MEPs: Managing the Complexity to Maintain their Benefit Robert M. Richter, VP, FIS Relius 1
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. 2
What We ll Cover Definitions The mechanics of MEPs Advantages/disadvantages of MEPs Administrative issues and best practices What happens when things go wrong 3
Definitions: What is a MEP? 4
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 5
What s a Plan? Answer varies for Code vs. ERISA We will cover this in detail in later slides 6
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 7
The Mechanics 8
The Code 9
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 10
Multiple Employer Plans 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 11
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) 12
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 13
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 14
Compensation 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 15
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 16
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 17
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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,... 19
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. 20
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 21
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 22
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; 23
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. 24
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 25
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) 26
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 27
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 28
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) 29
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 30
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 31
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 32
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 33
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The Benefits 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 35
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? 36
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 37
The Nuts and Bolts 38
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? 39
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 40
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 41
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 42
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 43
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 44
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? 45
MEPs: Managing the Complexity to Maintain their Benefit Robert M. Richter, VP, FIS Relius 46