On July 29, 2019, the Department of Labor issued final rules clarifying when an employer group or association, or professional employer organization (“PEO”) may sponsor a defined contribution multiple employer retirement plan (“MEPs”). Although MEPs already exist, the Department issued the regulation to alleviate the uncertainty surrounding the ability of PEOs and associations to sponsor MEPs, including a clarification that having a principal place of business in the same region meets the commonality of interest requirement of a MEP. The Department posits that by participating in a MEP, small businesses will benefit from reduced costs achieved through the economies of scale for administrative costs and investment choices.
In order for a bona fide group or association of employers to establish a MEP (a.k.a Association Retirement Plan) under the Final Rules, the group or association must have at least one substantial business purpose unrelated to offering employee benefits. The group or association must have a formal organizational structure, and its activities must be controlled by the employer members. Each member of the group or association must have one employee who is a participant in the MEP, and participation through the association must not be available other than to employees and former employees of the employer members. The employer members must also have a commonality of interest. In order to meet the commonality of interest criteria, the employer members must be in the same trade, industry, line of business or profession or have a principal place of business in the same region that does not exceed the boundaries of a single state or metropolitan area (even if the metropolitan area includes more than one state). The group or association cannot be owned or controlled by a bank or trust company, insurance issuer, broker-dealer, or similar financial services firm.
Similarly, the Final Rules allow bona fide PEOs to establish a MEP. A PEO is a human-resource company that contractually assumes certain employer responsibilities of its client employers. In order for a PEO to establish a MEP, it must (1) perform substantial employment functions on behalf of its client employers, (2) have substantial control over the functions and activities of the MEP, (3) ensure that each client employer that adopts the MEP is an employer of at least one employee who is a participant in the MEP, and (4) ensure that the MEP is only available to employees and former employees of the PEO and its client employers.
The Final Rules do not permit the creation of defined contribution retirement arrangements that cover employees of employers with no relationship other than their joint participation in the MEP, commonly known as “open MEPs” or “pooled employer plans”. The Department is seeking further comment regarding whether open MEPs should be permitted and, if permitted, under what terms.
The new DOL regulations are likely to garner interest among small employers that are interested in offering an employee retirement plan but have found the associated administrative costs to be prohibitive.
