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MEPs: Managing the Complexity to Maintain their Benefit

Robert M. Richter, VP, FIS Relius

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Robert M. Richter, VP, FIS Relius

Robert M. Richter, JD, LL.M. is a Vice President with FIS

(formerly SunGard) in Jacksonville, Florida. Robert manages the

consulting department and is instrumental in authoring and

supporting SunGard Corbel's retirement plan documents. He is a

frequent lecturer and author on matters involving qualified

retirement plans and cafeteria plans. Robert is President-Elect of

the American Retirement Association and has held numerous

positions within the American Society of Pension Professionals

and Actuaries (ASPPA) , including President from October 2011

to October 2012 and President-Elect. He is a Fellow of the

American College of Employee Benefits Counsel and is a

member of the Florida Bar as well as other organizations. Robert

received a B.S., with a major in Finance, from the University of

Florida, a J.D. from Florida State University, and an LL.M. in

taxation from the University of Florida.

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What We’ll Cover

Definitions The mechanics of MEPs Advantages/disadvantages of MEPs Administrative issues and best practices What happens when things go wrong

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Definitions: What is a MEP?

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Terminology

• Multiple Employer Plan (MEP) = a ―plan‖ adopted by 2 or

more employers that are not part of a controlled group or

an affiliated service group

• Members of a CG or an ASG are treated as one employer

• Closed MEP = MEP where adopting employers have a

connection to each other

• Open MEP = MEP adopted by employers with little or no

connection to each other

• Multiemployer Plan = union plan

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What’s a Plan?

• Answer varies for Code vs. ERISA

• We will cover this in detail in later slides

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Typical MEP Situations

• Staffing firm cosponsors plan with clients PEO

• 2 or more MDs share a suite and some employees Shared employee

• Closely related companies but not controlled group/ASG; ―break-up‖ ―Kissing cousins‖

• Open to all members of professional group (e.g., AMA) Trade association

• No particular relationship between adopting employers Open MEP

• Open to ERs in a state (or all ERs in a certain category); state run State MEP

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The Mechanics

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The Code

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What’s a Plan for Purposes of the Code?

• Treas. Reg. §1.414(l)-(1)(b)

• A plan is a single plan only if all of the plan assets are

available to pay all plan participants and beneficiaries

• Using several trusts doesn‘t create multiple plans

• Using a group trust doesn‘t create a MEP

• Contributions and allocations may still be determined separately

• Walling off assets will create separate plans (e.g., the portion of

the trust attributable to Dr. A can only be used to pay benefits for

Dr. A‘s participants)

• This is why a DB MEP is problematic

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• IRC §413(c) sets forth rules for a plan adopted by more

than one employer

• A MEP is a single plan, but for a limited number of

purposes it is ―deemed‖ to be separate plans

Multiple Employer Plans

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Treated as Separate Plans

• Treated as separate plans for purposes of:

• IRC §401(a)(4) nondiscrimination testing

• ADP/ACP testing

• HCE determination

• Top-heavy rules

• Deduction Limits (unless plan was adopted before 1989)

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Treated as One Plan

• Treated as one plan, and one employer, for purposes of:

• Service

• Eligibility

• Vesting

• Distributable events (i.e., no severance if going from one

participating employer to another)

• 415 annual additions

• Exclusive benefit rule

• Without this the single plan would violate the exclusive benefit rule

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Massive Plan

• State of Confusion sponsors MEP and invites any

employer in state to cosponsor

• 30,000 employers do so

• Mary left work at one of the 30,000 and goes to work for a new

employer (also a cosponsor)

• Mary is not entitled to a distribution and Mary enters immediately

• How will it know?

• Recipe for operational failure

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• Aggregate compensation from all employers to

demonstrate compliance with 415

• Each employer counts only its own compensation for

purposes of:

• Testing nondiscrimination (including testing an alternative

definition of compensation to determine if it is nondiscriminatory)

• Analyzing HCE status

• Applying the top-heavy rules

• Applying the 401(a)(17) limit

Compensation

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Overall Qualification

• A MEP is one plan

• The entire plan must be qualified or the plan as a whole

is disqualified

• One bad apple spoils the barrel

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Can there be a 403(b) MEP?

• There is no definitive answer

• There is no connection between IRC §413(c) and IRC

§403(b)

• IRS position on pre-approved 403(b) plans is that MEP

provisions are permitted but there is no reliance on the

opinion/advisory letter

• Implies that the IRS believes they are permitted but they don‘t

know whether the rules of IRC §413(c) apply

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What is an Employee Pension Benefit Plan?

• ERISA 3(2):

• …The terms ―employee pension benefit plan‖ and

―pension plan‖ mean any plan, fund, or program which

was heretofore or is hereafter established or maintained

by an employer or by an employee organization [union],

or by both, to the extent that by its express terms or as a

result of surrounding circumstances such plan, fund, or

program—

• provides retirement income to employees, or

• results in a deferral of income by employees for periods extending

to the termination of covered employment or beyond, . . .

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What’s an Employer for Plan Status?

• ERISA §3(5):

• The term ―employer‖ means any person acting directly as

an employer, or indirectly in the interest of an employer,

in relation to an employee benefit plan; and includes a

group or association of employers acting for an employer

in such capacity.

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Who’s an Employer for ERISA?

• Employers don‘t include organizations which don‘t

employ employees

• For ERISA, employees don‘t include

• Sole proprietors

• Partners

• Sole shareholders of corporations

• Spouses of above

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How Does this Relate to MEPs?

• Numerous DOL Advisory Opinions focusing on whether

an arrangement is established or maintained by an

employer or by an employee organization

• DOL interprets ―group or association of employers‖ to

mean a ―bona fide‖ group of association of employers

• Key issue for MEP: are the employers a bona fide group

or association?

• Bona fide group: facts and circumstances test

• Likely not an issue for shared employee or kissing cousin

situations

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Factors Used to Determine Bona Fide Group Status

• How members are solicited;

• Who is entitled to participate and who actually

participates in the association;

• The process by which the association was formed, the

purposes for which it was formed, and what, if any, were

the preexisting relationships of its members;

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Factors Used to Determine Bona Fide Group Status

• The powers, rights, and privileges of employer members

that exist by reason of their status as employers; and

• Who actually controls and directs the activities and

operations of the benefit program.

• The employers that participate in a benefit program must, either

directly or indirectly, exercise control over the program, both in

form and in substance, in order to act as a bona fide employer

group or association with respect to the program.

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Summary: Commonality and Control

• Commonality

• Participating employers must have a ―common employment

bond‖

• Must be genuine economic or representational interests unrelated to

the provision of benefits

• Many associations (e.g., automobile dealers) are OK

• Chambers of commerce probably too broad

• Control

• Exercised either directly or indirectly by participating employers

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How Does this Relate to Open MEPs?

• DOL Advisory Opinion 2012-04A holds that an open MEP

is not established by a bona fide group or association of

employers

• Not one point in their favor

• Therefore, the MEP isn‘t established and maintained by an

employer

• Therefore, the MEP isn‘t an ERISA plan

• However, each underlying ―employer‖ has adopted a

separate ERISA plan

• So MEP is holding ERISA plan assets – lots of ERISA plans

• Each employer is the plan sponsor of its plan (regardless of what

document may say)

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Rejected Arguments

• Saying each employer is separately adopting the plan

doesn‘t make it one plan

• Most of the advisory opinions deal with welfare plans

• DOL has been more concerned about abusive multiple employer

welfare plans

• But the law uses the same definitions for pension and welfare

plans

• The 413(c) service rules create commonality between the

sponsors

• Not cited in any advisory opinion

• Doesn‘t affect ERISA status

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DOL Interpretive Bulletin (11/18/2015)

• DOL: A state is considered to act indirectly in the interest

of the participating employers

• A state has a unique representational interest in the health and

welfare of its citizens that connects it to the in-state employers

that choose to participate in the state MEP and their employees

• Therefore a state run MEP is not an open-MEP

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Who’s the Fiduciary?

• MEP operators are ERISA fiduciaries

• Subject to ERISA prohibited transaction rules both as fiduciaries

and as service providers

• Each employer sponsor of a plan that participates in the

arrangement is a fiduciary

• Employers must act prudently in electing and monitoring a MEP

provider (FAB 2002-03 & 2015 Interpretive bulletin)

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DOL Interpretive Bulletin (11/18/2015)

• The continuing involvement by participating employers in

the ongoing operation and administration of a MEP could

be limited to enrolling employees in the state plan and

forwarding voluntary employee and employer

contributions to the plan

• When an employer joins a carefully structured MEP, the

employer is not the ‗‗sponsor‘‘ of the plan under ERISA,

and also would not act as a plan administrator or named

fiduciary

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What About Annual Filing and Audits?

