In the last three weeks, the Department of Labor (DOL) undertook two initiatives that have the potential to improve the efficiency of the retirement system and the retirement security it provides to US workers.
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The first initiative clarifies and liberalizes the conditions for multiple employer retirement plans (MEPs) under the existing provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). MEPs are intended to reduce the burden on and risk to, typically, micro and small businesses that otherwise would not sponsor a retirement plan, and thus to expand the coverage of the private retirement system.
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The second initiative considers auto-portability, a process for retaining savings in retirement form and consolidating a plan participant’s retirement savings across changes in employment or the availability of a retirement plan in the workplace. By providing an automated means for participants to preserve and consolidate their retirement savings in a single account as they change employment, auto-portability is intended to improve the quality and quantity of retirement savings.
The MEP initiative is included in both the President’s August 31, 2018 Executive Order on retirement security and DOL’s most recent Regulatory Agenda for guidance projects, while the auto-portability initiative is not.
Auto-Portability
DOL’s consideration of auto-portability did not take the form of a proposed regulation or other generally applicable authority, but rather consists of of:
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Advisory Opinion 2019-01A (November 5, 2018), which opined on the ERISA fiduciary status of the provider of a specific auto-portability program and of the employers sponsoring the plans participating in the program; and
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A proposed individual prohibited transaction exemption to resolve conflict of interest concerns raised by the structure of that same program, published on November 7.
In a news release, DOL encouraged the submission of other auto-portability proposals for its consideration.
In broad scope, the auto-portability program in question utilized a multi-step process.
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A retirement plan sponsor would choose to participate in the program and engage the program provider. DOL judged this to be a fiduciary determination on the part of the plan sponsor, which must (i) be made in accordance with the ERISA section 404(a) prudence and exclusive benefit standards, (ii) take into account the “reasonable contract” requirements of the ERISA section 408(b)(2) service provider exemption, and (iii) be monitored for ongoing compliance. DOL did not address the conditions under which such determinations could be made; the fair inference is, however, that DOL did not view the program as inherently inconsistent with reaching such determinations.
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In the event of a mandatory distribution from the plan on a participant’s termination of employment or the discontinuance of the plan by the employer, participants would be notified that their balances would be transferred to a default IRA (maintained by an affiliate of the program provider or of a plan recordkeeper that is also participating in the program) absent a different election, in accordance with the ERISA automatic rollover rules.
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Through data exchange programs with plan recordkeepers, the program provider would identify if and when the former participant became covered by a new employer’s plan and, through a 60-day negative consent process, automatically transfer the IRA balance to the new plan if allowed under that plan, unless the participant instructed otherwise. DOL concluded that the program provider, but neither of the plan sponsors, would be acting as an ERISA fiduciary in connection with the transfer of the IRA balance to the new employer’s plan.
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The program provider would receive various fees in connection with its services, including a fee upon transfer from the IRA to the new employer’s plan.
In light of the program provider’s conflicted interest with respect to that determination, and because of the opportunity to reduce leakage from the retirement system, DOL proposed a five-year individual exemption that would allow the program provider to receive the transfer fee, subject to substantial conditions including:
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Advance fee disclosure to and approval by an independent plan fiduciary;
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Specified notices to and consents from plan participants, including an annual statement of fees and expenses;
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An ongoing opportunity for the participant to opt out of the program once the default IRA is established;
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At least monthly queries by the program provider on whether the participant has become covered by a new employer’s plan;
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A prohibition on the receipt of indirect compensation by the program provider other than specified compensation from an unaffiliated default IRA provider, if any;
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A commitment that the program provider will not restrict or limit the ability of unrelated parties to develop similar programs (i.e., the program provider will not assert intellectual property rights over this business method);
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A prohibition on the sale or marketing of the plan or participant data received by the program provider, which it may use only to administer the program; and
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An annual compliance audit by an independent auditor.
Multiple Employer Plans
The MEP initiative is more developed and of general applicability. On October 22, DOL issued a proposed rule to expand access to MEPs in the defined contribution retirement space. The proposal follows on the heels of similar regulations for health care MEPs and seeks to encourage small businesses in particular to offer retirement plans to their employees by joining an MEP sponsored through a group, an association or a Professional Employer Organization (PEO). Under the proposed regulation, the MEP sponsor would be considered to be the employer for purposes of plan sponsorship and would assume the role of plan administrator. The MEP sponsor would be responsible, as plan administrator, for compliance with ERISA’s requirements, including any reporting, disclosure and fiduciary obligations.
ERISA section 3(5) defines the term “employer” to include “any person acting . . . 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.
Under current law, DOL distinguishes employer groups or associations that can act as an ERISA section 3(5) employer in sponsoring a multiple employer plan from those that cannot. To do so, DOL examines whether the group or association has a sufficiently close economic or representational nexus to the employers and employees that participate in the welfare plan that is unrelated to the provision of benefits. If the multiple employer plan does not satisfy DOL’s interpretation, DOL considers the plan to be a collection of separate single employer plans, each sponsored by a participating employer, rather than a single plan.
