There has been increasing interest in the market to put together Multiple Employer Plans for 403(b) plans, and with good reasons. Tax exempt entities are really well suited to the sorts of economies of scale that a MEP can bring, and they often organize well around common associations.

But a 403(b) MEP is really complicated when you get down to it because-like anything 403(b), it seems-of the devil that exists in the details.  For example, besides  having to deal with the DOL 2012 Advisory Opinion on all MEPs; and  the fact that the Tax Code Section governing 401(a) MEPS does not apply to 403(b) plans (which means you can never really have a 403(b) MEP for tax purposes); and that the ERISA Section governing all ERISA MEPs (including 403(b) MEPs) requires compliance with that Tax Code Section which doesn’t cover 403(b) MEPS; you still have to deal with the complications of dealing with those legacy contracts of the various participating employers in the MEP. Then there is the issue of dealing with those combination of ERISA and non-ERISA 403(b) plans commonly sponsored by a 403(b)participating employer. These require use of traditional state law agency rules to make them work.

Yes, this is all manageable if you can have a MEP in the first place. The point here is that there are a lot of moving pieces in a 403(b) MEP that you don’t have to deal with in a 401(a) MEP. Using the aggregation model (see, for example, Section 202 of the recently introduced Retirement Enhancement and Savings Act of 2018 (“RESA”) which describes this model well) instead of the MEP -which many school districts actually do and call them MEPS- is so often more attractive.

What makes it all the more challenging is that you are dealing with the DOL’s regulatory processes which are geared to MEPs, while also dealing (on the same arrangement) with IRS regulatory processes which deal with each participating employer in a MEP as a single employer plan. The impact on this really falls on the IRS. The Form 5500 epitomizes the problem.

It starts with Form 5500 Section 1 which requires that you identify the plan as a MEP or a single employer plan.  For ERISA purposes, the answer is MEP, and you must check the box. However, for Tax Code purposes, it is not a MEP-do you also check the single employer box?

What flows from that may cause the IRS heartburn. The financial statements are driven by ERISA’s rules and not the Code’s, though the IRS relies upon the DOL information when performing their own compliance activities. This means that such  information is  required to be reported on an aggregated MEP basis, not on a single employer basis. The only “single employer” data provided on the 5500 is each participating employer’s EIN, along with something called “percentage of contributions” for each of those employers. The compliance questions will also be answered on the consolidated MEP basis, not on the “single employer” basis, which may be of a concern to the IRS.

It’s also likely to become messy when the IRS is looking for an individual plan Form 5500 for the 403(b) plan under the EIN of the employer and with a plan number and doesn’t find one. This is exacerbated by the way a plan joins the MEP: it typically merges with the plan of the lead sponsor, but the merger is with a “plan” the IRS doesn’t recognize as a plan.

Let’s not forget about the Form 8955 SSA, either.  This is a tax form, and it is required of all 403(b) plans subject to ERISA’s vesting standards. It is not an ERISA form. With each participating employer under a 403(b) MEP being considered an individual plan, a separate 8955-SSA has to be signed and filed on behalf of each participating employer. The IRS will have difficulty tying this back to the MEP’s Form 5500.

I truly doubt that the IRS’s systems are up to all of this and other process issues I haven’t mentioned, especially given the IRS’s budgetary strain. Even the provisions in RESA which will permit Open MEPS® won’t address these issues. It is likely to exacerbate them. So be prepared to deal with some bizarre regulatory twists in dealing the IRS when working with a 403(b) MEP,  to manage through this lack of regulatory processes, or to seriously consider the aggregation model.

 

 

There is a growing public policy concern regarding the ability of workers in the gig economy to access the ability to accrue retirement savings,. Though IRA’s and SEPs are, of course, available, they are nowhere near as effective as worksite retirement plans. Troy Tisue’s testimony at yesterday’s congressional hearing on retirement plans for the gig economy addresses how Open Meps® may help address this issue. In addition to his written testimony, Troy also discussed at the hearing on how there are ways in which aggregation programs-which are currently available- can be used to address this need. To read Troy’s testimony, click here.

 

The DOL’s proposed regulation permitting Association Health Plans which cover unrelated employers is likely to have a significant impact on the market’s ability to offer Multiple Employer retirement plans to unrelated employers. This is because the regulation permits AHPs through the modification of the ERISA regulatory definition of the term “employer” under Section 3(5). It was this definition that the DOL used to turn down the idea of an Open MEP in Advisory Opinion 2012-04. To be an “employer,” the DOL claimed there must be “commonality” of employment between employers who “controlled” the plan.

