[Federal Register Volume 84, Number 147 (Wednesday, July 31, 2019)]
[Rules and Regulations]
[Pages 37508-37544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16074]
[[Page 37507]]
Vol. 84
Wednesday,
No. 147
July 31, 2019
Part IV
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2510
Definition of ``Employer'' Under Section 3(5) of ERISA--Association
Retirement Plans and Other Multiple-Employer Plans and ``Open MEPs''
and Other Issues Under Section 3(5) of the Employee Retirement Income
Security Act; Final Rule and Proposed Rule
Federal Register / Vol. 84 , No. 147 / Wednesday, July 31, 2019 /
Rules and Regulations
[[Page 37508]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2510
RIN 1210-AB88
Definition of ``Employer'' Under Section 3(5) of ERISA--
Association Retirement Plans and Other Multiple-Employer Plans
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Final rule.
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SUMMARY: This document contains a final regulation under title I of the
Employee Retirement Income Security Act (ERISA) that expands access to
affordable quality retirement saving options by clarifying the
circumstances under which an employer group or association or a
professional employer organization (PEO) may sponsor a multiple
employer workplace retirement plan under title I of ERISA (as opposed
to providing an arrangement that constitutes multiple separate
retirement plans). The final regulation does this by clarifying that
employer groups or associations and PEOs can, when satisfying certain
criteria, constitute ``employers'' within the meaning of ERISA for
purposes of establishing or maintaining an individual account
``employee pension benefit plan'' within the meaning of ERISA. As an
``employer,'' a group or association, as well as a PEO, can sponsor a
defined contribution retirement plan for its members (collectively
referred to as ``multiple employer plans'' or ``MEPs'' unless otherwise
specified). Thus, different businesses may join a MEP, either through a
group or association or through a PEO. The final regulation also
permits certain working owners without employees to participate in a
MEP sponsored by an employer group or association. The final rule
primarily affects groups or associations of employers, PEOs, plan
participants, and plan beneficiaries. It does not affect whether
groups, associations, or PEOs assume joint-employment relationships
with member-employers or client employers. But it may affect banks,
insurance companies, securities broker-dealers, record keepers, and
other commercial enterprises that provide retirement-plan products and
services to ERISA plans and plan sponsors.
DATES: This final regulation is effective on September 30, 2019.
FOR FURTHER INFORMATION CONTACT: Mara S. Blumenthal or Frances P.
Steen, Office of Regulations and Interpretations, Employee Benefits
Security Administration, (202) 693-8500. This is not a toll-free
number.
SUPPLEMENTARY INFORMATION:
A. Background
1. Need To Expand Access to Workplace Retirement Plans
Expanding access to workplace retirement plans is critical to
helping more American workers financially prepare to retire.
Approximately 38 million private-sector employees in the United States
do not have access to a retirement plan through their employers.\1\
According to the U.S. Bureau of Labor Statistics, 23 percent of all
private-sector, full-time workers have no access to a workplace
retirement plan.\2\ The percentage of private-sector workers without
access to a workplace retirement plan increases to 32 percent when
part-time workers are included.\3\
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\1\ This number was estimated by the U.S. Department of Labor's
Employee Benefits Security Administration using statistics from the
U.S. Bureau of Labor Statistics, National Compensation Survey:
Employee Benefits in the United States, March 2018 (https://www.bls.gov/ncs/ebs/benefits/2018/employee-benefits-in-the-united-states-march-2018.pdf). According to Table 2 (entitled Retirement
Benefits: Access, Participation and Take-up rates, Private Industry
Workers) of this survey, approximately 68% of private-sector
industry workers have access to retirement benefits through their
employers in 2018. According to Appendix Table 2, the survey
represents approximately 118.1 million workers in 2018. Thus, the
number of private industry workers without access to retirement
plans through their employers is estimated to be approximately 38
million ((100%-68%) x 118.1 million).
\2\ U.S. Bureau of Labor Statistics, National Compensation
Survey: Employee Benefits in the United States, March 2018 at Table
2 (entitled Retirement Benefits: Access, Participation and Take-up
rates, Private Industry Workers). The survey is available at
(www.bls.gov/ncs/ebs/benefits/2018/employee-benefits-in-the-unitedstates-march-2018.pdf).
\3\ Id.
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Small businesses are less likely to offer retirement benefits. In
2018, approximately 85 percent of workers at private-sector
establishments with 100 or more workers were offered a retirement plan.
In contrast, only 53 percent of workers at private-sector
establishments with fewer than 100 workers had access to such plans.\4\
Contingent or temporary workers are less likely to have access to a
workplace retirement plan than those who are traditionally employed.\5\
Access to an employment-based retirement plan is critical to the
financial security of aging workers. Among workers who do not have
access to a workplace retirement plan, only about 13 percent regularly
contribute to individual retirement accounts, commonly called IRAs.\6\
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\4\ Id.
\5\ See U.S. Bureau of Labor Statistics, Contingent and
Alternative Employment Arrangements--May 2017. See also Copeland,
Employee Benefit Research Institute, Employment-Based Retirement
Plan Participation: Geographic Differences and Trends, 2013,
(October 2014); U.S. Government Accountability Office, Contingent
Workforce: Size, Characteristics, Earnings, and Benefits, April 20,
2015; U.S. Gov't Accountability Office, GAO-15- 566, RETIREMENT
SECURITY--Federal Action Could Help State Efforts to Expand Private
Sector Coverage (Sept. 2015) (www.gao.gov/assets/680/672419.pdf)
\6\ The Department calculated this using Survey of Income and
Program Participation 2008 Panel Data Waves 10 and 11.
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Cost and regulatory complexity discourage employers--especially
small businesses--from offering workplace retirement plans for their
employees. Establishing and maintaining a plan can be expensive for
small businesses. A survey by the Pew Charitable Trusts found that only
53 percent of small-to mid-sized businesses offer a retirement plan; 37
percent of those not offering a plan cited cost as a reason.\7\
Employers often cite annual reporting costs and exposure to potential
fiduciary liability as major impediments to plan sponsorship. \8\
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\7\ The Pew Charitable Trusts, Employer Barriers to and
Motivations for Offering Retirement Benefits, (June 2017) (http://www.pewtrusts.org/-/media/assets/2017/09/employerbarrierstoandmotivations.pdf) (``Most commonly, employers
without plans said that starting a retirement plan is too expensive
to set up (37 percent). Another 22 percent cited a lack of
administrative resources. In focus groups, some business
representatives said their mix of workers--especially if they
included low-wage or short-term employees--translated into limited
employee interest in or demand for retirement benefits. But in the
survey, only 17 percent cited lack of employee interest as the main
reason they did not offer a plan.'').
\8\ Two other types of pension arrangements share features of
MEPs, but are not the focus of this rule. First, a ``multiemployer
plan'' as defined in ERISA section 3(37) is a plan to which more
than one employer is required to contribute and which is maintained
pursuant to one or more collective bargaining agreements between one
or more employee organizations and more than one employer. Second,
Pre-Approved Retirement Plans, are plans that providers, such as
financial institutions, make available for adoption by employers and
that have been pre-approved by the IRS. See Rev. Proc. 2017-41,
2017-29 IRB 92. A plan that uses a Pre-Approved Plan document may
either be a single-employer plan or a MEP. With respect to single-
employer Pre-Approved Plans, providers often offer centralized
administration services and pool the assets of different plans into
a central investment fund, such as an IRS Rev. Rul. 81-100 group
trust.
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Although there are ways to save for retirement outside of the
workplace, none are as advantageous to workers as employment-based
plans. IRAs, for example, are not comparable to workplace retirement
savings options. As compared to IRAs, ERISA-covered retirement plans
offer private sector workers: (1) Higher contribution limits; (2)
generally lower investment
[[Page 37509]]
management fees as the size of plan assets increases; (3) a well-
established uniform regulatory structure with important consumer
protections, including fiduciary obligations, recordkeeping and
disclosure requirements, legal accountability provisions, and spousal
protections; (4) automatic enrollment; and (5) stronger protections
from creditors. At the same time, workplace retirement plans enhance
employers' ability to choose among a wide variety of plan features and
the flexibility to tailor retirement plans to meet their business and
employment needs.
Although many MEPs already exist, past sub-regulatory guidance
issued by the Department and uncertainty about the ability of PEOs and
associations to sponsor MEPs as ``employers'' may have hindered the
creation of MEPs. As the Department also learned through its
``association health plan'' rulemaking process (AHP Rule), described in
section 3 of this preamble, many employer groups and associations are
interested in offering employee benefits to their members, but view the
Department's prior interpretive guidance as too restrictive, creating
an undue impediment to greater sponsorship of retirement plans.
Likewise, we understand that an active PEO industry already exists \9\
and that its members, much like employer groups and associations, offer
or would like to offer MEPs to their clients. At least some PEOs may be
discouraged from doing so by a lack of clear standards, to the
detriment of employers, especially small employers.
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\9\ The IRS has already recognized that a PEO may offer a MEP
for its clients under the Code. See IRS Rev. Proc. 2002-21
(describing steps that may be taken to ensure the qualified status
of defined contribution multiple employer plans maintained by PEOs).
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2. Legislative Activity
In recent years, members of Congress have also sought to promote
MEPs through legislation, including recent legislative proposals that
address so-called ``open MEPs,'' which are plans that cover employees
of employers with no relationship other than their joint participation
in the MEP. Since the publication of the proposal and the beginning of
the 116th Congress, seven bills dealing with this topic have been
introduced, including H.R. 1994, the ``Setting Every Community Up for
Retirement and Enhancement Act of 2019,'' commonly known as the
``SECURE Act,'' which was passed overwhelmingly by the House of
Representatives on May 23, 2019 by a vote of 417-3.\10\ The SECURE Act,
in relevant part, makes comprehensive changes to ERISA and the Code to
facilitate open MEPs. The final rule differs in significant ways from
the legislative proposals introduced in Congress. In particular, this
rule is significantly more limited in scope because it relies solely on
the Department's authority to promulgate regulations administering
title I of ERISA. Unlike the Department, Congress has authority to make
statutory changes to ERISA and other areas of law that govern
retirement savings, such as the Code.
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\10\ The SECURE Act had originally been introduced on March 22,
2019 on a bipartisan basis by House Ways and Means Chairman Richard
Neal (D-MA), Ranking Member Kevin Brady (R-TX), Rep. Mike Kelly (R-
PA) and Rep. Ron Kind (D-WI). The SECURE Act contains the MEP
provisions found in S. 972/H.R. 1007, the ``Retirement and
Enhancement Savings Act of 2019'' or ``RESA,'' introduced by Senate
Finance Committee Chair Charles Grassley (R-IA) and Ranking Member
Sen. Ron Wyden (D-OR) on April 1, 2019 and Rep. Ron Kind (D-WI) and
38 cosponsors on February 6, 2019, respectively, and H.R. 1084, the
``Family Savings Act,'' introduced in February 7, 2019 by Rep. Mike
Kelly (R-PA) and 9 cosponsors. The other three MEP bills introduced
in the 116th Congress are H.R. 198, the ``Retirement Security for
American Workers Act,'' introduced by Reps. Vern Buchanan (R-FL) and
Ron Kind (D-WI) on March 27, 2019; S. 1101, the ``Small Business
Employees Retirement Enhancement Act, introduced by Sens. Tom Cotton
(R-AR), Todd Young (R-IN), and Doug Jones (D-AL) on April 3, 2019;
and S. 321, the ``Retirement Security Act of 2019, introduced by
Sens. Susan Collins (R-ME) and Maggie Hassan (D-NH) on February 4,
2019. In the 115th Congress, there were eight bills introduced
containing MEP provisions.
