags: , , ,

Testing of the MEP Waters

by Robert Toth
Posted on June 23, 2011

In blogging, I don't typically write about informal conversations I have had with anyone, including government staff, friends or colleagues, without first discussing it with them.  I fear that otherwise I would indeed lead a lonely life, as who would ever talk with me if there was a chance that conversation would end up on the internet the next day? 

In spite of this, I've chosen to write  about a discussion with DOL staff today only because I really think it would be helpful to add a bit more color  to Ilene Ferenczy's newsletter on "Clues From the Ivory Tower," a well written piece on on the ASPPA meetings with the DOL where issues on multiple employer plans were raised, among others.
 
Ilene appropriately and accurately describes the conversation with the DOL on MEPS in her newsletter, but reactions on the social networks to her newsletter has lead me to think that a little more context may be useful to more fully understanding the conversation. 
 
I was at the same meeting as Ilene. The question arose as to whether a non-association MEP would qualify as a single plan under ERISA, so to enable a single Form 5500, single audit, and a host of other things. DOL staff's reaction was that they believed that a non-benefit related commonality is needed, but they also expressed a willingness to discuss the idea. We explored several different points.
 
To be fair to the DOL staff, they were presented with the question almost as an afterthought, and staff had not been put on notice that we were looking for a thoughtful response. Likewise, we did not intend to prepare a case for why the answer should be one way or another. It was truly an initial response, to a sort of testing the waters on our part, with DOL staff asking follow up questions exploring why they should rule differently than with the MEWAs.
 
There is little doubt that any 413(c) MEP, including the non-association MEP, has substantial commonality. My ASPPA webcast next week will outline those, but includes vesting, participation, exclusive benefit and a few other things-413(c) even has the DOL drafting special break-in-service rules for 413c, which- I think-never have been written.
 
What it boils down to is actually a narrow question: should ERISA 3(5) be read to require a non-benefits based commonality. That is the concern raised by DOL staff. In my view, the language of ERISA does not require this, nor is there any regulation that does it.  What seems to be the genesis of  this narrow construction was based upon sound public policy: it  was necessary to stop those abusive healthcare MEWAs from continuing to harm participants who were purchasing non-existent health care coverage.  That narrow construction worked well to "plug the dike" until Congress stepped in to change the MEWA rules without requiring the DOL to engage in contortions.
 
The DOL has not ruled (either by Advisory Opinion or informal guidance) on what should be required under ERISA for a 413c plan to be recognized as a single ERISA plan, using the definition of employer under ERISA 3(5).  413c, unlike the MEWA rules, requires substantial commonality to qualify under the Code section as a single plan, but it is a benefits based commonality-one which the DOL position argues against.
 
From a purely policy perspective, as long as the ERISA rules are followed properly, a MEP can actually enhance the compliance that MEWAs were attempting to avoid. Think about it. It really is about professionals now willing to serve as the 3(16) Administrator-after years of TPAs and other professionals (acting on advice of us lawyers) making sure they WEREN'T serving in this role. Now, there appears to be a real market need for it.
 

So, the DOL's initial, and informal, position is that a non-benefits commonality is required for a 413c MEP-I believe in large part because of the long line of of well established MEWA rulings saying so. I think the answer should be otherwise, as supported by the IRS regulatory structure under 413c of what constitutes a single plan, which is substantially different than the MEWA rules (or lack thereof) upon which the DOL position seems to be based. I suspect there will be some parties making this case to the DOL, in a much better prepared manner, and I would expect, over time, a thoughtful response from the DOL once they have reviewed things. But this means before one sets up a new MEP, one should do it with knowledge that the DOL may eventually not agree with this position. But there are a number of very large plans n the market already, so even the DOL's nonacquiesence may not be the end of it. Even the GAO has taken an interest, and is doing initial research on whether these MEPS are a good tool to deepen retirement plan penetration in the small end of the marketplace.

Stay tuned, and step cautiously.  

 

 

Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   

 

Tags: