A FRESH PERSPECTIVE ON MULTIPLE EMPLOYER PLANS ( MEPs )
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1 A FRESH PERSPECTIVE ON MULTIPLE EMPLOYER PLANS ( MEPs ) Chuck Rolph, J.D. Director, Advanced Consulting Group Nationwide Financial Background This white paper provides the reader general information on the subject of multiple employer pension plans ( MEPs ) and does not, and is not intended to, constitute legal advice. The reader is advised to consult his/her own legal counsel to determine the applicability of the subject matter to his/her individual situation. MEPs are unique arrangements under which multiple employers join forces to participate in a single retirement plan that promises such benefits as streamlined administration, consolidated investment opportunities, and reduced fiduciary liability for adopting employers. We will explore the underpinnings of MEPs from an Internal Revenue Code ( Code ) and from an Employee Retirement Income Security Act ( ERISA ) perspective and provide the reader with some useful information in determining whether a MEP would be an appropriate mechanism by which to establish and operate a qualified retirement plan. The information contained herein is current as of November 15, Executive Summary A MEP is a single plan in which multiple employers participate. A MEP is not a single employer plan, a multiemployer plan, or a MEWA. For some purposes under the Code, a MEP has single plan/single employer status and for other purposes it has multiple plan/multiple employer status. Actions by one employer could affect the status of the entire plan. A MEP files a single Form 5500 and has a single plan audit. For an employer to enter this unique segment of the retirement plan market, it is necessary to have a package consisting of: (i) plan and trust documents; (ii) coordinated investments; and (iii) integrated recordkeeping and administration. Because of the requirement that, to qualify as a single plan, all assets must be available to pay all benefits without segregation by employer, MEPs tend to be of the defined benefit (DB) type, though there is nothing to prevent employers from also offering a defined contribution (DC) option, provided the plan assets are maintained on a pooled basis. 1
2 Due to the amount of assets that MEPs accumulate versus those accumulated in a single employer plan, there are typically more institutional share class investment options available (i.e., reduced asset management fees as compared to retail class investments). Generally, there is a tradeoff for each adopting employer in terms of less flexibility in terms of plan design and investment selection versus simplified administration and reduced fiduciary liability. The requirement of individual employer nondiscrimination tests, however, means that there is little advantage to using the multiple employer design for DC only plans. Participating employers usually have some kind of connection that falls short of common ownership ( controlled group status under the Code). One of the advertised benefits of a MEP is reduced fiduciary liability exposure for adopting employers because of the fact that the roles of plan administrator, named fiduciary, and trustee are filled by the sponsoring organization without the need of adopting employers to assume these roles. As with any legal matter, employers interested in becoming an adopting employer of a MEP should first obtain an opinion from their own legal counsel as to what they are really getting into from a liability and responsibility standpoint. Each MEP is a unique creation and generalizations cannot be applied to an adopting employer s potential responsibilities and liability exposure under the arrangement. MEP Defined A multiple employer pension plan ( MEP ) is a single pension plan sponsored by one employer or a sponsoring organization and adopted by other employers that are not considered to be under common control. The instructions to the Form 5500 indicate that a multiple employer plan is a plan that is maintained by more than one employer and that is not a single employer plan or a multiemployer plan. A MEP should be distinguished from other arrangements in which multiple employers join together to participate in some type of employee benefit plan, either pension benefit or welfare benefit. The first of these other arrangements is a multiemployer pension plan (sometimes referred to as a Taft Hartley Plan), which is a collectively bargained, jointly administered pension plan. Under the Taft Hartley Act, employers can contribute to jointly administered labor management trust funds for the sole and exclusive use of employees and their dependents. Characteristics of a multiemployer pension plan include: (i) a jointly administered (equal numbers of labor and management trustees) trust fund; (ii) collective bargaining agreements that require employers that are signatories to those agreements to make contributions to the trust fund; and (iii) fiduciary liability shared by the trustees. A multiemployer plan format can also be used to establish and operate an employee welfare benefit plan. Another common employee benefit arrangement involving multiple employers is a MEWA (multiple employer welfare arrangement). As the name implies, a MEWA s purpose is to join 2
3 multiple employers for the purpose of funding and administering employee welfare benefits, mostly health benefits. MEWAs have unique regulatory and governmental filing requirements that do not apply to MEPs, which are pension plans for purposes of ERISA. Reasons Employers May Choose to Adopt a MEP Providers of MEPs typically give employers who may be looking for an alternative structure by which to establish and operate a qualified retirement plan the following reasons [nonexclusive list] for adopting a MEP, as opposed to establishing their own plan: Potential for decreased fiduciary responsibility and liability due to having professional fiduciaries serving as plan administrator, named fiduciary, and trustee, which are roles typically assumed by the employer and individuals within the employer s organization Ease of adoption by the affected employers Consolidated investment opportunities with a potential to access institutional share class investment options due to the greater amount of plan assets Streamlined administration facilitated, in part, by standardized plan provisions If the plan is truly a single plan of multiple adopting employers, then only one Form 5500 need be filed, and that task is handled by the MEP s organizers and administrators If an employer plan has more than 100 participants, an annual plan audit is required; the MEP administrator provides for this without involving the adopting employers Creation of the MEP MEPs may be created in a variety of ways. Number 1 a Professional Employer Organization ( PEO ) may create a MEP for those employers that contract with the PEO for its payroll, human resources, and benefit plan services. Number 2 a sponsoring organization, such as an association for employers with common characteristics, can establish a prototype arrangement, consisting of a basic plan and trust document with an adoption agreement that employers who belong to the association can adopt. Number 3 an individual employer can take on the responsibility to establish the plan for itself and those similarly situated employers it would allow to join the plan by means of executing an adoption agreement. Number 4 some employers choose to participate in the so called Open MEP arrangement, in which various employers without any business relationship or connection to each other join to participate in the common plan. Typically, a special entity is created to serve as the plan sponsor of the Open MEP. There are certain risks associated with the Open MEP, as will be discussed below. Number 5 employers who perhaps thought that they were part of a controlled group of corporations or businesses under common control (i.e., a controlled group ) may inadvertently create a MEP when it is determined that a controlled group does not, in fact, exist. 3
4 ERISA Requirement Sponsorship of the MEP ERISA mandates that there be an employer employee relationship before there can be an employee pension benefit plan that is subject to ERISA. The Code also requires an employer employee relationship in connection with any qualified retirement plan in order to make sure that there is no violation of the Code s exclusive benefit rule (discussed below), which states that a qualified retirement plan cannot provide benefits to any person who is not a participant (or beneficiary) in the plan by virtue of being an employee of the employer maintaining the plan or otherwise considered to be an employee under the Treasury regulations. ERISA 3(2) defines an employee pension benefit plan as being any plan, fund, or program established or maintained by an employer or employee organization, or both. All MEPs, as employee pension benefit plans, must have a plan sponsor. ERISA 16(B) defines a plan sponsor as: (i) the employer in the case of an employee benefit plan established or maintained by a single employer; (ii) the employee organization in the case of a plan established or maintained by an employee organization; or (iii) in the case of a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan. ERISA 3(5) defines "employer" as 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. ERISA 3(4) states that an "employee organization" means any labor union or any organization of any kind, or any agency or employee representation committee, association, group, or plan, in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning an employee benefit plan, or other matters incidental to employment relationships; or any employees' beneficiary association organized for the purpose in whole or in part, of establishing such a plan. ERISA Impact No Valid Plan Sponsor of the MEP One concern in the structuring of a MEP is that it must be sponsored by an employer or an association of employers acting for an employer in such capacity in order for it to be considered an employee pension benefit plan within the meaning of ERISA 3(2). The DOL considered this question in the context of an employee welfare benefit plan that was sponsored by a trade association, as described in Advisory Opinion ( Adv. Op. ) A, with relevant portions thereof reproduced as follows: Section 3(5) of ERISA defines employer as:... 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. The definitional provisions of ERISA thus recognize that a single employee welfare benefit plan might be 4
5 established or maintained by a cognizable, bona fide group or association of employers, acting in the interests of its employer members to provide benefits for their employees. A determination whether there is a bona fide employer group or association must be made on the basis of all the facts and circumstances involved. Among the factors considered are the following: 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. The Department has expressed the view that where several unrelated employers merely execute identically worded trust agreements or similar documents as a means to fund or provide benefits, in the absence of any genuine organizational relationship between the employers, no employer group or association exists for purposes of ERISA section 3(5). Similarly, where membership in a group or association is open to anyone engaged in a particular trade or profession regardless of their status as employer, and where control of the group or association is not vested solely in employer members, the group or association is not a bona fide group or association of employers for purposes of ERISA section 3(5). See, e.g., Adv. Op (February 13, 1995) and Adv. Op A (March 28, 1988). The DOL repeated its view, in its Advisory Opinion A, that in order to be considered an association of employers for the purpose of sponsoring a plan that constitutes a MEWA that is an employee welfare benefit plan within the meaning of ERISA 3(1), the MEWA must be established by a bona fide group or association of employers to benefit their employees. It went on to state that where several unrelated employers merely execute participation agreements... as a means to fund benefits, in the absence of any genuine organizational relationship between the employers, no employer association can be recognized. According to the DOL, a bona fide group or association of employers requires that a common economic or representation interest or genuine organizational relationship unrelated to the provision of benefits exist. The key portion of the definition of an employee pension benefit plan, as found in ERISA 3(2) is that it be established or maintained by an employer, by an employee organization, or by both. An identical requirement appears in ERISA 3(1), which is the definition of an employee welfare benefit plan. ERISA 3(3) states that an employee benefit plan under ERISA encompasses both pension benefit and welfare benefit plans. Even though the advisory opinions discussed above have as their factual backgrounds employee welfare benefit plans, there is no reason to think that the welfare benefit plan interpretation of the phrase established or maintained by an employer, by an employee organization, or by both 5
6 would differ from the pension benefit plan interpretation of the same phrase. Thus, the principles articulated in the aforementioned advisory opinions should apply to pension benefit plans, as they are encompassed within the MEP context. If the DOL determines, in the facts of a particular case, that there is no MEP because of a lack of a plan sponsor, it means that each employer, in adopting an arrangement it thought to be a MEP is, in reality, the sponsor of its own plan. This becomes problematic if many years have passed since the affected employers initially signed up for the MEP because of the need on the part of each employer to possibly refile Form 5500s, possibly obtain plan audits, potentially establish a new trust and transfer assets, straighten out plan document issues, etc. For this reason, each employer that is considering joining a MEP should first obtain an opinion from its own legal counsel to the effect that the MEP has been properly established with a plan sponsor as a single plan of multiple employers. What is a Single Plan? In order to have status as a MEP, the plan in question must be a single plan of multiple employers. Note that a single plan of multiple employers is different from a single employer plan and from a multiemployer plan. Unless the arrangement in question is a single plan of multiple employers, it will not have status as a MEP. Therefore, any employer who may be considering adopting a MEP must first determine whether it will be adopting a single plan as an adopting employer in a MEP or whether it will merely be establishing its own single employer plan using the documents provided by the MEP s sponsor. We first look to the Code and the Treasury regulations to determine whether a plan is a single plan. Code 413(c) is the governing Code section for multiple employer plans, otherwise known as section 413(c) plans. A plan is a section 413(c) plan if: (i) the plan is a single plan, within the meaning of Code 413(a) and Treas. Reg (a)(2); and (ii) the plan is maintained by more than one employer. Thus, the critical aspect of MEP status for a pension plan is that it be a single plan that is maintained by more than one employer. For purposes of Code 413, a plan is a "single plan" if and only if, on an ongoing