Open Multiple Employer Plans: Tax And ERISA Considerations

INTRODUCTION

Sponsors of 401(k) plans (and the company officials charged with the responsibility of managing them) have significant obligations under the Employee Retirement Income Security Act (ERISA).1 Those duties include the prudent selection and monitoring of service providers and the investment options offered to the participants,2 and they have been referred to as the highest duties known to the law.3 Expanding on these obligations, the Department of Labor (DOL) is in the process of finalizing new disclosure regulations that will require 401(k) plan fiduciaries to engage in a heightened level of review of service provider arrangements and to ensure that significantly enhanced disclosures related to investment options, fees and other subjects are being made to the participants.4 While some of these fiduciary duties may be delegated to others, the plan sponsor retains the ultimate responsibility – and potential liability if something goes wrong – for operating the plan in the best interests of the participants.

In light of these expanding regulatory requirements, plus increased 401(k) plan fee and fiduciary litigation, small and mid-sized employers — as well as their advisers — may be looking for options to provide their employees with the benefits of a well-managed 401(k) plan while reducing their administrative burdens and mitigating fiduciary risk. One approach that is gaining wider acceptance among both plan sponsors and their advisers is the "open" multiple employer 401(k) plan – a single plan sponsored by an independent plan sponsor that covers the employees of a number of unrelated employers, with a centralized administrative and fiduciary structure.

The concept of the multiple employer plan (MEP) is clearly established under both the Internal Revenue Code (the Code) and Title I of ERISA. In particular, and for reasons discussed in more detail later, MEPs have been commonly offered for years by Professional Employer Organizations (PEOs), which are employee-leasing organizations, to their employer-clients. MEPs are also commonly sponsored by organizations and associations of employers within certain industries. The distinction between an "Open MEP and any other MEP is that an Open MEP is offered for adoption by any employer, whereas other types of MEPs are generally restricted to employers that are members of a trade or industry association or similar group to which there is a greater degree of exclusivity.

The advantages of MEPs are numerous: As the plan sponsor, the MEP provider files one Form 5500 annually for all adopting employers in the plan; and if an audit of the plan's financial statements is required, it is performed on a plan-wide basis rather than on an employer-by-employer basis. Administrative and fiduciary functions that would otherwise have to be performed by the employers or their own designated service providers can be outsourced to the Open MEP and its designees. They provide employers with significant flexibility in terms of the benefit structure (including determining the amounts of any matching or other employer contributions, vesting, eligibility, etc.) that will apply to their employees, while avoiding the costs of maintaining and updating their own individual plan documents and summary plan descriptions. In sum, the use of a MEP benefits employers by allowing them to minimize their administrative burdens and potential fiduciary liability exposure, and benefits their employees by providing them with access to quality, professional plan services at a manageable cost.

The availability of Open MEPs allows small and midsized employers that are not members of a trade or industry association, which may sponsor its own MEP, to take advantage of all these benefits, both on their own behalf and that of their workers. Even the most diligent employers are often ill-equipped to deal with the regulatory complexities of qualified retirement plans, because they lack the internal resources to execute their fiduciary responsibilities. Others simply may give them a low priority or not understand these responsibilities. In the current regulatory and litigation environment, access to professional investment advisory, recordkeeping and other important plan services is critical and should not be regarded as luxuries that are available to employees of only the largest companies.

The purpose of this White Paper is to explore the legal bases for establishing, and operational requirements that apply to, MEPs (and in particular, Open 401(k) MEPs) under the Code and ERISA, including analysis of the policy considerations for supporting Open 401(k) MEPs as a viable alternative for employers to provide their employees with tax-advantaged retirement benefits. In preparing this White Paper, we have worked with 401k SAFE, which is an Open MEP plan sponsor that serves employers across the country to help them mitigate their liability and compliance burdens of sponsoring a 401(k) plan. By transferring their role as plan sponsor to 401k SAFE, these employers eliminate the need to file a Form 5500 or conduct a plan audit, to administer plan provisions and compliance requirements, including amending the plan document to comply with changes in the law, or to fulfill most fiduciary obligations to which they would otherwise be subject, such as selecting and monitoring investments and evaluating expenses.

EXECUTIVE SUMMARY

A MEP is a single retirement plan covering a number of unaffiliated employers, with centralized administrative and fiduciary structures.

There is a clear legal basis for establishing MEPs under the Code, and in fact, the Code and Treasury Regulations provide special rules for MEPs. For example, in order to satisfy the Code requirement that a qualified plan trust must be maintained for the exclusive benefit of an employer's own employees and their beneficiaries, the Code provides that all MEP participants are treated as the employees of all the participating employers.

In addition, there are special operational rules that apply to MEPs under the Code. For example, some of the Code requirements that generally apply to qualified retirement plans must be applied on a plan-wide basis by MEPs, such that the failure by one employer to maintain the plan in satisfaction of the qualification requirements of the Code will result in disqualification of the plan for all employers maintaining the plan.5 (In light of the IRS correction program for qualified plans, described later, it is unlikely that actions or inactions by one participating employer would cause a MEP to actually be disqualified. Further, it may be possible to draft plan provisions that would significantly ameliorate, if not entirely eliminate, this risk.) Still other requirements are applied on an employer-by-employer basis, such as coverage and nondiscrimination testing of benefits, so that, for each employer, the MEP is subject to the same rules for discrimination against rank-and-file employees as those that apply to individual plans.

Under ERISA, there is likewise a legal basis for establishing and maintaining MEPs generally, as well as Open 401(k) MEPs in particular. And given the advantages that Open 401(k) MEPs can provide – especially to small and mid-sized plan sponsors – it would seem that from a policy perspective there is no reason why the use of Open MEPs should be prohibited or restricted.

ANALYSIS AND DISCUSSION

Open 401(k) MEPs are offered by independent providers for adoption by small and mid-sized employers. The provider is the plan sponsor and is responsible for creating and updating the MEP's governing document, which lays out the general operational provisions of the plan, including those that are required to ensure ongoing compliance with the requirements of the Code and ERISA. The plan document also establishes the identity of the "Plan Administrator"6 and the "Named Fiduciary,"7 which will generally be the plan sponsor/ provider (or, in some cases, the provider's advisory committee). This means that the plan sponsor/ provider, rather than the participating employers, will be responsible for: executing most of the administrative and fiduciary functions required by law or otherwise for the plan's operation, such as providing plan participants with certain disclosures; the appointment of other service providers, such as investment advisors and managers; and the selection and monitoring of the plan's investment alternatives.

Employers adopting an Open MEP will ordinarily execute a participation or joinder agreement that provides for the employer's participation and establishes certain specific provisions, such as the types and amounts of employer contributions (if any), that the participants working for that employer will be entitled to receive. Also, employers in an Open MEP are permitted to select the eligibility and vesting provisions that will apply to their own employees. Because there is no requirement that all employers in an Open MEP provide the same benefits, the individual employers retain much of the flexibility they would enjoy if they were sponsoring their own single-employer plans.

The following sections of this White Paper analyze the structure of Open MEPs, including those with 401(k) features, and how they operate under the Code and ERISA.

MEPs Under the Code

MEPs are described in Code section 413(c) and the Treasury Regulations issued thereunder,8 which also contain a number of special operational requirements that MEPs must satisfy. In order to constitute a MEP, the Treasury Regulations require that only two conditions be met:

The plan is a single plan, and The plan is maintained by more than one employer. As to the first condition, the IRS considers a plan to be a "single plan" 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."9 If a portion of a plan's assets are not available to pay some of...