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By clarifying and liberalizing the connection needed for MEP treatment, the proposed regulation would relieve more individual employers of such obligations when participating in an MEP. Under the proposed rule, the MEP would constitute a single employee benefit plan under Title 1 of ERISA instead of a collection of separate, individual plans.
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The proposal also provides that working owners, such as sole proprietors and other self-employed individuals, may elect to participate in the employer group or association as “employers,” while being treated as “employees” of their businesses for the purposes of participating in the MEP maintained by associations. This rule would not apply in the case of MEPs sponsored by PEOs.
Groups or Associations as Employers
DOL has long taken the position that an MEP may exist where a cognizable group or association of employers, acting in the interest of its employer members, establishes a benefit program for the employees of member employers. DOL expects this group or association to exercise control over the amendment process, plan termination and other similar functions of the participating employers with respect to the plan and any trust established under the program.
In distinguishing between employer groups or associations that can act as an ERISA section 3(5) employer from those that cannot, the DOL inquires whether the group or association has a sufficiently close economic or representational nexus to the employers and employees that participate in the plan. This analysis generally focusses on three broad sets of issues, in particular: (1) whether the group or association is a bona fide organization with business/organizational purposes and functions unrelated to the provision of benefits; (2) whether the employers share some commonality and genuine organizational relationship unrelated to the provision of benefits; and (3) whether the employers that participate in a plan, either directly or indirectly, exercise control over the plan, both in form and substance.
The proposal specifies seven criteria for determining whether a group or association of employers is a “bona fide” group or association or employers. Four of the criteria provide that the group or association must:
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Have a formal organizational structure,
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Be controlled by its employer members,
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Have at least one substantial business purpose unrelated to offering and providing employee benefits to its employer members, and
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Limit plan participation to employees and former employees of employer members.
Two other criteria provide that employer members must have a commonality of interest and that each employer must act directly as an employer of at least one employee participating in the MEP.
Professional Employer Organizations as Employers
The proposed regulation provides PEOs with much needed direction on the factors that must be present for a PEO to qualify as an “employer.” Under the proposal, the PEO must: (1) perform substantial employment functions on behalf of the client employers; (2) exert substantial control over the functions and activities of the MEP, and assume certain statutory roles under ERISA; (3) ensure that each participating client-employee has at least one employee who is a participant covered under the MEP; and (4) ensure that participation in the MEP is limited to current and former employees of the PEO and of client-employers, as well as their beneficiaries.
The proposal further provides nine guiding criteria that, if the PEO were to engage in, would constitute fulfillment of the ambiguous “substantial employment functions” factor:
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Paying wages to the employees without regard to the receipt or adequacy of payment from its client-employers;
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Reporting, withholding and paying any applicable federal employment taxes, without regard to the receipt or adequacy of payment from its client-employers;
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Recruiting, hiring and firing workers in addition to the client-employer’s responsibility for recruiting, hiring and firing workers;
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Establishing employment policies and conditions of employment, and supervising employees in addition to the client-employer’s responsibility to perform these same functions;
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Determining employee compensation, including the method and amount, in addition to the client-employer’s responsibility to determine employee compensation;
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Providing workers’ compensation coverage in satisfaction of applicable state law, without regard to the receipt or adequacy of payment from its client-employers;
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Providing integral human resource functions, such as job description development, background screening, drug testing, employee-handbook preparation, performance review, paid time off tracking, employee grievances or exit interviews, in addition to the client-employer’s responsibility to perform these same functions;
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Maintaining regulatory compliance in the areas of workplace discrimination, family and medical leave, citizenship or immigration status, workplace safety and health, or permanent labor certification program, in addition to the client-employer’s responsibility for regulatory compliance; or
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Continuing to have employee benefit plan obligations to MEP participants after the client-employer no longer contracts with the organization.
Notably, the proposal provides safe harbors for PEOs that meet five or more of these criteria. These criteria tend to establish that the PEO is acting broadly as a surrogate for the employer, as distinguished from the services provided by a plan recordkeeper or third-party administrator, for example. PEOs that have “service contracts” within the meaning of Internal Revenue Code section 7705 may also avail of the safe harbor.
Requests for Comments
The proposal only addresses sponsorship of an MEP by either a group or association of employers or by a PEO. DOL solicited comments on whether there are other types of entities that should be treated as an “employer” within the meaning of ERISA for purposes of sponsoring an MEP. Examples of such entities would include “corporate MEPs” or related employees that are not in the same controlled group or affiliated service group, and “open MEPs” or employers with no other relationship other than their joint participation in the MEP.
Additionally, the proposal calls for comments on whether including working owners in the current proposal could affect the utility of 401(k) plans for working owners, who may prefer those plans because of their ERISA-exempt status or other reasons.
DOL also invited comments on the scope and burdens associated with the proposed regulation, the impact on federal and state law obligations, and the notice and reporting requirements.
Finally, the proposal requests comments on whether there is a need for guidance or clarification on the obligations of the MEP sponsor with respect to investment management, recordkeeping, and allocating plan costs and expenses.
Comments are currently due by December 24, 2018.
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