Multiple Employer Plans - Their Nuances and Working with Them Monday, April 29, 2013

Transcription

1 Multiple Employer Plans - Their Nuances and Working with Them Monday, April 29, 2013 S. Derrin Watson, JD, APM Jean Ackerman, DOL Code 413(c) definition A single retirement plan under Code 414(l) Maintained by more than one employer Related employers (controlled group, ASG, etc.) are one employer for this purpose Not a multiemployer (union) plan 1

2 MEP Notes Plan: Fund in which all plan assets are available to pay all plan participants and their beneficiaries Could include situations where each employer signs a separate document Merely using a group trust doesn t create a multiple employer plan (MEP) Could include a situation in which each employer s contributions and forfeitures only benefit employees of that employer Any trade or business which can sponsor a plan can be a cosponsor of a MEP Even if business sponsors another (single-employer plan) Typical MEP situations PEO Shared employee Kissing cousins Trade association Open MEP State MEP Staffing firm cosponsors plan with clients 2 or more MDs share a suite and some employees Closely related companies but not controlled group/asg; break-up Open to all members of professional group (e.g., AMA) No particular relationship between adopting employers Open to ERs in a state (or all ERs in a certain category); state run 2

3 Benefits Promoters Claim for open MEPs Some claims are firmer than others One 5500 NOPE More $ invested Economies of Scale One Audit NOPE Reduce Fiduciary Risk Decrease ER duties Professional Management Comparison of MEP to controlled group Issue Controlled group MEP Exclusive benefit Eligibility; vesting 415 limits Can cover EEs of any related ER Count all years with all related ERs Single limit for all related ERs Can cover EEs of any participating ER Count all years with any participating ER Single limit within plan; aggregate with other plans ER maintains Coverage Test together Test each ER separately ADP/ACP/ 401(a)(4) HCE status Related ERs test together in joint plan HCE of one related ER is HCE of all Test each ER separately Determined separately Deductibility One deduction limit Separate deduction limits Top heavy Test together Test separately 3

4 Participation example Eve Employee works for Carl Client 3 YOS Carl Client signs up with Peter PEO Cosponsors PEO s MEP Eve goes on Peter s payroll Eve has 3 YOS for participation the day she goes on the payroll Treat her like a rehired employee She enters the plan immediately when Carl signs document or, if later, the day she is hired Vesting example Jane owns 60% of X and Y with unrelated individuals owning the other 40% Not related X and Y sponsor MEP Employees move back and forth between X and Y Earl has 3 YOS with X Leaves X and goes to work for Y He hasn t severed employment with plan sponsor His service at X counts toward Y contributions His service at Y counts toward X contributions 4

5 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 enters immediately But will new employer pass out forms immediately? How will it know? Recipe for operational failure PEO issues Rev. Proc : Treat the worksite employees as CO employees So you can t do a single ADP test Doesn t matter whether you think the PEO is the true common law employer Eliminates great source of confusion 5

6 Coverage/nondiscrimination/ADP/ACP testing For coverage purposes, each employer is maintaining a separate plan Peter PEO maintains MEP 401(k) with 100 cosponsors Some PEO back office EEs and true temps participate 101 separate coverage tests 101 ADP test 101 ACP tests (a)(4) tests 101 top-heavy tests PEO troubles Cindy Client uses services of Patty PEO for her New Jersey office Cindy pays employees at other offices directly Patty PEO sponsors MEP Cindy cosponsors it for New Jersey employees Patty needs census information on all of Cindy s employees (NJ and elsewhere) to determine if plan satisfies coverage (and general test, if needed) 6

7 Client troubles Cindy sponsors her own retirement plan to cover employees outside NJ If each plan separately passes coverage, great (although we need to include NJ employees in general test) If not, consider permissively aggregating the plans Must have same plan year Must test the same way But watch out for benefits, rights, and features Offset Suppose Cindy wants to cover the NJ employees in her separate plan But offset the benefits from the MEP Testing possibilities Permissively aggregate the plans Pass the general test 7