basis, all of the plan assets are available to pay benefits to employees who are covered by the plan and their beneficiaries. For purposes of the preceding sentence, all the assets of a plan will not fail to be available to provide all the benefits of a plan merely because the plan is funded in part or in whole with allocated insurance instruments. A plan will not fail to be a single plan merely because of the following: (i) the plan has several distinct benefit structures which apply either to the same or different participants; (ii) the plan has several plan documents; (iii) several employers, whether or not affiliated, contribute to the plan; (iv) the assets of the plan are invested in several trusts or annuity contracts; or (v) separate accounting is maintained for purposes of cost allocation but not for purposes of providing benefits under the plan. However, 6
7 more than one plan will exist if a portion of the plan assets is not available to pay some of the benefits. This will be so even if each plan has the same benefit structure or plan document, or if all or part of the assets are invested in one trust with separate accounting with respect to each plan. [Treas. Reg (l) 1(b)(1)] The instructions to Form 5500 indicate that a separate Form 5500, with line A (single employer plan) checked, must be filed by each employer participating in a plan or program of benefits in which funds attributable to each employer are available to pay benefits only for that employer s employees, even if the plan is maintained by a controlled group. In order to have status as a multiple employer plan, there must be more than one employer contributing to the plan and the contributions of each employer must be pooled and made available to pay benefits to all participants. In order for a MEP organized as a defined contribution plan to have single plan status (i.e., all of the plan assets are available to pay benefits to employees who are covered by the plan), there needs to be a common pool of assets from which all participants choose their investments. Each participating employer cannot have its own separate pool of plan assets that are available only to its own employees. Employers that are contemplating joining a MEP need to be aware of the rule that requires all assets of the MEP to be available to pay all benefits under the plan. If that characteristic is not present in the arrangement the employer is contemplating joining, the affected employer may be establishing is own single employer plan, rather than becoming a participating employer in a MEP. Status of a MEP under the Code Exclusive Benefit Rule. Code 401(a)(2) provides that a trust forming a part of a qualified pension, profit-sharing, or stock bonus plan must be a trust established and maintained by an employer for the exclusive benefit of that employer's employees and their beneficiaries ( exclusive benefit rule ). Therefore, a retirement plan that provides benefits for individuals who are not employees of the employer maintaining the plan (and who are not otherwise treated as employees under rules such as those under 414) violates the exclusive benefit rule and does not satisfy the requirements of 401(a). The exclusive benefit rule is the backdrop for many of the rules that govern the establishment and operation of a MEP. Single Plan/Employer Status Under Code 413(c) for Certain Purposes. Under Code 413(c)(2), in determining whether a MEP complies with the exclusive benefit rule, all employees benefitting under the MEP are treated as the employees of all employers who maintain the plan. Additionally, an employee's service with all of the employers adopting the plan is taken into account for purposes of vesting under Code 411 and plan participation under Code 410(a). See Code 413(c)(1) and (3). Similarly, for purposes of the contribution and benefit limitations of Code 415, an employee's compensation from all employers adopting the plan is taken into account. See Treas. Regs (e)(1). In summary, adopting 7
8 employers of a multiple employer plan are considered to be a single employer and the plan a single plan for the following purposes: Eligibility of employees to participate in the plan. [Code 413(c)(1)] Exclusive benefit rule. [Code 413(c)(2)] Vesting of participants accrued benefit. [Code 413(c)(3)] Even though employers are considered to be a single employer under the MEP rules for purposes of applying the vesting rules, it should be possible to have separate vesting schedules for each adopting employer given that each employer is treated as being its own employer for coverage and nondiscrimination purposes; only service needs to be counted and credited the same as if done on a single employer basis. Funding only for plans established before January 1, [Code 413(c)(4)(B)] Deductions only for plans established before January 1, [Code 413(c)(6)] Multiple Plan/Employer Status under Code 413(c) for Other Purposes. For all other purposes, employers adopting a MEP (unless they are related) are treated as having adopted separate plans. Such purposes include the following: Coverage and Discrimination. Each employer considers only its employees, and not the employees of any other adopting