The key to the DOL’s proposed MEP regulation is not so much the helpful and appropriate hemming in of the “commonality and control” requirements (those rules will apply only to group or association MEPs); nor is it that certain PEOs can generally be “employers” when acting indirectly on behalf of their clients in sponsoring a MEP; nor is it in the likewise helpful notion that participating employers are not co-sponsors (though they still retain certain fiduciary obligations with regard to the MEP); nor is it in the DOL’s new-found willingness to recognize important policy differences between MEWAs and a retirement plan MEP.
The key to the regulation is, instead, the DOL’s extensive request for comments. The mere fact that the reference to wanting comments appears on no less than 18 of the “pre-publication” pages is in itself telling.
For what is the Department asking comments? It has identified are two major, unresolved issues. The first is what should constitute a “corporate MEP.” We all are familiar with those arrangements, the most prominent being a single plan covering employers of what used to be a controlled or affiliated service group.
The second, however, is what seems to be the focus of the Departments attention: pooled employer plans, the classic MEP of unrelated employers which the Department declined to recognize in its seminal Advisory Opinion, 2012-04. The DOL has initially decided not to include this category of MEPs in the proposed safe harbor because it “implicates different policy concerns” than PEOs. And it is this upon which it appears to be seriously seeking comment.
The DOL is looking for insight on where you draw the line between a service provider purely serving its own narrow commercial interest (such as in the sale of DCIO products) and one which involves the service provider bearing some measure of the employer’s employment based legal obligations. According to the DOL, failing to draw this line correctly “would effectively read the definition’s employment-based limitation” out of the ERISA.
The DOL proposes drawing this line at the “substantial employment function.” Staff is clearly comfortable that PEOs which meet its criteria do perform a substantial employment function, even though still engaged in a pecuniary commercial enterprise.
This standard seems appropriate, and well founded in law-at least for “non-corporate” plans.
The question really to be answered whether a pooled service provider (lets call it the “PSP”) is performing a substantial employment function, as well, when sponsoring and controlling a retirement plan covering a client’s employees. The PSP, in doing so
- performs most of the retirement plan obligations of a plan sponsor;
- while being legally responsible for the employer’s formal 3(16) responsibilities and acting as the named fiduciary;
- while performing the vast majority of the 3(21) administrative functions under the plan and maintaining the ERISA processes required under the plan;
- while having the authority to name other fiduciaries, including the 3(21) and 3(38) investment fiduciaries.
The satisfactory performance of these obligations requires the PSP to be integrally involved in the client employer’s employment practices. Think simply, for example, of the work that goes into hiring of the plan’s auditor and supporting all of the work and review necessary to completing the audit. The auditor’s management letter addresses the PSP activities.
These functions make the PSP much more like a PEO than a DCIO, and perhaps makes it even more closely aligned to the employer than the PEO. In fact, the Open MEP had its origins in the PEO industry, with the PSP willing to take on employer legal obligations that the PEOs were unwillingly to, themselves, bear.
DCIOs, on the other hand, draw strict limits on their liability, and strive to keep their involvement with their client employer’s employment relationships at a minimum (if extant at all). In contrast, an effective PSP needs a substantial and ongoing relationship with the employer in order to even adequately perform is function.
The DOL itself states in its proposed regulation that “access to an employment-based retirement plan is critical to the financial security of aging workers.” This makes it hard to argue that taking on the responsibility for employer-based retirement plans is not a substantial employment function.