• Each plan files a separate 5500

• Large plans include an audit

• Strategy: Have an MEP file a 5500 as a DFE

• Requires audit

• Simplifies 5500 and audits for large underlying plans

• Each plan files a separate 8955-SSA

• The more returns filed means there will be higher chance

of an IRS audit

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Bonding Requirements

• Each underlying plan subject to the ERISA fidelity bond

requirement

• Lesser of 10% or $500,000 (if qualified assets)

• Can get a bond covering multiple plans (FAB 2008-04)

• But claim of one plan can‘t reduce coverage of another covered

plan

• Total bond for the MEP = sum of the bonds for the

underlying plans

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Concern Over Use of Assets

• Likely can‘t have assets of ERISA plan A (or revenue

sharing from those assets) used to pay expenses of

ERISA plan B

• One fund requirement of IRC §413(c) arguably violates

ERISA‘s exclusive purpose requirement

• Result is that if an open MEP for purposes of ERISA then

plan will need to be separate plans for purpose of the

Code

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• One 5500 (if MEP is single plan for ERISA)

• Lower cost investments due to aggregation

• Savings on audit

• If plan otherwise subject to an audit and MEP is single plan for

ERISA

• Growing pains if separate plans would not otherwise be subject to

audit (fewer employers to spread out cost in early years of MEP)

• One plan document

• But depending on how much flexibility is offered, participation

agreements can get lengthy

The Benefits

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The Benefits

• Reduced fiduciary risk

• Duty to select and monitor MEP sponsor

• Other aspects depend on arrangement of plan

• Reduced employer responsibilities

• Professional management of plan

• Easy to market to association members

• If single plan for ERISA, reduced risk of audit?

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The Disadvantages

• Combined 415 limit

• One bad apple spoils the barrel

• Combined service for eligibility and vesting

• Practical concern on tracking

• Affects eligibility

• Reduces amount of forfeitures

• May have to deal with many different payroll providers

• Separate compliance testing (but no worse off then if

separate plans)

• Employer loses control

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The Nuts and Bolts

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Plan Documents

• MEPs are allowed in pre-approved plans

• Issues to consider

• Provisions to kick-out bad apples

• As a practical matter can MEP sponsor create new plan for the bad

apple?

• How much flexibility to offer each employer?

• Will generic pre-approved plans work?

• With an open MEP there may not be a lead employer

• Are responsibilities appropriately allocated?

• Can service provider amend on behalf of adopting employers?

• Separate SPD for each employer?

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Plan Design

• Ways to overcome some of the problematic operational

issues:

• Immediate eligibility and vesting

• Avoids service crediting issues (but not distributable event)

• ADP/ACP test safe harbor plan that meets TH exemption

• No ADP test; no TH rules

• If allow other employer contributions, design to satisfy TH

minimums and use a safe harbor allocation method

• If employer is permitted to have other plans, provide that 415

limits and TH (if applicable) are corrected in other plans before

the MEP

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EPCRS for a MEP

• If only one employer ―at fault‖ VCP filing fee based on

that employer‘s participants

• Audit CAP sanction also determined on individual

employer basis

• Plan administrator must file for plan as a whole

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Clean Up Your Own Mess

• Plan and/or contracts should require each employer to:

• Cooperate with administrator‘s requests

• Hold others harmless for issues related to its portion of the plan

• Accuracy of information

• Making required contributions

• Paying for correction of failures

• But what happens if the employer doesn‘t (or can‘t) follow

through?

• Someone else has to step up or, or entire plan potentially

disqualified

• Kick out non-cooperating employer

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Exiting a MEP

• Some MEPs restrict exiting

• Possible breach of fiduciary duties in selecting the MEP

• If exiting employer wishes to continue to maintain a plan:

• Spin-off

• Create mirror plan and then transfer assets

• No distributable event

• If exiting employer wants to terminate it‘s plan:

• Spin-off followed by termination

• Termination is distributable event

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The Inadvertent MEP

• Carol owns 100% of Companies A & B

• A & B are both in same plan

• Carol sells Company B to Carl (unrelated) during 2016

• Becomes a MEP upon the sale

• No guidance on ADP/ACP testing

• IRC §410(b)(6)(C) only provides a transitional rule for coverage

testing

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How does MEP Sponsor get Paid?

• Self-dealing if TPA sets up a MEP and wants to hire itself

to provide TPA services

• Have independent fiduciary approve all expenses

• Costly

• Have adopting employers review and approve expenses

• Is that realistic?

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MEPs: Managing the Complexity to Maintain their Benefit

Robert M. Richter, VP, FIS Relius