employer in applying the coverage and nondiscrimination requirements, unless any of the employers are related employers. [Treas. Reg (a)(3)] Funding. The minimum funding standards are applied separately, as though each employer maintained its own plan; however, a multiple employer plan established before January 1, 1989, may elect to satisfy minimum funding as if it were a plan maintained by a single employer. [Code 413(c)(4)] Deductions. Each adopting employer computes its deduction for contributions made to the plan as though it maintains its own single employer plan. [Code 413(c)(6)] Top heavy rules. A MEP is subject to the requirements of Code 416, but only with respect to each individual employer. Thus, if twelve employers contribute to a MEP and the accrued benefits for the key employees of one employer exceed 60 percent of the accrued benefits of all employees for such employer, the plan is top heavy with respect to that employer. A failure by the MEP to satisfy 416 with respect to the employees of such employer means that all employers are maintaining a plan that is not a qualified plan. [Treas. Reg , G 2] Limitations on contributions and benefits. For purposes of applying the limitations of Code 415 with respect to a participant in a plan maintained by more than one employer, benefits and contributions attributable to such participant from all of the employers maintaining the plan must be taken into account. Furthermore, in applying the limitations of section 415 with respect to a participant in such a plan, the total compensation received by the participant from all of the employers maintaining the plan is taken into account under the plan, unless the plan specifies otherwise. [Treas. Reg (a) 1(e)] 8
9 401(k) nondiscrimination testing. A MEP is treated as comprising separate plans, each maintained by each separate employer for purposes of apply the coverage and nondiscrimination rules of Code 401(k)(3). Potential Issues with PEO Retirement Plans Revenue Procedure A retirement plan of a PEO may be a single plan of the PEO or it may be a MEP. An employer who contracts with a PEO for the various services that the PEO offers must be aware of what obligations it is or is not undertaking when it signs with the PEO. A PEO is an employee leasing arrangement that typically involves the interaction among three parties: the PEO, the Client Organization ( CO ), and the Worksite Employees (i.e., employees who receive amounts from a PEO for providing services to a CO pursuant to a service agreement between the PEO and the CO). In a typical situation, a PEO enters into an agreement with a CO whereby employees become Worksite Employees and continue to provide services to the CO. Rev. Proc describes a problematic PEO qualified defined contribution retirement plan situation. The central issue for plan qualification purposes in the facts of this revenue procedure is whether a worker is an employee of the PEO or CO. The critical consideration in determining who is the employer of an individual is which entity has the right to direct and control the individual performing the services. If it is found that the CO, not the PEO, is the employer, the plan maintained by a PEO that benefits Worksite Employees of the CO would fail to satisfy the exclusive benefit rule. See Professional and Executive Leasing, Inc. v. Commissioner, 89 T.C. 225 (1987), aff'd, 862 F.2d 751 (9th Cir. 1988). A retirement plan that provides benefits for individuals who are not employees of the employer maintaining the plan (and who are not otherwise treated as employees under rules such as those under Code 414) violates the exclusive benefit rule and does not satisfy the requirements of Code 401(a). Code 414(n) does not permit PEOs to maintain plans for Worksite Employees who are not the common law employees of the PEO. Code 414(n) deals with individuals who are not common law employees of the entity for which they perform services ( recipient ) but who might have to be taken into account in determining whether a retirement plan maintained by the recipient satisfies the requirements of Code 401(a). Notice 84 11, C.B. 469, provides questions and answers relating to Code 414(n). Code 414(n) addresses the relationship between the recipient and the leased workers, but it does not apply to situations in which a worker is the common law employee of the recipient. What all of the foregoing discussion means is that, if in the facts of a given PEO CO situation, the employees are treated as employees of the CO, rather than of the PEO, the retirement plan sponsored by the PEO for employees of the CO will be in violation of the exclusive benefit rule because the participants are not actually employed by the PEO, which is the sponsor of the plan. The IRS gave PEOs who find their retirement plans to be in violation of the exclusive benefit rule the option to convert the PEO Retirement Plan to a multiple employer plan as a means of correcting the violation of the exclusive benefit rule. Some commentators have suggested that this corrective MEP option put forth by the IRS means that the IRS is somehow 9