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3. Association Health Plan Rule
As mentioned above, the Department recently promulgated a similar
rule to expand access to more affordable, quality healthcare by
enhancing the ability of employers to band together to provide health
benefits through a single ERISA-covered plan, called an ``association
health plan.'' That regulation, the AHP Rule, issued on June 21, 2018,
explains how employers acting together to provide such health benefits
may meet the definition of the term ``employer'' in ERISA section
3(5).\11\ The AHP Rule sets forth several criteria under which groups
or associations of employers may establish an ERISA-covered multiple
employer group health plan. Several commenters on the AHP proposed rule
encouraged the Department to bring MEPs within the scope of that rule
or a new rule. In the AHP Rule, the Department said it would consider
those comments in the retirement plan context.\12\
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\11\ 83 FR 28912 (June 21, 2018). In State of New York v. United
States Department of Labor, 363 F. Supp. 3d 109 (D.D.C. March 28,
2019), the District Court vacated portions of the Department's final
rule on AHPs. The Department disagrees with the District Court's
ruling and an appeal has been filed.
\12\ Id. at 28964, n.10.
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4. Executive Order 13847
On August 31, 2018, President Trump issued Executive Order 13847,
``Strengthening Retirement Security in America,'' (Executive Order),
which states that ``[i]t shall be the policy of the Federal Government
to expand access to workplace retirement plans for American workers.''
The Executive Order directed the Secretary of Labor to examine policies
that would: (1) Clarify and expand the circumstances under which U.S.
employers, especially small and mid-sized businesses, may sponsor or
adopt a MEP as a workplace retirement savings option for their
employees, subject to appropriate safeguards; and (2) increase
retirement security for part-time workers, sole proprietors, working
owners, and other entrepreneurial workers with nontraditional employer-
employee relationships by expanding their access to workplace
retirement savings plans, including MEPs. The Executive Order further
directed, to the extent consistent with applicable law and the policy
of the Executive Order, that the Department consider within 180 days of
the date of the Executive Order whether to issue a notice of proposed
rulemaking, other guidance, or both, that would clarify when a group or
association of employers or other appropriate business or organization
could be an ``employer'' within the meaning of ERISA section 3(5).
The Department has authority to interpret the statutes it
administers, and it believes that it is appropriate to clarify how the
statutory definition of ``employer,'' 29 U.S.C. 1002(5), should apply
to certain MEPs under title I of ERISA. For several reasons, the
Department has chosen to retain nearly the same criteria for these MEPs
that it proposed. The Department is not opining, however, on whether
other types of MEPs with different or less-stringent criteria, or
different ``employers,'' may also qualify under title I. The Department
had previously issued subregulatory guidance interpreting this section
3(5) of ERISA that took a narrow view of the circumstances under which
a group or association of employers could band together to act ``in the
interest of'' employer members in relation to the offering of
retirement savings plans. By clarifying its interpretation of the
statutory language, the Department expects to improve access to
employer-
[[Page 37510]]
sponsored retirement savings plans in America.
The Department, therefore, is publishing this final rule
interpreting the term ``employer'' for purposes of ERISA section 3(5).
This rule facilitates the adoption and administration of MEPs and
thereby expands access to workplace retirement plans, especially for
employees of small and mid-size employers and for certain self-employed
individuals. This final rule supersedes any preexisting subregulatory
interpretive rulings under ERISA section 3(5) pertaining to bona fide
groups or associations of employers and, at the same time, establishes
more flexible standards and criteria for sponsorship of MEPs than
currently articulated in that prior guidance. The final rule does not
affect existing auto-enrollment options and other features that make
defined contribution plans attractive for employers. The final rule
also has no superseding effect on Interpretive Bulletin 2015-02, as
further explained below in the ``Miscellaneous'' section of this
preamble.
5. Notice of Proposed Rulemaking
On October 23, 2018, the Department published a proposed regulation
(``Proposed Rule'') to clarify certain circumstances under which an
employer group or association or a PEO may sponsor a MEP. More
specifically, the Proposed Rule clarified that employer groups or
associations and PEOs can, when satisfying certain criteria, constitute
``employers'' within the meaning of section 3(5) of ERISA for purposes
of establishing or maintaining an ``employee pension benefit plan''
within the meaning of ERISA section 3(2). Under the terms of the
Proposed Rule, a group or association, as well as a PEO, could sponsor
a MEP as an ``employer.'' The Proposed Rule permitted different
businesses to join a MEP, either through a group or association or
through a PEO. The Proposed Rule also permitted certain working owners
without employees to participate in a MEP sponsored by a group or
association.
The Proposed Rule identified the potential advantages of scale
offered by MEPs. MEPs have the potential to broaden the availability of
workplace retirement plans, especially among small employers, because
they enable different businesses to band together and adopt a single
retirement plan. Pooling resources in this way can reduce costs and
encourage plan formation. For example, investment companies often
charge lower fund fees for plans with greater asset accumulations. And
because MEPs facilitate the pooling of plan participants and assets in
one large plan, rather than many small plans, they enable small
businesses to give their employees access to the same low-cost funds as
large employers offer.
The Proposed Rule also identified other potential advantages of
MEPs. For a small business, in particular, a MEP may present an
attractive alternative to taking on the responsibilities of sponsoring
or administering its own plan. The MEP structure can reduce the
employer's cost of sponsoring a benefit plan and effectively transfer
substantial legal risk to professional fiduciaries responsible for the
management of the plan. Although employers retain fiduciary
responsibility for choosing and monitoring the arrangement and
forwarding required contributions to the MEP, the employer can keep
more of its day-to-day focus on managing its business, rather than the
MEP.
Under the Proposed Rule, participating employers were generally
required to execute a participation agreement or similar instrument
that lays out the rights and obligations of the MEP sponsor and the
participating employer before participating. But these participating
employers were not viewed as sponsoring their own separate, individual
plans under ERISA. Rather, the MEP, if it met the conditions of the
Proposed Rule, constituted a single employee benefit plan for purposes
of title I of ERISA. Consequently, the MEP sponsor--and not the
individual participating employers--generally was responsible, as plan
administrator, for compliance with the requirements of title I of
ERISA, including reporting, disclosure, and fiduciary obligations. This
is so because the individual employers would not each have had to act
as plan administrators under ERISA section 3(16) or as named
fiduciaries under section 402 of ERISA.
The Proposed Rule provided that an employer group or association or
PEO could act as the ``employer'' sponsoring the plan within the
meaning of section 3(5) of ERISA. This means that, typically, the
employer group or association or PEO would act as a plan administrator
and named fiduciary and, thus, would assume most fiduciary
responsibilities. A MEP under the Proposed Rule is subject to all of
the ERISA provisions applicable to defined contribution retirement
plans, including the fiduciary responsibility and prohibited
transaction provisions in title I of ERISA. As a plan that is
maintained by more than one employer, a MEP also has to satisfy the
requirements of section 210(a) of ERISA.
6. Legal Background
a. Statutory Definitions
ERISA section 4 governs the reach of ERISA and, accordingly, of the
Department's authority over benefit plans. ERISA applies not to every
benefit plan but, as relevant here, to an ``employee benefit plan''
sponsored ``by any employer.'' ERISA section 4(a)(1); 29 U.S.C.
1003(a)(1).\13\ The provision reads in relevant part: ERISA ``shall
apply to any employee benefit plan if it is established or maintained
by any employer engaged in commerce or in any industry or activity
affecting commerce . . . .'' ERISA defines ``employee pension benefit
plan'' to include ``any plan, fund, or program . . . established or
maintained by an employer . . . to the extent that by its express terms
or as a result of surrounding circumstances'' it provides retirement
income to employees or the deferral of income to the termination of
employment or beyond. Thus, the term ``employer'' is essential to a
benefit arrangement's status as an ``employee pension benefit plan''
within the meaning of ERISA. A prerequisite for ERISA coverage is that
the retirement plan must be established or maintained by an
``employer.''
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\13\ ERISA also covers benefit plans established or maintained
by employee organizations and such plans established or maintained
by both employers and employee organizations.
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ERISA section 3(5) defines the term ``employer.'' ERISA section
3(5); 29 U.S.C. 1002(5). ERISA's definitional provision, in relevant
part, states that 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.''
When Congress enacted ERISA in 1974, it carried forward this important
definition from the 1958 Welfare and Pension Plans Disclosure Act.
Public Law 85-836, section 3(a)(4), 72 Stat. 997, 998 (1958).
But ERISA does not explain what it means for an entity to act
``directly as an employer'' or ``indirectly in the interest of an
employer, in relation to an employee benefit plan.'' Nor does the
statute explain what is meant by a ``group or association of
employers.'' In short, these ambiguous statutory terms are not
themselves defined. As one court has recognized, the ``problem lies,
obviously enough, in determining what is meant by these oblique
definitions of employer.'' Meredith v. Time Ins. Co., 980 F.2d 352, 356
(5th Cir. 1993). The statutory lacunae have proven
[[Page 37511]]
problematic for some courts. They ``have found the phrase `act . . .
indirectly in the interest of an employer' difficult to interpret.''
See Mass. Laborers' Health & Welfare Fund v. Starrett Paving Corp., 845
F.2d 23, 24 (1st Cir. 1988); accord Greenblatt v. Delta Plumbing &
Heating Corp., 68 F.3d 561, 575 (2d Cir. 1995) (collecting cases). Also
ambiguous is the statutory term ``group or association of employers.''
Because ERISA ``does not define th[at] term,'' this ``void injects
ambiguity into the statute.'' MD Physicians & Assocs. v. State Bd. of
Ind., 957 F.2d 178, 184 (5th Cir. 1992). Although ERISA contains a
definition of ``employer,'' the important terms used within that
definition are unexplained.