The DOL makes a stunning admission in the AHP reg preamble about its historical application of the “commonality” rule. It sounds an awful lot like the argument we made in requesting the MEP advisory opinion:

These definitional terms are ambiguous as applied to a group or association in the context of ERISA section 3(5), and the statute does not specifically refer to or impose the particular historical elements of the “commonality” test on the determination of whether a group or association acts as the “employer” sponsor of an ERISA covered plan within the scope of ERISA section 3(5). Accordingly, that determination may be more broadly guided by ERISA’s purposes and appropriate policy considerations, including the need to expand access to healthcare and to respond to statutory changes and changing market dynamics.

In a nutshell, the DOL is proposing the following:

  • An association can sponsor a health plan which can permit other, unrelated employers to join.
  • The association can be formed for the sole purpose of offering the plan, lifting the long-standing prohibition against associations being formed for the sole purpose of providing the benefit plan.
  • The “commonality” requirement will be met if the members of the association are in the same trade, industry, or state or metropolitan area (even if it crosses state lines).
  • The direct or indirect “control” requirement will be met if the members of the association elect the directors or officers of the association

Interestingly enough, the AHP definition of employer will permit companies with no employees, but with only  “owner-employees,” to participate-which was always a bugaboo with MEPS to begin with. There is also a health care related “non-discrimination” rule which doesn’t apply to retirement plans.

It is highly unlikely that the  DOL will be able to hold the line now against MEPs formed through associations meeting the criteria outlined above, or what I call “AMEPS” (for “Association MEPs), especially considering what the DOL stated in its MEP advisory opinion:

“In your submission, you urge that the Department’s historical interpretation of “employer” under section 3(5) of ERISA regarding multiple employer welfare arrangements (MEWAs) should be restricted to welfare plans and that a less restrictive interpretation be applied to retirement plans. The Department is of the view, however, that the term “employer” should have the same meaning in this context whether applied to the term welfare plan or pension plan. See Sullivan v. Stroop, 496 U.S. 478, 484 (1990).”

 Does this mean that we now run out and establish AMEPs? That, I think, would be ill-advised given that there are likely to be a number of changes to the proposed regs before they become final, and there really are a number of issues related to the proposal which need to be answered. For example, the ERISA language under 3(5) enabling one employer to act for another does not require any sort of trade or geographical link and, given the ways companies morph and move, such a requirement seems to unnecessarily deny modern business realities. Lets see, under the reg, you don’t have to be in same trade as long as you are in a large metro area. But if you have a multi-state, international business in a small town or state (yes, there are many of us like this, given the digital nature of  business),  you can’t belong to an Association plan of an unrelated trade which is based in another state.  There’s sound policy behind this archaic thought? That seems counterintuitive, and restricts small business access to true competitive pricing- particularly where the benefits are not inherently “trade based.” But at the very least,  it does give us a strong basis to advocate the same treatment for association MEPS as AHPs. And for this, no statutory change would be needed.

 

 

 

 

 

 

We have now begun the “season of restatement” for 403(b) plans, which will run until March 2020. This is not a joyous yuletide sort of season; it is instead one of reckoning, I’m afraid. This is because we have been able to effectively ignore a number of difficult issues involving plan documents until now, because it was never critical to address them. But now we must.  It really is going to be a season of learning for us all-for the regulators at the IRS and DOL and practitioners as we try to weave our way to some sort of sensible solutions.

The application of the Spousal Consent and Joint and Survivor Annuity rules is one such issue which we need to consider.  In the 401(a) space, dealing with this issue is pretty straightforward.  The rules apply uniformly to all 401(a) plans through 401(a)(11) and 417, which is well coordinated with ERISA’s requirements under Section 205. As long as the default form of benefit under the plan is not a J&S benefit; and the spouse is entitled to the survivor benefits upon the participant’s death unless the spouse consents otherwise; the rules are met. If, however,  the plan is a money purchase plan, or holds money transferred in from a money purchase plan or a defined benefit plan, or the plan’s default distribution is an annuity payment, the spouse must consent to a lump sum distribution-or even to a loan. Many will remember the efforts we went through years ago cleansing those annuity payment requirements from plans and products, just so no spousal consent would be required for lump sum distributions or loans.