10 overriding the definition of single plan found in Treas. Reg (l) 1(b)(1), such that a defined contribution MEP that maintains separate accounts for the employees of each adopting employer and restricts funds attributable to each employer to paying benefits only for that employer s employees qualifies as a single plan. In point of fact, Rev. Proc does not address the single plan definition found in Treas. Reg (l) 1(b)(1). Thus, one is left to conclude that the MEP solution propounded by the IRS in its Rev. Proc encompasses the single plan definition and that all of the plan assets in the MEP must be available to pay benefits to employees who are covered by the plan and their beneficiaries without limitation or restriction in order for the MEP to be considered a single plan of multiple adopting employers. Open MEPs In an Open MEP, the various adopting employers are not members of a common professional association, leasing organization, or professional employer organization (PEO). The idea is to form a plan that is open to any employer without having to have an organizational nexus to the other adopting employers. Generally, Open MEPs are sponsored by a financial services firm or third party administrator that offers membership to its clients. The DOL has clarified its position on Open MEPs in Adv. Op A, where the issue was whether the plan in question would be considered a single multiple employer 401(k) profit sharing plan covering the employees of the sponsoring organizations as well as employees of other unrelated employers that adopt the plan. The DOL ruled that the mere execution of identically worded trust agreements or similar documents by unrelated employers as a means to fund or provide benefits for their employees is not a sufficient basis for concluding that the employers have established or maintain a single plan for purposes of ERISA. Participation agreements that label the signatory employers as co sponsors of a plan do not change this conclusion, according to the DOL. The DOL concluded that the plan in question did not constitute a single MEP for purposes of ERISA, but rather that it was an arrangement under which each participating employer established and maintained a separate employee benefit plan for the benefit of its own employees. The significance of the advisory opinion to each employer that enters into an agreement with the sponsor of an Open MEP is that, for purposes of ERISA, such employer will be considered to have adopted its own single employer plan and not a true single plan MEP. As an ERISA advisory opinion, this ruling has no impact on the qualified status of the plan or plan assets under the Code, assuming compliance with all applicable IRS qualification requirements. The practical consequences of adopting and maintaining a separate plan include: (i) each adopting employer's "separate plan" must obtain a fidelity bond in the amount required by ERISA; (ii) each separate plan" would need to file a Form 5500; and (iii) to the extent any "separate plan" has 100 or more participants, it would need to obtain an annual accountant's audit of the plan's 10
11 financial position, as opposed to being able to rely on the audit of the combined plan. If the Open MEP is, after the fact, considered to be a grouping of separate plans maintained by the various adopting employers, other issues may have to be considered, such as the trustee, service provider relationships and contracts, and fiduciary liability concerns. Fiduciary Aspects of MEP Establishment and Operation One of the characteristics of a MEP is that certain fiduciary functions are delegated by the adopting employers to the plan sponsor or one or more fiduciaries appointed by the MEP s named fiduciary. In Adv. Op A, the DOL clarified that a plan s named fiduciaries may be either named in the plan instrument or chosen through a procedure specified in the plan. The advisory opinion points out that a plan sponsor (typically through the board of directors of the sponsor/employer) has the power, pursuant to ERISA 402(b), to delegate limited scope duties to a specialized fiduciary responsible for administration of the plan (an ERISA 3(16) Plan Administrator); one responsible for selecting, monitoring, and (if necessary) replacing the investment options offered in the plan (an ERISA 3(38) Investment Manager); or one responsible for trustee duties defined in the plan (an ERISA 403(a) Plan Trustee). Each adopting employer needs to carefully consider, before adopting the MEP, what fiduciary responsibilities under the particular MEP are delegated and what fiduciary responsibilities are retained by the adopting employer. Annual Return Form 5500 The instructions to Form 5500 make it clear that a MEP includes only those plans in which individual employer contributions are available to pay benefits to all participants; i.e., the single plan definition. Generally, only one annual report must be filed for each such plan and adopting employers need not file individual annual reports. However, in the case of a defined benefit plan, a single Schedule SB (Single Employer Defined Benefit Plan Actuarial Information) is filed. If the funding requirements in the defined benefit MEP are applied to each employer separately, then separate attachments