In light of all this, and consistent with longstanding principles
of administrative law, the Department is well-positioned to address
this statutory ambiguity by exercising its rulemaking authority, see 29
U.S.C. 1135, to explicate some of the terms used in section 3(5). In
doing so, the Department is aided both by the common understanding of
the broad terms used in ERISA section 3(5) and by the statutory
context.
b. Bona Fide Groups or Associations
The Department has long taken the position in subregulatory
guidance that, even in the absence of the involvement of an employee
organization, a single ``multiple employer plan'' under ERISA 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. To satisfy these criteria, the group or
association must exercise control over the amendment process, plan
termination, and other similar functions of the plan on behalf of the
participating-employer members with respect to the plan and any trust
established under the program.\14\ DOL guidance generally refers to
these entities--i.e., entities that qualify as groups or associations,
within the meaning of section 3(5)--as ``bona fide'' employer groups or
associations.\15\ For each employer that adopts for its employees a
program of pension or welfare benefits sponsored by an employer group
or association that is not ``bona fide,'' such employer establishes its
own separate employee benefit plan covered by ERISA.\16\ Largely, but
not exclusively, in the context of welfare-benefit plans, the
Department has previously distinguished employer groups or associations
that can act as ERISA section 3(5) employers in sponsoring multiple
employer plans from those that cannot. To do so, the Department has
asked whether the group or association has a sufficiently close
economic or representational nexus to the employers and employees that
participate in the plan that is unrelated to the provision of
benefits.\17\
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\14\ See 83 FR at 28912, 28920.
\15\ See, e.g., Advisory Opinions 2008-07A, 2003-17A, and 2001-
04A.
\16\ See 83 FR 28912, 13 (citing Advisory Opinion 96-25A).
\17\ See 83 FR 28912; see also Advisory Opinions 2012-04A,
1983-21A, 1983-15A, and 1981-44A.
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DOL advisory opinions and court decisions have long applied a
facts-and-circumstances approach to determine whether there is a
sufficient common economic or representational interest or genuine
organizational relationship for there to be a bona fide employer group
or association capable of sponsoring an ERISA plan on behalf of its
employer members. This analysis has focused 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. This approach has ensured
that the Department's regulation of employee benefit plans is focused
on employment-based arrangements, as contemplated by ERISA's text.
c. Professional Employer Organizations
According to the IRS, the term ``PEO'' generally refers to an
organization that ``enters into an agreement with a client to perform
some or all of the federal employment tax withholding, reporting, and
payment functions related to workers performing services for the
client.'' \18\ The provisions of a PEO arrangement typically state that
the PEO assumes certain employment responsibilities that the client-
employer would otherwise fulfill with respect to employees. Under the
terms of a typical PEO client contract, the PEO assumes responsibility
for paying the employees and for related employment tax compliance, and
has attendant contractual responsibilities and obligations, without
regard to payment from the client employer to the PEO. A PEO also may
manage human resources, employee benefits, workers-compensation claims,
and unemployment-insurance claims for the client employer. The client
employer typically pays the PEO a fee based on payroll costs plus an
additional amount.\19\ According to a representative of the PEO
industry, the PEO assumes specific employer rights, responsibilities,
and risks through the establishment and maintenance of a relationship
with the workers of the client, including in some cases to reserve a
right of direction and control of the employees with respect to
particular matters.
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\18\ Certified Professional Employer Organizations, 81 FR 27315
(May 6, 2016).
\19\ Foster, Michael D., Certified Professional Employer
Organizations (July 7, 2016) https://www.jacksonkelly.com/tax-monitor-blog/certified-professional-employer-organizations.
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(i) Current Primary Legal Authority
Although many PEOs administer plans for their client employers
today, there is little direct authority on precisely what it means for
a PEO or other entity to act ``indirectly in the interest'' of its
client employers in relation to an employee benefit plan for purposes
of ERISA section 3(5). Whether a PEO is an ``employer'' under section
3(5) depends on the ``indirectly in the interest of an employer''
provision, not the ``employer group or association'' provision. And
neither existing subregulatory guidance nor judicial authority has
articulated a specific test to determine when a PEO is sufficiently
tied to its client-employer to be said to be acting ``indirectly in the
interest of an employer, in relation to an employee benefit plan,''
within the meaning of section 3(5).\20\ The different statutory text
and the differences in the nature of the employer relationships merit a
different regulatory approach to PEOs than to employer groups or
associations.
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\20\ The lack of a specific and clear test leads to different
outcomes. Compare Yearous v. Pacificare of California, 554 F. Supp.
2d 1132 (S.D. Cal. 2007) (applying factors in Nationwide Mut. Ins.
Co. v Darden, 503 U.S. 318 (1992), court concluded that PEO is
direct employer of owner of company for purposes of sponsoring an
ERISA covered healthcare plan covering the owner and his
beneficiaries) with Texas v. Alliance Employee Leasing Co., 797 F.
Supp. 542 (N.D. Tex. 1992) (finding leasing company did not act
directly or indirectly as employer under ERISA).
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(ii) Current Secondary Legal Authority
Some federal statutes treat a PEO as an ``employer'' for certain
limited purposes in other circumstances. For instance, regulations
issued pursuant to the Family and Medical Leave Act of 1993 (FMLA)
specifically recognize that a PEO may, under certain circumstances,
enter into a relationship
[[Page 37512]]
with the employees of its client companies such that it is considered a
``joint employer'' for purposes of determining FMLA coverage and
eligibility, enforcing the FMLA's anti-retaliation provisions, and in
limited situations, providing job restoration.\21\ In the main,
however, the FMLA regulations clarify that a ``PEO does not enter into
a joint employment relationship with the employees of its client
companies when it merely performs . . . administrative functions,''
such as ``payroll benefits, regulatory paperwork, and updating
employment policies.'' 29 CFR 825.106(b)(2). The regulation makes clear
that PEOs do not become joint employers simply by virtue of providing
such services to client-employers.
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\21\ 29 CFR 825.106(b)(2), (e).
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Furthermore, the Tax Increase Prevention Act of 2014, Public Law
113-295 (Dec. 19, 2014) required the IRS to establish a voluntary
certification program for such PEOs (CPEO Program) as discussed in more
detail below. The CPEO Program certifies PEOs that meet certain
requirements within the Code and provides a level of assurance to
small-business owners that rely on such a Certified Professional
Employer Organization (CPEO) to handle their employment-tax issues.
CPEOs are treated as employers under the Code for employment tax
purposes with regard to remuneration paid to their customers' employees
under CPEO service contracts. Pursuant to its certification as a CPEO,
a CPEO is solely liable for the employment tax withholding, payment,
and reporting obligations with respect to remuneration it pays to work
site employees (as defined in IRC 7705(e)).'' \22\
---------------------------------------------------------------------------
\22\ See IRC section 3511(a)(1).
---------------------------------------------------------------------------
B. Overview of the Final Rule and Discussion of Public Comments
1. In General
The Department believes that providing additional opportunities for
employers to join MEPs as a way to offer workplace retirement savings
plans to their employees could, under the conditions in the final rule,
offer many small businesses more affordable and less burdensome
retirement savings plan alternatives than are currently available. MEPs
provide another avenue for those employers that are reluctant to
shoulder such burdens. In addition, the final rule will level the
playing field for small-business employees by permitting them to have
access to the lowest-cost funds, often reserved for employees in large-
asset plans. Accordingly, the Department is confident that the final
rule will prompt some small businesses that do not currently offer
workplace retirement benefits to offer such benefits. This will
increase the number of employees enrolled in workplace retirement
plans, thereby offering some of America's workers better retirement
savings opportunities and greater retirement security.
Paragraph (a) defines the scope of the final rule. This paragraph
provides that bona fide employer groups or associations and bona fide
PEOs may act as ``employer[s]'' under ERISA section 3(5) for purposes
of sponsoring a MEP. This interpretation is based upon the Department's
conclusion that such bona fide employer groups, associations, or PEOs
can act ``in the interest of '' their employer members in relation to a
retirement savings plan.
Although the term ``multiple employer plan'' can refer to a variety
of different kinds of employee-benefit arrangements, this final rule
addresses only two kinds of arrangements: Sponsorship of a MEP by
either a group or association of employers, or by a PEO. The final rule
is also limited to defined contribution plans, as defined in section
3(34) of ERISA. The final rule does not cover welfare benefit plans or
other types of pension plans.
Some commenters recommended expanding the scope of the Proposed
Rule so that the final rule would cover other employee benefit plans.
These commenters mentioned life, disability, and defined benefit
pension plans in particular. At the same time, however, other
commenters recommended that this rulemaking project remain limited to
defined contribution plans. These commenters stated that different
issues might arise under different employee benefit plan structures and
different benefit options. These commenters preferred that the
Department continue a discussion with interested parties on whether and
how to implement a future regulatory expansion to cover these other
employee benefit plans. After thoughtful review of these comments,
however, the final rule is limited to defined contribution plans
because the Department believes that consideration and development of
any proposal covering other types of pension and welfare benefit plans
or other persons or organizations as plan sponsors would benefit from
public comments and additional consideration by the Department.
2. Open MEPs and Request for Information
The Proposed Rule solicited comments on so-called ``open MEPs'' or
``pooled employer plans,'' which generally are defined contribution
retirement arrangements that cover employees of employers with no
relationship other than their joint participation in the MEP. The
Proposed Rule specifically requested comments on whether, and under
what circumstances, these arrangements should and could be operated as
ERISA-covered plans. The solicitation asked commenters who believe that
these arrangements should be addressed in this or a future rulemaking
to include a discussion of why such an arrangement should be treated as
one employee benefit plan within the meaning of title I of ERISA rather
than as a collection of separate employer plans being serviced by a
commercial enterprise that provides retirement plan products and
services. Such commenters also were encouraged to provide suggestions
regarding the regulatory conditions that should apply to these
particular arrangements.
Nearly half of the comments received addressed this issue, and the
majority were supportive of the Department promulgating a rule that
would facilitate these arrangements. Nonetheless, commenters had very
different ideas on how the Proposed Rule might best be amended to
facilitate open MEPs. Some commenters, for example, recommended
eliminating some or all of the substantial business purpose, control,
and commonality requirements from the Proposed Rule's bona fide group
or association provisions, and the provision that prohibits financial
services firms from being the group or association that establishes the
MEP. Other commenters, however, recommended modifications to, and an
expansion of, the Proposed Rule's bona fide PEO provisions. These
commenters argued that the bona fide PEO framework, with appropriate
modifications, could be expanded beyond the narrow scope of PEOs to
include commercial enterprises more generally. To these commenters, a
commercial entity's willingness to exert substantial control over the
functions and activities of the MEP, as the plan sponsor, plan
administrator, and as a named fiduciary provides a sufficient basis to
conclude that such an entity is acting ``indirectly in the interest of
an employer . . . in relation to an employee benefit plan'' for
purposes of section 3(5) of ERISA, without regard to whether the entity
is a PEO.
Not all commenters, however, supported the idea of open MEPs. A
number of commenters believed commercial entities and financial
services firms should be precluded from
[[Page 37513]]
sponsoring MEPs as an ``employer'' under section 3(5) of ERISA. A few
commenters viewed the matter as being better suited for legislation,
given the wide range of issues presented under ERISA and the Code.