Now, though, we have to deal with documenting these rules as they apply to 403(b) plans. Its not so simple:

  • 401(a)(11) and 417 do NOT apply to 403(b) plans This means the only way the spousal rights rules apply to 403(b)plans  is through ERISA Section 205.  This means that if you have a non-ERISA 403(b) plan, the spousal rights rules DO NOT apply. Be careful to avoid inadvertently applying them in the restatement.
  • HOWEVER, many non-ERISA 403(b) annuity contracts impose the spousal rights rules as a matter of contract language, even though they may not be imposed as a matter of law. Because the underlying contract is technically part of the plan document, this means those spousal rights will apply as a matter of a plan term. Be careful with your documentation of this. There is an interesting problem here: if the central “wrap” plan document states there are no spousal rights, but the underlying contract states that there are, there is a conflict-and  IRS rules says that the wrap plan document language will govern. But the problem is that the insurer is legally bound to honor the spousal rights as a matter of contract, and CANNOT legally ignore such claims. Screwing up the plan document language will inevitably lead to litigation, especially given when large account balances are involved, so be careful.
  • ERISA 403(b) plans are covered by the spousal rights rules, by virtue of ERISA Section 205. If the underlying annuity contract provides that the default payment is an annuity-as many old contracts, particularly individual ones will-ERISA will require spousal consents for lump sum payments and loans. Even if the wrap plan document makes the normal form of payment a lump sum in an attempt to “cleanse” this problem, the DOL has never concurred with the IRS’s position that the centralized plan documents control. The insurer is legally bound to follow the contract terms; and it is a registered security, which can cause security law problems if this language is ignored. So, again, be very careful in your restatement, especially if you have legacy contracts in the plan.
  • Finally, there’s the “money purchase plan” issue. It is typical for a 403(b) plan to provide a set percentage of pay as the employer benefit under the plan, much like a money purchase plan. There is a very real and unresolved issue as whether or not this set formula makes the plan a “money purchase plan” which is subject to the J&S rules, even if you have avoided the “annuity” language problem noted above. There is a sound position that such plans are NOT money purchase plans. [*] This  is a substantial issue and one upon which you will need to make a determination when you restate the 403(b) plan.

[*] A money purchase plan is defined only by Code Section 401(a)(27), as a 401(a) tax qualification requirement-which does not apply to 403(b) plan. Under ERISA 205, an individual account plan becomes subject to the J&S rules only if it is a “money purchase plan” under Section302(a)(2)(B).  ERISA does not define “money purchase plan,” and it would be difficult to apply any other definition than that which is contained in the Code-which, here, does not apply to 403(b) plans.

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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.

On November 14, the Office and Management and Budget received from the DOL a proposed rule which would broaden the definition of employer under ERISA to allow more businesses to join association health plans.

This was in response to the  Oct. 12 executive order which directed the DOL to “consider expanding the conditions that satisfy the commonality‑of-interest requirements under current Department of Labor advisory opinions interpreting the definition of an “employer” under section 3(5) of the Employee Retirement Income Security Act of 1974.”

The DOL’s advisory Opinion on MEPs in 2012 was specifically premised on the DOL’s interpretation of   the definition of “employer,” for health plan (MEWA)  purposes. The DOL ‘s position was that it had no authority to redefine their historical definition of employer it developed for MEWA purposes merely for retirement plan purposes, that it was bound by the statute to apply the same “employer” definition to both health plans and retirement plans. Does this mean that the new proposed definition of “employer” will, necessarily, by operation of statute, be expanded for retirement plan purposes as well? If this is the case, MEPS would be opened up to unrelated employers under the same set of circumstances as they would for health plan purposes.

No one has seen the specific language of the proposed regulation, of course. But it would seem that the DOL (in its own collective mind) really has no authority to expand the definition of “employer” for ACA/Association Health plan purposes without also expanding it for retirement plans.

We will watch closely for this new proposed reg when it is published. But it’s hard to see how this would not also apply to retirement plans, and thereby opening up MEPS. Even if the language of the proposed reg is limited to health plans, there will be an opportunity under the comment process to make the case that there, legally, can be no difference-at least according to the DOL’s own rules….

 

Anyone who has had the pleasure of dealing with the 403(b) annuity recognizes that it is truly an “odd duck” – especially when looking at it through the lens of the 401(a) experience.  So it should come as no surprise that this “odd-duckiness” shows up in settlements under the EPCRS’s Closing Agreement Program” (or CAP).

The CAP is the portion of EPCRS which is used when the IRS discovers uncorrected plan errors on audit. Ultimately, it involves the plan sponsor negotiating a final settlement with the IRS. This inevitably also involves the agreeing to pay a CAP sanction which, under current guidance, cannot be less than the fee that would be payable had the sponsor corrected under the IRS’s Voluntary Compliance Program.