must be filed with the Schedule SB. A separate Schedule R (Retirement Plan Information) is filed for each adopting employer, as part of the Form 5500 package, because each adopting employer performs coverage testing separately. Whether an audit is required is determined by the total number of participants in the plan. If the purported MEP provides that each adopting employer's contributions are only available to pay benefits for the affected employer's employees who are covered by the plan, each such adopting employer is considered a single employer and must file a separate annual report for its plan as a single employer plan, not a MEP. Most so called MEPs fall outside the definitional aspects of Code 413(c) for a MEP (single plan maintained by multiple employers) because no grouping of unrelated employers in a 401(k) plan environment is going to allow the assets being held for its employee participants to be available for payment of another adopting employer s benefit obligations to its employee participants, which is the essence of the single plan. 11
12 Plan Qualification Procedures The IRS will not issue an opinion letter for a prototype or volume submitter document that is used with a MEP. [Rev. Proc , 6.03] Therefore, in order to ensure the qualified status of such a plan, IRS Form 5300 is used to obtain a determination letter from the IRS with respect to the design of a MEP. The application may be made by either the plan sponsor or the plan administrator. [Instructions to Form 5300] A determination letter applicant for a MEP can request either: (i) a letter of determination of qualified status for the plan in the name of the controlling member; or (ii) a letter of determination of qualified status for the plan in the name of the controlling member and a letter of determination of qualified status for each employer maintaining the plan with respect to whom a separate letter of determination of qualified status is filed. An employer maintaining a MEP can rely on a favorable determination letter issued for the plan without having to request its own determination letter except with respect to the requirements of Code 401(a)(4), 401(a)(26), 401(l), 410(b) and 414(s), and, if the employer maintains or has ever maintained another plan, 415 and 416. The Service will mail a determination letter to each employer maintaining the plan for which a separate Form 5300 has been filed. An employer adopting a MEP may continue to rely on a favorable determination letter after another employer commences participation in the plan, regardless of whether the first employer s reliance is based on its own letter or the letter issued for the plan and regardless of whether an application for a determination letter for the new employer is filed. An application for a determination letter that takes into account the addition of such other employer should include a completed Form 5300 for the plan in the name of the controlling member on the Form 5300 that was filed, and a supplemental Form 5300 and optional Schedule Q (and, if applicable, adoption agreement) for each new employer who desires a separate determination letter. The Service will send the determination letter only to the applicant and the new employers. [IRS Rev. Proc , 10] Shadow MEP Design Instead of having a true MEP design that is characterized as a "single plan" wherein, on an ongoing basis, all of the plan assets are available to pay benefits to all employees who are covered by the plan and their beneficiaries, one may be able to achieve the plan design objectives of a MEP with a shadow MEP plan. Such a plan design would look like a MEP with: (i) a prototype plan document consisting of a basic plan document and adoption agreement; (ii) a common investment platform to all adopting employers; and (iii) unified administration and recordkeeping. This arrangement would result in the creation of as many separate plans as there are adopting employers with the attendant determination letter process for each adopting employer s plan. It would also 12
13 mean that each employer s plan would be filing its own annual return (i.e., Form 5500) and would be responsible for its own plan audit (if required). The Employee Retirement Income Security Act of 1974 ( ERISA ) and the federal income tax laws are complex and subject to change. The information in this paper provides the reader general information on the subjects contained herein and does not, and is not intended to, constitute legal advice. It is based on current interpretations of the law and is not guaranteed. Neither Nationwide, nor its employees, its agents, brokers or registered representatives gives legal or tax advice. The reader is advised to consult an attorney or competent tax professional for answers to specific tax and/or legal questions triggered by a reading of this paper as they apply to his or her situation. Nationwide and the Nationwide framemark are registered service marks of Nationwide Mutual Insurance Company. Nationwide Financial Services, Inc. All rights reserved. Nationwide Investment Services Corporation, Columbus, Ohio, member FINRA. PNM-2507AO.2 (11/13) 13
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