After reviewing the comments, the Department is persuaded that open
MEPs deserve further consideration. The Department, however, does not
believe that it has acquired a sufficient public record on, or a
sufficiently thorough understanding of, the complete range of issues
presented by the topic. In light of the conflict in the comments about
whether and how to permit open MEPs, as well as legislation pending in
the 116th Congress, the Department has decided to solicit comments on a
broad range of issues relating to open MEPs in a Request for
Information (RFI) published elsewhere today in the Federal Register for
possible future rulemaking and to defer rulemaking on open MEPs until
after a fuller public record is developed. Because of its interest,
however, in expanding opportunities for small businesses and working
owners to participate in MEPs as soon as possible, the Department is
publishing this final rule today, which is limited to bona fide groups
or associations and bona fide PEOs that may act as employers that
establish and maintain MEPs.
3. Bona Fide Groups or Associations of Employers
Paragraph (b) of the final rule contains the provisions defining
what is a bona fide group or association of employers capable of
establishing a MEP. \23\ These provisions replace and supersede
criteria in prior subregulatory guidance dealing with retirement plans
and bona fide groups or associations of employers. The criteria in
paragraph (b) distinguish bona fide group or association MEPs from
retirement products and services offered by purely commercial pension
administrators, managers, and record keepers. In a broad colloquial
sense, it is possible to say that commercial service providers, such as
banks, trust companies, insurance companies, and brokers, act
``indirectly in the interest of'' their customers, but that does not
convert every service provider into an ERISA-covered ``employer'' of
their customer's employees. ERISA section 3(5) and ERISA title I's
overall structure contemplate employment-based benefit
arrangements.\24\ The Department's authority to define ``employer'' and
``group or association of employers'' under ERISA section 3(5) does not
broadly extend to arrangements established to provide benefits outside
the employment context and without regard to the members' status as
employers.\25\ Thus, the criteria in paragraph (b) identify certain
groups and associations that act as employers within the meaning of
ERISA section 3(5), and distinguish those groups and associations from
others that may not act as an ``employer.''
---------------------------------------------------------------------------
\23\ The term ``bona fide'' in the proposal refers to a group,
association, or PEO that meets the conditions of the proposed
regulation and, therefore, is able to be an ``employer'' for
purposes of section 3(5) of ERISA. No inferences should be drawn
from the use of this term regarding the actual bona fides of the
group, association or organization outside of this context.
\24\ The Department took the same position in the AHP Rule. 83
FR 28912, 28913 (June 21, 2018).
\25\ Id. at 28916.
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The provisions in paragraph (b) generally mirror those in the final
AHP Rule that define what is a bona fide group or association capable
of establishing an association health plan.\26\ These provisions have
the same meaning and effect here, as they have there. It makes sense to
have consistent provisions for AHPs and MEPs, because the Department is
interpreting the same definitional provisions in both contexts and
because many of the same types of groups or associations of employers
that sponsor AHPs for their members will also want to sponsor MEPs.
Accordingly, and for the sake of regulatory uniformity and simplicity,
if a group or association of employers can establish a bona fide AHP
under the AHP Rule, the group or association should also be able to
establish a MEP under this final rule.
---------------------------------------------------------------------------
\26\ The final rule does not contain provisions analogous to the
healthcare nondiscrimination provisions of the AHP Rule because
defined contribution retirement plans do not underwrite health risk
and are not susceptible to the rating and segmentation pressures
that characterize the healthcare marketplaces. Some defined
contribution plans may offer lifetime income features, such as
immediate or deferred annuities, which potentially implicate some
degree of longevity risk. The Department, however, does not believe
the potential presence of longevity risk in ancillary features of
defined contribution MEPs warrants nondiscrimination provisions
analogous to those of the AHP Rule. The Department also believes,
and a few commenters expressly agreed with the Department, that any
relevant nondiscrimination concerns are already addressed in the
tax-qualification provisions of the Code or other federal laws.
---------------------------------------------------------------------------
Although commenters suggested changes to the provisions in
paragraph (b) of the Proposed Rule, the final rule adopts the
provisions essentially as proposed. In many instances, the rationale
for declining a particular suggested change or amendment is the same or
substantially similar to the reason the Department declined the same
proposed provision in connection with the AHP Rule. After thoughtful
consideration, the Department has generally determined that the
rationale for declining a particular suggested change or amendment in
the AHP context is applicable in the MEP context, unless otherwise
specified. Accordingly, the major comments on the proposal and
provisions of the final rule are discussed below.\27\
---------------------------------------------------------------------------
\27\ Many commenters who support open MEPs made recommendations
to substantially modify or eliminate some or all of the provisions
in paragraph (b) of the final rule as a way of achieving an open MEP
framework. Those comments are addressed in the aggregate above in
section B 2 of this preamble, and in the related RFI published
elsewhere in today's Federal Register. They are not addressed in
this section of the preamble.
---------------------------------------------------------------------------
a. Purpose of the Association
Paragraph (b)(1)(i) of the Proposed Rule required that a group or
association of employers have at least one substantial business purpose
unrelated to offering and providing MEP coverage or other employee
benefits to its employer members and their employees, even if the
primary purpose of the group or association is to offer such coverage
to its members. This provision helps ensure that the association is a
bona fide association of employers, rather than merely a commercial
arrangement or entity marketing retirement benefits and services to
customers on a commercial basis. The ``primary purpose'' provision
recognizes that it is perfectly legitimate for associations to form, in
part, as a means of achieving the sorts of economies of scale,
bargaining power, and administrative expertise that enable them to
provide valuable benefits to their members, as long as they also serve
another unrelated substantial business purpose. As an additional
guidepost, the paragraph specifically provides that the ``substantial
business purpose'' test is satisfied if the group or association would
be a viable entity, even in the absence of sponsoring an employee
benefit plan.
A number of commenters believe this standard is too lenient. One
commenter, who believes this standard may be abused by profit seeking
enterprises, recommended a stricter standard providing that the primary
purpose of the group or association could not be offering or providing
retirement benefits. Other commenters with similar concerns recommended
that the final regulation limit eligible groups or associations of
employers to groups or associations that are not-for-profit
organizations. One individual believes the standard is undefined, lacks
meaningful limitations, and is perfunctory, and that it would allow an
[[Page 37514]]
association to exist for the sole purpose of plan sponsorship.
It remains the Department's view, however, that requiring a
substantial business purpose unrelated to offering employee benefits
strikes an appropriate balance. It appropriately separates out the
sorts of bona fide associations of employers that Congress intended to
cover from solely commercial operations; promotes expanded access to
MEPs; and minimizes the danger of abuse. The ``substantial purpose''
test is not a lenient standard, as reflected by the safe harbor for
associations that would be viable even if they did not provide employee
benefits. Thus, an entity that exists solely to sponsor a MEP would
never qualify under the safe harbor. The importance of this safeguard
should not be underestimated. In the Department's experience under
ERISA, many (if not most) regulated entities opt to meet the
requirements of safe harbor provisions, even if more stringent than
other legally defensible approaches, in exchange for the legal
certainty that comes from safe harbor compliance.
More importantly, the commenters overlooked the important
modifier--``substantial''--in the phrase ``substantial business
purpose.'' For an organization's business purpose other than offering
employee benefits to be ``substantial,'' it must be of considerable
importance to the group or association.\28\ Perfunctory or
insubstantial purposes are clearly insufficient to meet the test. The
viability safe harbor provides an indication of just how substantial
the other purpose must be to meet the rule's terms.
---------------------------------------------------------------------------
\28\ Compare, substantial, Oxford Dictionary (2019), https://en.oxforddictionaries.com (last visited Apr. 24, 2019) (of
considerable importance) with, substantial, Merriam-Webster (2019)
https://www.merriam-webster.com (last visited Apr. 24, 2019)
(consisting of or relating to substance).
---------------------------------------------------------------------------
The Department recognizes, however, that it may not always be easy
to determine if an association would be viable if it did not offer
employee benefits; that associations may serve multiple other purposes;
and that the extent to which other purposes support the organization's
viability may vary from year to year based on all sorts of internal and
external factors. Accordingly, a purpose other than MEP sponsorship
does not have to be the lifeline of the organization in order to be
``substantial.'' It must, however, be of considerable importance to the
existence of the organization--not merely ``important,'' but of
``considerable'' importance. The Department expects that, in practice,
organizations may have numerous other purposes depending on the type
and size of the organization.
Ultimately what is ``substantial'' or ``of considerable
importance'' to a group or association of employers depends on the
facts and circumstances of the particular situation, taking into
account the particular organization and its stated mission as reflected
in its formal organizational structure and by-laws. But in each
instance, the ``other'' business purpose(s) or activity must be
substantial enough that the association could, under different
circumstances, be a viable entity even in the absence of sponsoring a
MEP. This is true even if the viability of the association as currently
structured depends on offering and providing MEP coverage to its
members. For example, if the group or association operated with an
active membership before sponsoring a MEP, that would be compelling
evidence of such a substantial business purpose, even if its primary
purpose in the future becomes offering and providing MEP coverage to
its members. The organization's earlier operations demonstrate that the
association could be viable in the absence of offering and providing
MEP coverage, assuming the organization continues its pre-MEP
activities.
Importantly, the final rule includes conditions which, when
combined with the ``substantial business purpose'' standard, will
protect participants and beneficiaries from the concerns identified by
the commenters. These other conditions include the requirement that the
functions and activities of the group or association must be controlled
by its employer members. For all of the foregoing reasons, paragraph
(b)(1)(i) of the Proposed Rule is adopted without change.