There are formally 10 different factors under EPCRS which the IRS takes into account when proposing the sanction amount. One of those elements (and what used to be the most significant factor before the 2106 modifications to the program under 2016-51) is the “Maximum Payment Amount” (the MPA). The IRS agent is required to calculate the MPA as part of the CAP process, which is the tax which the IRS could collect because of the failure of the plan to meet the tax compliance rules. This includes the:

  • tax on the “trust;”
  • additional income tax on the employer from the loss of employer deductions (plus interest and penalties arising from the loss);additional income tax on the individual from the failure (including taxability of a loan);and
  • any other tax which may result from the failure that would apply but for the CAP settlement.

This number in the 401(a) world can be a very large number, even for a small plan, especially when taken over a number of years.

But it’s interesting to see the effect on a 403(b) plan going through this process:

  • There is no tax exempt trust here that is enjoying 501(a) tax exempt treatment. An annuity contract or a custodial account are not, themselves, taxpayers-or entities which can be taxed. The individual who owns the contacts can be taxed (so, the third bullet point applies), but that’s it. This number should be zero.
  • The employer is a tax-exempt entity. This means there should be no loss of deduction, except in the very rare case where a tax exempt might have been taxed under the UBIT rules.
  • The individual will suffer taxation, the amount of which should be included in the MPA. But there are a couple of important factors which come into play here:
    • “Inside buildup.” The tax rules which apply to “non-qualified” annuities (which is the terms we use to describe annuities sold outside of 401(a) and 403(b) plans) defer the taxation of earnings of the investments inside that contract (including the “separate account” investments) until those amounts are distributed-and even then, those earnings might only be taxed (if it’s considered a “distribution as an annuity”) using something called the “exclusion ratio.” The exclusion ratio has the effect of back loading the tax into much later years. Because most 403(b) annuity contracts will qualify as annuities for “inside buildup” purposes-even if they fail 403(b) treatment- the earnings should be excluded from the MPA. Note this treatment will not apply to custodial accounts.
    • Finally, virtually all of the operational errors (except for non-discrimination) will only impact the contracts against which the error occurred. So, for example, a 415 violation will only impact the particular contract to which the excess was made, and only to the extent of the excess. It does NOT “blow up” the entire plan. So, the MPA should only include the tax on portion of the excess in the account of the affected individual.

Though the MPA has a much more limited impact on the sanction amount than prior to 2016, it still can affect the ultimate sanction by showing that many errors may not really be all that egregious (especially when compared to a 401(a) sanction amount on the same type of error).

 

The implementation of the IRS’s 403(b) pre-approved plan program by a number of vendors has been delayed by at least one thorny issue which will cause concern for a number of 403(b) plan sponsors. The IRS seems to have technically resolved the issue with its guidance on “effective date addendums,” (see https://www.irs.gov/retirement-plans/pre-approved-403b-plans-effective-date-addendum ).  But at least one of the issues it was meant to address has left many plan sponsors with questions of what to do now.

One of the roots of the problem is what the IRS generally refers to as the “once in, always in” rule of 403(b)’s “universal availability” requirement.  “Once in, always in” refers to the IRS position that once an employee has become eligible to make elective deferrals into the plan by reaching the 1000-hour benchmark in one year, that employee will remain eligible to make elective deferrals in future years-even in years where that employee does not complete 1000 hours of service.  That person can only lose that ability to defer if they become part of one of those limited categories of employees which can be excluded (such as certain students).

Now, this rule is not explicitly stated in the 403(b) regulations, nor is it part of the Code Section 403(b). Though this position has not been widely publicized over the years, the IRS applies it on audit, and the Internal Revenue Manual itself contains this interpretation as well.

It all came to a head in the pre-approved document process. The IRS requires that the “once in, always in” term be included in the pre-approved document.  The practical problem that came to the attention of the IRS is that many employers may not have not applied this rule, over time, consistent with the required plan document term. With the pre-approved document covering practices back to January 1, 2010, plans which adopted this the pre-approved plan with this term automatically included term might immediately have a “form and operation” problem which would force them into EPCRS.

This problem is not limited to the “once-in-always-in”rule, as there can be any number of practices required by the pre-approved document which the employers have not “practiced” since January 1, 2010. The “effective date addendum” addresses this “automatic” form and operation problem, though it will really serve to complicate plan 403(b) plan documents even further. Why I say “even further” is because 403(b)plan documents are complex beasts to begin with. For example, they incorporate by reference the underlying annuity contracts and custodial agreements as plan terms. A number of us have raised the issue that there are going to be inevitable conflicts between the central plan document and those (often complex)  underlying contracts, and the IRS’s position that the centralized plan document must control in the event of such conflicts may not always be tenable.