8 Code 415 limits One plan: one 415 limit Aggregate compensation from each employer Each ER must aggregate MEP with other plans ER maintains Overall qualification By definition, except for coverage and nondiscrimination a multiple employer plan is one plan The entire plan must be qualified or the plan as a whole is disqualified The failure by one employer maintaining the plan (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the section 413(c) plan for all employers maintaining the plan One bad apple spoils the barrel 8

9 VCP 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 Clean up your own mess Plan 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 9

10 Deduction limit Each employer computes deduction limit separately Exception: If plan adopted before 1989 there is a single limit shared by all participating employers unless plan elects separate limits 401(a)(17) Comp limit follows deduction limit ERISA issues 10

11 ERISA and the Code The IRS administers the Internal Revenue Code Qualified plan rules Qualified for tax benefits If you don t follow the rules, you don t get the tax benefits The DOL administers ERISA Title 1 Rules relating to employee pension benefit plans Rules apply whether the plan satisfies the tax qualification rules or not Who s an employer for ERISA? For purposes of determining whether a plan is subject to ERISA, Employees don t include Sole proprietors Partners Sole shareholders of corporations Employers don t include organizations which don t employ employees That s why owner-only plan files 5500-EZ It isn t an employer plan and so it isn t subject to ERISA Note: Owner who participates in ERISA plan treated as employee under ERISA 11

12 What is an employee pension benefit plan subject to ERISA? 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, 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,... 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. DOL interprets group or association of employers to be a bona fide group of association of employers 12

13 How does this relate to MEPs? Many DOL Advisory Opinions reject the concept that a given MEP is a single plan under ERISA Opinions primarily turn on not the types of benefits provided but on whether the arrangement is established or maintained by an employer or by an employee organization 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 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; 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. 13

14 How does this relate to open MEPs? DOL Advisory Opinion A 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) Rejected arguments Saying each employer is separately adopting the plan doesn t make it one plan Each employer has adopted a separate plan ERISA does recognize multiple employer plans exist (ERISA 210 talks about hours of service) DOL responds that this assumes there is a single ERISA plan Not cited in any advisory opinion 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 The 413(c) service rules create commonality between the sponsors Not cited in any advisory opinion Doesn t affect ERISA status 14

15 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 will be subject to ERISA's fiduciary provisions. See FAB (in selecting a service provider, plan fiduciaries must, consistent with the requirements of section 404(a), act prudently and solely in the interest of the plan's participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan). What about annual filing and audits Each plan files a separate 5500 Large plans include an audit Strategy: Have the MEP file a 5500 as a DFE Requires audit Simplifies 5500 and audits for large underlying plans Each plan files a separate 8955-SSA Incidentally, 500 returns means a much higher chance of an IRS audit 15

16 Bonding requirements Each underlying plan subject to the ERISA fidelity bond requirement Lesser of 10% or $500,000 Total bond for the MEP = sum of the bonds for the underlying plans Example 500 ERISA plans 100 have at least $5M in assets Other 400 average $3M in assets Total bond is $170M Claims by plan A can t reduce coverage for plan B One way to satisfy requirements: get a separate bond for each underlying plan Whither open MEPs Still kickin But more expensive than before Have to adjust marketing and possibly pricing Still value to those who want Third party management Available through third party ERISA 3(16) administrator Economies of scale in buying power Available through group trust But watch securities laws 16

17 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 413(c) arguably violates ERISA s exclusive purpose requirement But getting rid of single plan status for Code purposes could be good Shared employee/kissing cousin contrast Likely one plan under ERISA So one 5500 One audit (if required) One fidelity bond amount 17

18 Typical MEP situations pass/fail PEO Shared employee Kissing cousins Trade association Open MEP State MEP Staffing firm cosponsors plan with clients 2 or more MDs share a suite and some employees Closely related companies but not controlled group/asg; break-up Open to all members of professional group (e.g., AMA) No particular relationship between adopting employers Open to ERs in a state (or all ERs in a certain category); state run Reading room Who s the Employer BenefitsLink Column Journal of Pension Benefits article Who s the Employer (6 th edition) 18