Commenters indicated that it may be a common practice for such
groups or associations to form wholly owned non-profit corporations for
the sole purpose of establishing and maintaining benefit programs for
their members. In these circumstances, the group or association has a
mechanism to appoint the board of directors of the affiliated
corporation from among members of the group or association, according
to the commenters. Commenters requested clarification as to whether the
substantial business purpose test precludes a group or association of
employers from using a wholly owned affiliate to administer a MEP in
this manner. They also pointed out that there are prudent business
reasons for adopting this type of delivery structure, including that
the affiliated corporation can focus exclusively on administering
retirement benefits and catering to the specialized needs of plan
participants and retirees, while the group or association focuses on
promoting and advancing the related, but different business purposes of
the group or association. It is not inconsistent with the substantial
business purpose test, in the Department's view, if a group or
association with a substantial business purpose unrelated to offering
and providing MEP coverage or other employee benefits were to create a
wholly owned subsidiary to administer a MEP, even if the subsidiary
exists solely to administer the MEP. In this circumstance, the group or
association's substantial business purpose unrelated to the provision
of employee benefits is not affected by its decision to create a
subsidiary under its control to administer the MEP. This analysis also
assumes that the other requirements of the final rule are satisfied,
including the requirement that the group's or association's employer
members that participate in the plan control the plan, both in form and
substance.
b. Groups or Associations of Individuals
Paragraph (b)(1)(ii) of the Proposed Rule required that each
employer member of the group or association participating in the plan
be a person acting directly as an employer of at least one employee who
is a participant covered under the plan. At least two commenters
requested that the final regulation be expanded to cover groups or
associations whose members include, not just employers and working
owners, but also individuals who are not working owners and whose
employers do not participate in the group or association. These
commenters assert that membership in associations often includes
individuals who are common law employees of employers that are not also
members of the association. These associations desire to permit these
individuals to enroll in the MEP, according to the commenters. The
commenters argued that otherwise, the Proposed Rule unduly limits the
ability of these associations to offer MEPs to all of their members,
including small employers, independent contractors, and sole
proprietors who could otherwise benefit from the final rule's extended
coverage of ``working owners.'' Regardless of the policy merits of
these arguments, the Department's authority to define ``employer'' and
``group or association of employers'' under ERISA section 3(5) does not
broadly extend to arrangements established to provide benefits outside
the employment context and without regard to the members' status as
[[Page 37515]]
employers. Thus, the final rule, like ERISA section 3(5), is limited to
employers, including working owners, because the Department cannot
expand its definition beyond the statute's scope. Accordingly,
paragraph (b)(1)(ii) of the Proposed Rule is adopted in the final rule
without change.
c. Formal Organizational Structure
Paragraph (b)(1)(iii) of the Proposed Rule required a group or
association to have ``a formal organizational structure with a
governing body'' as well as ``by-laws or other similar indications of
formality'' appropriate for the legal form in which the group or
association operates in order to qualify as a bona fide group or
association. The Department received no comment letters on this
provision. Commenters on the mirror provision in the AHP Rule generally
supported these provisions on the basis that having such formalities
will not only serve to clarify the rights and obligations of members of
the group or association, but to promote accountability by enabling
regulators and others to readily identify those parties who are
responsible for operations, including the establishment and maintenance
of the group health plan. These commenters suggested that the existence
of formalized and robust organizational structures could be an
important form of protection against fraud and insolvency. The
Department agrees with the commenters that the requirements of
paragraph (b)(1)(iii) promote accountability and provide support
against fraud and insolvency. The provision also ensures that the
organization is a genuine organization with the organizational
structure necessary to act ``in the interest'' of participating
employers with respect to the MEP as the statute requires. For these
reasons and to maintain consistency with the AHP Rule, the Department
adopts these provisions in this final rule without modification.
d. Participating Employer Control Over the Group or Association
Paragraph (b)(1)(iv) of the Proposed Rule required that member
employers control the functions and activities of the group or
association, and that the employer members that participate in the plan
control the plan. Control must be present both in form and in
substance. One commenter recommended that the final rule state that the
control test may be satisfied indirectly through the regular nomination
and election of directors, officers, or other similar representatives
that control such functions and activities. The implicit concern raised
by this commenter is that the control test, as proposed, could be
construed as requiring that participating employers be responsible for
management and day-to-day operations of the group or association and
MEP in order for the group or association to qualify as bona fide.
The final rule does not require group or association members to
manage the day-to-day affairs of the group or association or the plan
in order for the group or association to qualify as bona fide. As has
long been the case, the Department will consider all relevant facts and
circumstances in determining whether the functions and activities of
the group or association are sufficiently controlled by its employer
members, and whether the employer members who participate in the group
or association's pension plan sufficiently control the group plan. In
the Department's view, the following factors, although not exclusive,
are particularly relevant for this analysis: (1) Whether employer
members regularly nominate and elect directors, officers, trustees, or
other similar persons that constitute the governing body or authority
of the employer group or association and plan; (2) whether employer
members have authority to remove any such director, officer, trustees,
or other similar person with or without cause; and (3) whether employer
members that participate in the plan have the authority and opportunity
to approve or veto decisions or activities which relate to the
formation, design, amendment, and termination of the plan, for example,
material amendments to the plan, including changes in coverage,
benefits, and vesting. The Department ordinarily will consider there to
be sufficient control if these three conditions are met.\29\
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\29\ A number of commenters requested clarification or
confirmation that the control test would be satisfied in an array of
fact patterns involving different control structures, membership
classifications, and participation privileges, including subgroup
structures and associations of groups or associations. As stated
elsewhere in this preamble, control must be present both in form and
in substance, and whether control exists is determined under a facts
and circumstances test. The Department declines in this preamble to
address the application of the final rule to specific fact patterns.
As noted above, the Department has procedures to answer inquiries of
individuals or organizations affected, directly or indirectly, by
ERISA as to their status under ERISA and as to the effect of certain
acts and transactions. See ERISA Advisory Opinion Procedure 76-1 (FR
Doc. 76-25168).
---------------------------------------------------------------------------
The same commenter suggested that the final rule could contain a
deeming provision under which the control test would be considered
satisfied if, in the absence of actual control, it could be
demonstrated that the group or association otherwise acts in the
interest of its employer-members in relation to such a plan, including
but not limited to demonstrating the existence of a fiduciary or
contractual duty to act in the plan's interest. Whether group or
association members in fact have sufficient control of the functions
and activities of the group or association for it to be considered bona
fide, however, is entirely independent of and unrelated to whether the
group or association's key officials or board members are fiduciaries
of the MEP. For these reasons, the Department declines to adopt the
suggestions of these commenters.
e. Commonality of Interest
Paragraph (b)(1)(v) of the Proposed Rule required that the employer
members of the group or association of employers have commonality of
interest. Paragraph (b)(2)(i)(A) of the Proposed Rule recognized
commonality if the employers are in the same trade, industry, line of
business or profession. Alternatively, paragraph (b)(2)(i)(B) of the
Proposed Rule recognized commonality if each employer has a principal
place of business in the same region that does not exceed the
boundaries of a single State or a metropolitan area (even if the
metropolitan area includes more than one State).
(i) Commonality Based on Size
Commenters suggested the final rule should contain a new provision
that finds sufficient commonality based on the ``small'' size of the
participating employers, regardless of the small firms' type of
business or location. Some of these commenters would include in this
category businesses with no employees other than the owner. According
to the commenters, small employers often share unique bonds, interests,
needs, and regulatory schemes, and may have significantly more
commonality of interest than those in the same industry or region due
solely to their size.
The Department does not agree that this characteristic should be
included as additional commonality of interest criteria in the final
rule. A test that would treat all small businesses--including sole
proprietors/working owners--nationwide as satisfying the standard based
on size alone--without regard to their products, services, lines of
business, or location--would be too open-ended to establish the
requisite commonality of interest. Moreover, to the extent this class
of business is not part of a single trade, industry, line of
[[Page 37516]]
business, or profession, the geography standard for establishing a
commonality of interest at paragraph (b)(2)(i)(B) of the final rule
already provides this class of business with the ability to form State-
wide and metropolitan area groups and associations that qualify as an
employer for purposes of sponsoring a MEP. Accordingly, this suggestion
was not adopted. Commenters on the RFI, however, are invited to include
additional comments on this topic in the context of open MEPs.
(ii) Commonality Based on Industry
Paragraph (b)(2)(i)(A) of the Proposed Rule recognized commonality
if the employers are in the same trade, industry, line of business, or
profession. This reflects that employers in the same trade or industry,
not only produce the same or similar products or services, but that
they also tend to share, among other things, similar regulatory and
market environments, economic trends, collective bargaining, and other
similar business challenges that in turn may bear on the provision of
benefits to their employees. Because of these shared traits, employers
in the same trade or industry routinely associate in various industry
or trade groups, and have done so historically. One commenter on the
AHP Rule, for example, reported a membership of more than 7,000 trade
associations. This commenter, which is an association of associations,
stated that there is an organization or association for every industry
and profession in the United States, and that over 60,000 are organized
under Code section 501(c)(6) as trade associations and business
leagues. As of 2017, the Internal Revenue Service recognized more than
63,000 Code section 501(c)(6) trade and professional associations.\30\
---------------------------------------------------------------------------
\30\ Internal Revenue Service Data Book, 2017, p. 57,
Publication 55B Washington, DC (March 2018) (https://www.irs.gov/pub/irs-soi/17databk.pdf).
---------------------------------------------------------------------------
Commenters requested that the Department clarify whether businesses
that support a particular industry, or that are allied with a
particular industry, are considered to be ``in the same industry'' as
that term is used in paragraph (b)(2)(i)(A) of the Proposed Rule. For
example, one commenter notes that an association of home builders that
includes builders and developers might also include a wide variety of
professionals, artisans, and tradespeople, such as plumbers,
carpenters, and electricians, who support the home building and
development industry. In addition, another commenter notes that an
association of owners and operators of vending machine companies might
also include vending machine manufacturers and vending machine
suppliers, who support and are allied with the owners and operators of
the vending machine companies. These commenters request clarification
so that persons interested in forming MEPs would have more certainty
regarding the permissible scope and membership classifications that
would satisfy the final rule.
Determinations of what is a ``trade,'' ``industry,'' ``line of
business,'' or ``profession,'' as well as whether an employer fits into
one or more these categories, are based on all the relevant facts and
circumstances. In general, the Department intends for these terms to be
construed broadly to expand employer and employee access to MEPs.
Absent future guidance to the contrary, the Department ordinarily will
not challenge any reasonable and good faith industry classification or
categorization adopted by the group or association of employers. Nor
will the Department challenge the inclusion of ``support'' or
``allied'' businesses as members of the group or association if they
share a genuine economic or representational interest with the other
members. The Department declines in the preamble to address the
application of the final rule to specific fact patterns. The Department
has procedures to answer inquires of individuals or organizations
affected, directly or indirectly, by ERISA as to their status under
ERISA and as to the effect of certain acts and transactions. See ERISA
Advisory Opinion Procedure 76-1 (FR Doc. 76-25168).
(iii) Commonality Based on Geography
Paragraph (b)(2)(i)(B) of the Proposed Rule contained a geography
test. It recognized commonality if each employer has a principal place
of business in the same region that does not exceed the boundaries of a
single State or a metropolitan area (even if the metropolitan area
includes more than one State).
Commenters recommended broadening the geography test in two
different ways. Some commenters recommended expanding the geography
test to allow regional commonality, rather than the state-based
approach taken in the Proposed Rule. For this purpose, these commenters
recommended using the regional divisions used by the U.S. Census
Bureau, the districts used by the Federal Reserve, or the regions used
by the Bureau of Economic Analysis. Alternatively, some commenters
recommended expanding the geography test so that a MEP for employers in
a metropolitan area that crosses two or more states would not need to
exclude employers in those states that are located outside the
metropolitan area. The first recommendation would foster large regional
MEPs, potentially increasing economies of scale compared to state-based
MEPs. The second recommendation would help employers in suburban and
rural areas of states that may not have access to a statewide MEP.
Because of the similarities between these recommendations and other
ideas being explored in the RFI on open MEPs published elsewhere in
today's Federal Register, the Department defers action on these
recommendations. These recommendations provide a wide variety of other
ways the Department could draw these lines, and the Department believes
these issues would benefit from an additional opportunity for public
comment. Accordingly, the Department includes a comment solicitation in
the RFI on group or association MEPs covering larger geographic regions
to ensure a fully developed public record before considering or taking
any further action.