The “effective date rule” does address the technical issue of adopting terms which were not applicable back to January 1, 2010. What plan sponsors need to be aware of, though, is the need to implement the once in, always in rule going forward. But it does not address the elephant in the room: what happens to the employer which did not use that rule back to January 1, 2010, and admits in their plan document that they didn’t?

One of the more difficult rules that the IRS has imposed on the 403(b) market in recent years is the complete ban on issuing determination letters on individually designed 403(b) plan documents, under any circumstance. The IRS has taken the position that all 403(b) plans must be on a pre-approved document in order to gain the “reliance” value of a determination letter. Unlike the 401(a) market, where there remains a process for IRS approval of individual designed documents, 403(b) plans have been granted no such grace.  This can be a challenge for many “legacy” 403(b) plans which have been in existence for many generations (keep in mind that the first 403(b) type of plan showed up in 1919).

Now the IRS has issued Rev Proc 2017-41, where it has fundamentally changed the structure of the pre-approved plan program fro 401(a) plans (2017-41 specifically does not apply to 403(b) plans). That Rev Proc eliminated the term “determination letter” for pre-approved plans, as well any distinction between “volume submitter” and “prototype “plan documents.

Buried in that Rev Proc is something we have been looking for in the 403(b) space, which actually would help alleviate some of the concerns document drafters have with these long-standing plans. Here’s what it says, in Section 8.03:

“Notwithstanding the preceding sentence, the following types of amendments will not cause a plan to fail to be identical to a Pre-approved Plan and, thus, will not result in the employer losing reliance on the Opinion Letter:

(7) Amendments to the administrative provisions in the plan (such as provisions relating to investments, plan claims procedures, and employer contact information), provided the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under § 401.”

There are actually a whole host of terms under a 403(b) plan to which this could be applied, especially given the fact that many plans have used  a wide multitude of vendors over a long period of time.  It may not address all of the issues we have, but given the fact that there really are only a relatively small handful of 403(b) plan terms which can actually affect the 403(b) status of a plan, this type of approach may prove some of the answers for which we are looking.

Does this suggest that the IRS will be willing to take a similar, flexible approach to 403(b) plan documents?

The DOL issued an important Advisory Opinion in January, AO 2017-01, which provides relevant guidance for those who are seeking viable “scale” alternatives to the MEP.  The Opinion really acts as a sort of “follow-on” to the DOL’s discussion of the “prototype” arrangement it first described in its legislatively revoked Interpretive Bulletin which permitted state based MEPs. Though it specifically opines on health plans, it has broad applicability to retirement plan arrangements, as well.

An Association of over 360 employers who employ over 9% of the U.S. private sector workforce is developing a package of health plan related services for its members. The idea is to engage in an extensive number of initiatives designed to improve the way in which its employer-members and their employee benefit plans purchase healthcare coverage for their covered employees. It is designed to give its members access to cost, quality and standards for medical networks they could not get on their own, while providing substantially improved care. The initiatives also involves gathering and distributing information to its members and health care providers that will help the members and providers improve their own employee communications and engagement practices.

Here is the key for retirement plans:  the Association will act as a negotiating agent on behalf of its members in order to leverage their combined purchasing power to get favorable terms and conditions from their members’ benefit plan vendors.

The DOL addressed two legal questions related to this arrangement which are important to the retirement plan market. The first is whether or not the package of benefit services they negotiated for their clients constituted, themselves, an ERISA plan. The DOL answered “no”, stating that the aggregation services being provided to employers for assistance in their own plans does not give rise the Association providing an employee benefit program. Secondly, the DOL affirmed that a “bundle of administrative services” established under the provisions of the initiative does not give rise to multiple employer (welfare) plan status.

This Opinion matters much in the retirement market: it demonstrates that the scale we seek is not exclusively the purview of the MEP.  Vendors have the ability to safely “bundle administrative services” to the same effect of a MEP, provided that they have enough scale on their own to negotiate the sort of investment pricing and expert services which the market seeks.  There are product designs which can facilitate these types of arrangements as well, such as insurance company pooled separate accounts and collective trust arrangements, if they are properly priced.

What the Opinion did not address are the fiduciary issues related to the “bundling” functions for retirement plans, which really are at the core of making this work in the retirement market. Yet even here, as more vendors become more comfortable with what is being called the “3(16)” services, the way is further opened for effective bundling.