Some commenters opposed the geography test due to its breadth.
These commenters argued that this test in effect establishes fictional
commonality among employers, because it is based on the simple fact
that their businesses reside in the same state, regardless of the
state's size or population. To these commenters, shared geography alone
is not an indicator of commonality of business or economic interests
among a state's inhabitants and should not be considered a sufficient
nexus to establish commonality. These commenters fear that geography-
based commonality will lead to the establishment of large MEPs by state
or even regional associations with large numbers of participating
members that have virtually nothing in common other than location and
no meaningful industry, professional, or business ties. The commenters
expressed concern that the geography test will enable and result in the
establishment of purely commercial arrangements by promoters with only
pecuniary interests in participating members and participating members
with only tenuous and remote connections and ties among themselves, all
of which ultimately could result in an increase in arrangements that
are susceptible to financial mismanagement, insolvency, and lack of
fiduciary oversight. These commenters, therefore, recommended
eliminating the geography test.
The Department does not agree with these commenters that geography
alone has no binding or cohesive impact on businesses. It seems plain
that employers in the same geography share
[[Page 37517]]
common interests concerning employees' education and workforce
development, taxation, transportation and commuting networks, the legal
and regulatory environment, human capital pool, physical environment,
local and state economic development partnerships, collective
bargaining, and myriad other regional business trends and issues. That
geography is a natural basis around which businesses organize
themselves is evident in the number of state and local chambers of
commerce in the United States, and their enrollment. There are roughly
4,000 chambers of commerce in the United States.\31\ The territorial
nature of these organizations speaks directly to the correlation
between geography and common interests.
---------------------------------------------------------------------------
\31\ According to the Association of Chamber of Commerce
Executives (https://secure.acce.org/about/chambers-of-commerce/).
---------------------------------------------------------------------------
Nor does the Department agree that it makes sense to eliminate the
geography test. A primary purpose of the geography test is to make it
easier for employers to band together and collectively benefit from the
economies of scale that come from aggregation. Eliminating the
geography test would undermine this intended benefit. Moreover, the
geography test in the final rule also aligns with the geography test in
the AHP Rule, thus making it possible for statewide groups and
associations to better serve their members by offering access to both
health and retirement benefits. Consequently, eliminating the geography
test would undermine that member service opportunity as well.
Nor does the Department agree that narrowing the geography test is
necessary to guard against fraud and abuse. The final regulation
contains numerous safeguards to prevent large aggregations of
completely unrelated employers in MEPs and potential mismanagement and
fraud. The final rule, for example, prohibits financial services firms
from being the group or association that establishes the MEP, requires
that functions of the group or association be controlled by employer
members, requires the group or association to have a substantial
business purpose other than providing benefits, and makes clear that
the parties administering the MEP must fully adhere to ERISA's
fiduciary standards. These provisions adequately guard against the
concerns raised by the commenters, and ensure that the group or
association will represent the common interests of its employer
members.
One commenter noted that the Seventh Circuit invalidated a
geography-based condition for ``voluntary employees' beneficiary
associations'' (VEBAs) described in section 501(c)(9) of the Code.\32\
While the commenter described that decision as applying in an analogous
context, section 3(5) of ERISA and section 501(c)(9) of the Code have
different language and purposes. In addition, the Department of
Treasury and the IRS, rather than the Department of Labor, have
jurisdiction over section 501(c)(9) of the Code.\33\
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\32\ Water Quality Association Employees' Benefit Corporation v.
United States, 795 F.2d 1303 (7th Cir. 1986).
\33\ In response to the Water Quality decision, the Internal
Revenue Service issued a proposed regulation at 26 CFR 1.501(c)(9)-
2, which sets forth a modified geographic limitation.
---------------------------------------------------------------------------
(iv) Commonality Provisions In General
Other commenters generally opposed the commonality provisions
(whether based on geography or industry) because they are not expressly
set forth in the statute. These commenters recommended eliminating the
commonality provisions entirely, and focusing instead only on whether
the group or association acts ``indirectly in the interest'' of an
employer in relation to the MEP, without regard to any requirement of a
common economic or representational nexus. While these commenters'
arguments are not without force, the Department has decided for policy
reasons not to simply eliminate these provisions.
Even assuming that criteria other than commonality could satisfy
section 3(5), the commonality provisions serve important policy goals
in this context. First, keeping them in this final rule for MEPs
establishes uniformity with the AHP Rule, thereby promoting consistent
outcomes for employer-groups interested in sponsoring both health and
retirement plans for their employees. Second, since employer groups
often form on geographic and industry lines, the commonality provisions
should be simple and natural to implement. Third, replacing the
commonality provisions with looser or tighter criteria would likely
require recalibration of the other conditions in paragraph (b) the
final rule, all of which are designed to work in tandem with the
commonality provisions. The more lenient test recommended by these
commenters, for example, would require the Department to reevaluate and
potentially expand the regulatory safeguards for MEPs, possibly to
include new and potentially sophisticated and extensive compliance and
enforcement mechanisms. This would be especially true in the case of
open MEPs sponsored by financial institutions. Before proceeding with a
less restrictive test (e.g., open MEPs), which is a much larger step,
the Department intends to evaluate the responses to the RFI on open
MEPs published elsewhere in today's Federal Register.
These policy objectives more than adequately justify the
commonality provisions in this final rule. Similar--albeit more
restrictive--commonality provisions were present in decades of
subregulatory guidance preceding and effectively superseded by this
final rule. The prior subregulatory guidance, which was issued to
address the ambiguity in section 3(5) of ERISA, used the commonality
provisions essentially to help draw a line between commercial
arrangements and associations that serve employers' interests. But
commonality provisions--whether in the narrower form as they existed in
the subregulatory guidance or in the expanded form as they exist in
this final rule--are not directly in or necessarily compelled by the
statute. And their long-term use in the prior subregulatory guidance in
no way restricts the Department's ability now to modify them or even
replace them altogether with different criteria. As a case in point, no
commonality provisions in any form are present in the portion of this
final rule governing bona fide PEOs because there the Department chose
other criteria that adequately demonstrate when a ``person'' is able to
adequately act in the employers' interests in relation to a MEP. And,
furthermore, unlike the prior subregulatory guidance, the final rule's
more expansive commonality provisions are the product of extensive
notice and comment rulemaking, in which the Department considered many
factors and provides herein ample justification for its decisions. In
the end, the regulatory process of addressing the ambiguity in section
3(5) of ERISA invariably required some measure of policy-making and
line drawing, and the lines in this final rule reflect the reasoned
policy judgment of the Department.
f. Provision Relating to Financial Services Firms
Paragraph (b)(1)(vii) of the Proposal Rule generally prohibited an
employer group or association from being a bank, trust company,
insurance issuer, broker-dealer, or other similar financial services
firm (including a pension record keeper or a third-party administrator)
and from being owned or controlled by such a financial services
[[Page 37518]]
firm. Nearly every commenter in favor of open MEPs opposed this
prohibition. Their recommendation to remove this prohibition, when
combined with their recommendations on other provisions, would achieve
their favored outcome. Other commenters, however, supported this
provision. Their support is based on the premise that, unlike
traditional groups or associations of employers such as chambers of
commerce or business leagues, which exist to serve and advance the
needs of their participating members, financial services firms exist
primarily to serve and advance the business interests of the company or
concern, including its shareholders or other owners. Several of these
commenters argued that financial services firms should not be in the
business of providing MEPs because of conflicts of interest.
This provision is consistent with the AHP Rule, which in relevant
part, prohibits health-insurance companies from being treated as a bona
fide group or association. In that context, the Department concluded
that a construction of ``employer'' encompassing insurance companies
that are merely selling commercial insurance products and services to
employers would effectively read the definition's employment-based
limitation out of the statute. Applying a similar understanding of
``group or association'' of employers in the pension context as in the
AHP context promotes simplicity and uniformity in regulatory structure.
The final rule therefore applies a similar approach to employer groups
or associations sponsoring MEPs in the final rule. The Department may
revisit this issue depending on future action, if any, taken in
response to the RFI on open MEPs published elsewhere in today's Federal
Register.
4. Bona Fide PEOs
Although a number of commenters discussed the bona fide PEO
provisions in the Proposed Rule, only a few comment letters actually
addressed the substance of these provisions. Many commenters favoring
open MEPs, for instance, raised the general concern that PEOs appeared
to be given preferential treatment under the Proposed Rule. This
observation came mainly from representatives of financial services
firms, such as banks, insurance companies, and brokerage firms, who
favor an open MEP structure. The Department does not agree that PEOs
have been singled out for preferential treatment under the final rule.
Rather, to the extent that PEOs stand in the shoes of their client
employers for certain purposes and perform substantial employment
functions on their client's behalf, the final rule merely recognizes
that such PEOs are acting ``indirectly in the interest of [their
client] employers'' under ERISA section 3(5) for purposes of sponsoring
a MEP. Nevertheless, in response to these comments, as announced
earlier in this document, elsewhere in today's Federal Register the
Department published a RFI soliciting comments on a broad range of
issues relating to open MEPs for possible future rulemaking. The RFI
will give these commenters an opportunity to provide additional
comments on possible extensions of the final rule. The substantive
comments received in response to the Proposed Rule are addressed below
in relation to the relevant provisions of the final rule.
a. The Four General Requirements
Paragraph (c) of the Proposed Regulation included four requirements
for a PEO to qualify as a ``bona fide'' PEO that may act ``indirectly
in the interest of [its client] employers'' and, consequently, as an
``employer'' under ERISA section 3(5) for purposes of sponsoring a MEP
covering the employees of client employers. The final rule adopts these
four requirements essentially as proposed. Paragraph (c)(1)(i) requires
the PEO to perform substantial employment functions on behalf of the
client employers. Paragraph (c)(1)(ii) requires the PEO to have
substantial control over the functions and activities of the MEP, as
the plan sponsor, the plan administrator, and a named fiduciary.
Paragraph (c)(1)(iii) requires the PEO to ensure that each client-
employer participating in the MEP has at least one employee who is a
participant covered under the MEP. Paragraph (c)(1)(iv) requires the
PEO to 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.
Regarding paragraph (c)(1)(i), a PEO's assumption and performance
of substantial employment functions on behalf of its client-employers
is one of the lynchpins of the final rule. Just as commonality and
control help to establish the appropriate nexus for groups or
associations of employers under paragraph (b) of the final rule, the
PEO's performance of substantial employment functions for its client
employers contributes significantly to the establishment of the
requisite nexus for PEOs. Requiring the PEO to stand in the shoes of
the participating client employers--by assuming and performing
substantial employment functions that the client-employers otherwise
would fulfill with respect to their employees--is what distinguishes
bona fide PEOs under the final rule from service providers or other
entrepreneurial ventures that in substance merely market or offer
client-employers access to retirement plan services and products. This
requirement applies a clear limiting principle to entities that can be
said to be acting ``indirectly in the interest of'' another employer
within the meaning of ERISA section 3(5).
Importantly, a PEO's status under the final rule does not make the
PEO more or less likely to have an employment relationship (whether
referred to as joint employment or otherwise) with the client-employer,
for purposes of other laws or liabilities. What constitutes joint
employment for purposes of other laws and liabilities is an independent
inquiry wholly unaffected by a PEO's potential status as an
``employer'' within the meaning of ERISA section 3(5). Whether a PEO
qualifies as an ERISA section 3(5) ``employer'' under the
``indirectly'' provision has no effect on the rights or
responsibilities of any party under any other law, including the Code
or Fair Labor Standards Act, and neither supports nor prohibits a
finding of an employment relationship in other contexts. The Department
received a number of responses to its solicitation for comments on this
issue. A number of commenters requested that the Department reiterate
that participation in a MEP does not necessarily create a joint
employment relationship by including language regarding joint
employment in the operative text of the final rule. Another commenter
asked that the Department state that MEP participation cannot be used
as evidence of employee status for purposes of evaluating in any
proceeding whether an individual is providing services as an
independent contractor or employee. Although the Department recognizes
the concern of commenters that participation in a MEP might create an
inference under other laws, the Department's authority in issuing this
final rule is limited to its interpretation of ERISA. Consequently, the
operative text of the final rule, like the NPRM, does not contain a
specific reference to the existence of a joint employment relationship
under other laws.
Regarding paragraph (c)(1)(ii), a second important limiting
principle in construing section 3(5)'s ``indirectly in the interest
of'' clause is that the PEO must have substantial control of the
functions and activities of the employee benefit plan at issue. This
construction comports with the reference in ERISA
[[Page 37519]]
section 3(5) to a person acting as the employer ``in relation to the
plan.'' Paragraph (c)(1)(ii) of the final rule requires the PEO to have
substantial control over the functions and activities of the MEP, as
the plan sponsor (within the meaning of section 3(16)(B) of ERISA), the
plan administrator (within the meaning of section 3(16)(A) of ERISA),
and a named fiduciary (within the meaning of section 402 of ERISA).
Looking to the PEO's substantial control of the MEP, as the sponsor,
administrator, and fiduciary, is sensible given the ``in relation to
the plan'' language of section 3(5) of ERISA. In response to comments,
the final rule clarifies that because the PEO assumes these important
statutory roles under ERISA, the PEO continues to have employee-benefit
plan obligations to the employees of a client employer, as plan
participants, even after that client employer no longer contracts with
the PEO. The obligations of the PEO as the plan administrator and as a
named fiduciary to the MEP's participants and beneficiaries does not
terminate with the conclusion of a client contract between the PEO and
the client employer; instead, these obligations continue until
participants are no longer covered by the plan and beneficiaries are no
longer receiving benefits (e.g., the individuals have received a lump-
sum distribution or a series of distributions of cash or other property
which represents the balance of his or her credit under the plan, or a
plan-to-plan transfer has occurred). As with pension plans in general,
distributions are governed by the terms of the MEP as are plan-to-plan
transfers.
b. Substantial Employment Functions Safe Harbor
Whether a PEO satisfies the requirement, in paragraph (c)(1)(i), to
perform substantial employment functions on behalf of its client
employers is generally determined based on the facts and circumstances
of the particular situation. This approach gives PEOs maximum
flexibility to structure their affairs and recognizes that all PEOs do
not necessarily follow the same business model or provide the exact
same services to client employers. It also provides PEOs room for
innovations in their business models and service packages in the
future. At the same time, however, the Department understands that some
entities may prefer more regulatory certainty in ordering their
business affairs than comes from a facts-and-circumstances test. For
this reason, the final rule contains a regulatory safe harbor separate
from this facts-and-circumstances test.
The safe harbor is contained in paragraph (c)(2) of the final rule
and differs from the safe harbor structure in the Proposed Rule. The
Proposed Rule contained two safe harbors, one for CPEOs within the
meaning of Code section 7705, and another for PEOs that are not CPEOs
(non-CPEOs). The change in structure stems from commenters who raised
concerns regarding both the number and type of criteria required under
the Proposed Rule. The commenters stated that the Proposed Rule's list
of nine criteria for non-CPEOs were, depending on the particular
criterion, unnecessary, unrealistic, not entirely consistent with
industry practice, not exactly reflective of how PEOs and their clients
share employer functions, misaligned with many state licensing
requirements, or out of step with the advisory role of PEOs. Without
significant adjustments to this safe harbor, including eliminating at
least two of the Proposed Rule's nine criteria, the commenters asserted
that many non-CPEOs would not qualify for the safe harbor. The
commenters recommended adding a criterion that the PEO be licensed and
registered in accordance with state law. With respect to the Proposed
Rule's CPEO safe harbor, the commenters essentially argued that the
Proposed Rule required PEOs to satisfy too many employment-function
criteria and that CPEO status alone should be sufficient, assuming the
service contract between the client and the CPEO meets the requirements
in the Code. One person asked for clarification on what would happen
under the safe harbor if a CPEO temporarily lost its certification, and
therefore its CPEO status, under the Code for minor infractions,
procedural missteps, or reasons having nothing to do with substantive
performance of employment functions on behalf of client employers. One
commenter argued that the standards should be the same for both CPEOs
and non-CPEOs, and not more or less favorable to one business model
over the other. This commenter viewed the Proposed Rule as favoring
CPEOs.
In response to these comments, the Department streamlined the
Proposed Rule's safe harbor structure in the final rule. Unlike the
Proposed Rule, which contained one safe harbor for PEOs that are CPEOs
and a second safe harbor for PEOs that are non-CPEOs, the final rule
contains only one safe harbor for all PEOs regardless of their status
under the Code's CPEO provisions. There may be sound business reasons
behind a PEO's decision to be a CPEO or not, and there may be equally
sound business reasons behind a client employer's decision to choose or
not choose a CPEO. Nevertheless, the status of a PEO under the Code's
CPEO provisions is irrelevant to satisfying the safe harbor in the
final rule; the relevant focus is the extent to which the PEO actually
performs substantial employment functions on behalf of its client
employers. The Department determined that the complexity of the
Proposed Rule's safe harbor could be reduced by reducing and combining
the essential elements of the Proposed Rule's two separate safe harbors
into a single safe harbor that both CPEOs and non-CPEOs may rely on in
connection with ERISA section 3(5). The Department reiterates that this
is a safe harbor, intended to provide regulatory certainty. It is
possible that a PEO could satisfy the statute's general facts and
circumstances test, even if it does not satisfy the safe harbor.
Instead of nine criteria, the new safe harbor contains only four
criteria, and instead of allowing the PEO the choice of selecting five
from among the nine criteria, the new safe harbor requires that the PEO
satisfy all four criteria. The four criteria selected were drawn from
the types of services and functions PEOs routinely provide to clients,
and with reference to, but not dependent on, the CPEO statutory
standards. After carefully reviewing the public comments, the
Department selected the four criteria that the commenters indicated are
central to all PEO client contracts and that, in the Department's view,
clearly show the PEO acts indirectly in the interest of the client-
employer under ERISA section 3(5), in such a way and to such an extent
that it sets the PEO apart from a mere service provider.
The new safe harbor provides that a PEO will be considered to
perform substantial employment functions on behalf of its client
employers under the following circumstances: First, the PEO assumes
responsibility for and pays wages to employees of its client-employers
that adopt the MEP, without regard to the receipt or adequacy of
payment from those client employers. Second, the PEO assumes
responsibility to pay and perform reporting and withholding for all
applicable federal employment taxes for its client employers that adopt
the MEP, without regard to the receipt or adequacy of payment from
those client employers. Third, the PEO plays a definite and
contractually specified role in recruiting, hiring, and firing workers
of its client-employers that adopt the MEP, in addition to the client-
employer's responsibility for recruiting, hiring, and firing workers.
As explained below, a
[[Page 37520]]
PEO is considered to satisfy this standard if it recruits, hires, and
fires, assumes responsibility for recruiting, hiring, and firing, or
retains the right to recruit, hire, and fire workers of its client-
employers that adopt the MEP, in addition to the client-employer's
responsibility for recruiting, hiring, and firing workers. Fourth, the
PEO assumes responsibility for and has substantial control over the
functions and activities of any employee benefits which the client
contract with a client employer may require the PEO to provide, without
regard to the receipt or adequacy of payment from those client
employers for such benefits. All four of these criteria must be
satisfied to meet the safe harbor.
The Proposed Rule contained language providing that, depending on
the facts and circumstances of the particular situation, even one of
the safe harbor criteria alone may be sufficient to satisfy the general
requirement that a PEO perform substantial employment functions on
behalf of its client employers. The final rule does not include that
language. The Department's view is that it is not appropriate to state
that any single safe harbor criterion alone can be relied upon to
satisfy the general requirement that a PEO perform substantial
employment functions on behalf of its client employers--all four safe
harbor criteria are necessary given the broad scope of activity
encompassed by the new safe harbor test and the nature of the four
remaining safe harbor criteria.
With respect to the third criteria, the first sentence of paragraph
(c)(2)(iii) of the final rule requires that the PEO have a definite and
contractually specified role in recruiting, hiring, and firing workers
of its client-employers that adopt the MEP, in addition to the client-
employer's responsibility for recruiting, hiring, and firing workers.
This sentence recognizes that PEOs and their client- employers share
responsibilities and can also individually retain responsibilities. For
example, a PEO client contract may provide that the client-employer
shall recruit, hire, and fire based on the needs of the business, but
allocate certain termination responsibilities to the PEO, such as in
the event a worksite employee engages in employment discrimination that
violates Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act of 1967, or the Americans with
Disabilities Act of 1990. This sentence also recognizes that PEOs
commonly have a role, for payroll and other human resource purposes, in
hiring and firing workers of client-employers, but client-employers
determine who works at their worksites and under what conditions, as
necessary to conduct their business.
The second sentence of paragraph (c)(2)(iii) of the final rule goes
on to explain that the requirement to have a ``definite and
contractually specified role'' in the first sentence would be satisfied
if, pursuant to the contract, the PEO recruits, hires, and fires;
assumes the responsibility for recruiting, hiring, and firing; or
retains the right to recruit, hire, or fire workers of its client-
employers that adopt the MEP. This text does not necessarily require
that PEOs actually interview and select the employees of client
employers in the traditional common-law sense, in which a business
hires employee based on the skillset and needs of the particular
business, but it does require that PEOs, at a minimum, retain a right
or obligation under contract to recruit, hire, and fire as necessary to
fulfill the PEO's responsibilities under the contract and applicable
state law. For example, a PEO client contract may provide that
following the client-employer's initial decision to hire an employee,
that hiring decision does not become official until the PEO approves or
ratifies the selection and finishes the administrative on-boarding
process. Similarly, a PEO client contract may provide that client
employer may not terminate a worksite employee until the PEO validates
or approves the termination. The intent of paragraph (c)(2)(iii) is to
accommodate the broad range of human resource services provided by and
across the various PEO models, but at the same time to require a
definite and contractually specified role for the PEO in the shared
recruiting, hiring, and firing processes.
c. PEOs and Working Owners
As discussed below in section 5 (d) of this preamble, the final
rule--like the Proposed Rule--does not extend the working-owner
provisions to bona fide PEOs.
d. PEOs and Health Plans
Some stakeholders inquired whether a ``bona fide professional
employer organization'' that is authorized under the final rule to
sponsor a MEP for the employees of its client employers also would be
able to establish and maintain a single plan, fund, or program of
healthcare benefits for these same individuals. These stakeholders
observed that the definition in section 3(5) of ERISA does not
differentiate as to the type of benefit plan that an employer who meets
the 3(5) definition may establish or maintain. Consequently, these
stakeholders maintain, if a PEO meets the conditions to be an employer
for purposes of sponsoring a single pension plan, the PEO also should
be able to rely on that status to sponsor a single group health plan.
The stakeholders also argued that the same or similar policy reasons
that support expanded access to retirement plan options for small
employers also support expanded access to healthcare options for these
same employers. Section 3(5) of ERISA, in relevant part, provides that
the term ``employer'' means any ``person'' acting indirectly in the
interests of an employer, in relation to ``an employee benefit plan.''
Although the statute is neutral on its face as to the type of employee
benefit plan being established or maintained by the ``person,'' the
final rule does not address when a PEO may be able to act as an
employer for establishing or maintaining a single group health plan to
cover the employees of the PEO's client employers. Evidence suggests
that some PEOs already offer health plans to the employees of their
client employers and that this number could increase.\34\ But, as many
commenters noted, health plan sponsorship may raise different issues
and require different regulatory conditions than retirement plans.\35\
The topic of health plans is beyond the scope of this rulemaking
project. The Proposed Rule did not address the topic of health plans in
a meaningful way, or provide the opportunity for the public to provide
comments. Accordingly, the PEO provisions in the final rule remain
limited to defined contribution retirement plans. Until the Department
takes additional regulatory or other action, a PEO interested in
sponsoring a health arrangement for its client
[[Page 37521]]
employers must look to the terms of the statute.
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\34\ See ``2015 Employer Health Benefits Survey,`` Section
Fourteen: Employer Opinions and Health Plan Practices, Kaiser Family
Foundation, September 2015, available at https://www.kff.org/report-section/ehbs-2015-section-one-cost-of-health-insurance/. (Five
percent of firms with 3 to 499 workers offering health benefits
through a PEO (Exhibit 14.8). Six percent of covered workers
enrolled in health benefits at firms with 3 to 499 workers are
enrolled in a plan offered through a PEO. The uptake was greatest
for firms that had 10-49 workers, with 8% of those firma offering
health benefits through a PEO.
\35\ As described above, the Department recognizes the
importance of expanding access to affordable group health care
coverage to small employers and accordingly, published a final rule
on Association Health Plans that permits a bona fide group or
association of employers to establish a single group health plan for
the employer members' employees; and sets out specific requirements
that such group or association must meet in order to be a 3(5)
employer. 83 FR 28912 (June 21, 2018). One such requirement that is
unique in the health plan context is that group health plan must not
discriminate against employees in premiums, eligibility or benefits
based on a health factor.
---------------------------------------------------------------------------
5. Working Owner Provision
a. In General
Paragraph (d) of the Proposed Rule expressly provided that working
owners, such as sole proprietors and other self-employed individuals,
may elect to act as employers for purposes of participating in a bona
fide employer group or association as described in (b)(1) of the
proposed regulation and also be treated as employees of their
businesses for purposes of being able to participate in the MEP. To
qualify as a working owner, a person would be required to work at least
20 hours per week or 80 hours per month, on average, or have wages or
self-employment income above a certain level. This provision in the
Proposed Rule is the same as the working-owner provision in the AHP
Rule.\36\ Paragraph (d) of the Proposed Rule was limited to MEPs
established and maintained by bona fide groups or associations of
employers, and did not extend to MEPs established and maintained by
PEOs. The public commenters supported this provision, which is adopted
as proposed.\37\
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\36\ 83 FR at 28964. In State of New York v. United States
Department of Labor, 363 F. Supp. 3d 109 (D.D.C. March 28, 2019),
the District Court vacated portions of the Department's final rule
on AHPs, including the working-owner provisions at 29 CFR 2510.3-
5(e). The Department disagrees with the District Court's ruling and
an appeal has been filed.
\37\ Nothing in the final rule should be read to indicate that a
business that contracts with individuals as independent contractors
becomes the employer of the independent contractors merely by
participating in the MEP with those independent contractors who
participate as working owners, or by promoting participation in a
MEP by those independent contractors, as working owners.
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b. Hours-Worked Provision
Paragraph (d)(2) of the Proposed Rule included an ``hours worked''
provision that contained three essential requirements. First, the term
``working owner'' means any person who a responsible plan fiduciary
reasonably determines is an individual who has an ownership right of
any nature in a trade or business, whether incorporated or
unincorporated, including a partner or other self-employed individual.
Second, this person also must earn wages or self-employment income from
the trade or business for providing personal services to the trade or
business. Third, this person must work ``on average at least 20 hours
per week or at least 80 hours per month providing personal services to
the working owner's trade or business.''
At least one commenter requested clarification on how to apply the
hours-worked provision to workers that do not have a defined work
schedule that results in a steady and predictable 20-hour work week or
80-hour month. The precise issue in need of clarification for this
commenter is whether plan fiduciaries are permitted to use two-year
averages when determining if working owners meet the minimum-hours-
worked requirement. According to this commenter, many workers in the
construction industry have variable employment, which is dependent on
the economy, weather, and other business and market factors. Working
owners facing these predicaments may encounter periods of high demand
for their services, during which they work greatly in excess of 80
hours per month, followed by periods of sustained low demand, during
which they work significantly less than 20 hours per week.
While the Department in this document does not render an opinion on
the categorical appropriateness of using two-year averages, the final
rule expressly permits the use of averaging by plan fiduciaries to
determine whether working owners satisfy the hours-worked provision in
the final rule. The Department adopted averaging language in the AHP
Rule in order to accommodate these ``variable workers'' in that
context, and today imports that same language into this final rule.
Thus, this final rule too allows flexibility in making an hours-worked
determination to address situations in which a working owner's time
performing services for his business varies due to various industry,
seasonal, and other business and market factors. A working owner could
demonstrate this by evidence of a work history or a reasonable
projection of expected self-employment hours worked in a trade or
business. While the final rule contains minimum weekly or monthly
hours-worked requirements, it does not contain a maximum reference
period over which averaging of hours is permitted or required. Since
many of ERISA's and the Code's pension benefit provisions require
annual recordkeeping and attention, many MEPs may decide to adopt
annual or 12-month periods for averaging purposes out of administrative
efficiency, although others may not. Ultimately, whether any particular
maximum reference period is appropriate, however, is a matter within
the discretion of the plan fiduciary taking into account the plan
document and facts and circumstances of the particular situation. The
exercise of this discretion by the plan is subject to the general
fiduciary requirements of section 404(a) of ERISA. Accordingly, the
final rule adopts paragraph (d)(2)(iii) of the Proposed Rule without
change.
c. Wages or Self-Employment Income
Paragraph (d)(2) of the Proposed Rule included an ``earned income''
alternative to the ``hours worked'' provision. Under the earned-income
alternative, the working-owner must have ``wages or self-employment
income from such trade or business that at least equals the working
owner's cost of coverage for participation by the working owner and any
covered beneficiaries in any group health plan sponsored by the group
or association in which the individual is participating or is eligible
to participate.'' For this purpose, the definitions of ``wages'' and
``self-employment income in Code sections 3121(a) and 1402(b) (but
without regard to the exclusion in section 1402(b)(2)), respectively,
would apply.
Several commenters were confused by the earned-income provision.
Some thought it was unnecessary in light of the hours-worked provision.
These commenters apparently understood the earned-income provision to
be a requirement in addition to the hours-worked condition, and not an
alternative. Other commenters did not understand the connection between
health care premiums or cost of coverage and participation in a MEP.
The commenters recommended eliminating this provision because they
either thought the provision was a mistake or saw no need for it.
The earned-income provision is an alternative to the hours-worked
provision. These two separate provisions are disjunctive conditions,
not conjunctive requirements. Thus, working owners may choose whichever
test is more appropriate for their circumstances. Further, this
provision offers administrative ease and convenience to the
administrator of the MEP. This is because the Department expects many
groups or associations of employers to offer to their members both AHPs
and MEPs and, if the working owner makes enough money to be considered
both an employer and employee under the AHP Rule, the working owner may
also be considered both an employer and an employee for participating
in a MEP. In finalizing the AHP Rule, the Department concluded that
using the cost of coverage of benefits under the AHP was a meaningful
metric to ensure that the working owner has a legitimate trade or
business, keeping in mind that ERISA governs benefits provided in the
context of a work relationship as opposed to the mere marketing of
insurance to
[[Page 37522]]
individuals unrelated to their status as employees in a trade or
business and any benefits they obtain through that status. Unlike
healthcare coverage, participation in a MEP does not have a specific
dollar amount associated with the benefits; thus, there is no minimum
cost of participation, making reference to the cost of healthcare
coverage a proxy in those cases where the group or association has such
a plan. For these reasons, the earned-income provision was not
eliminated.
Section 401(c) of the Code provides rules for when a self-employed
individual may participate in a qualified retirement plan. The
Department solicited comments on whether there might be circumstances
under which a ``working owner'' as defined in paragraph (d)(2) of the
Proposed Rule might nonetheless fail to be described in section 401(c)
of the Code, and if so whether the two provisions could and should be
directly aligned. Comments were specifically requested on whether the
final rule should limit the definition in paragraph (d)(2) to self-
employed individuals described in section 401(c) of the Code to avoid
such failures. The Department received no comments indicating a need
for or in support of such a limitation. One commenter opposed such a
change. This commenter was concerned about the complexity associated
with making determinations under section 401(c) of the Code and
imposing such an obligation on plan fiduciaries of MEPs. In light of
this comment, no changes in this regard were made to the final rule.
However, the Department of the Treasury has advised that the inclusion
of an individual who is not a common law employee or treated as an
employee under section 401(c) would affect the qualified status of the
plan. Also, they advised that a plan covering an owner-employee is
qualified only if it limits contributions with respect to the owner-
employee in accordance with section 401(d) of the Code.
d. Extending Working Owner Provision to PEOs
The final rule does not extend the working-owner provision to MEPs
sponsored by PEOs under paragraph (c). Thus, a working owner's trade or
business must have at least one common law employee to participate in a
PEO's MEP under paragraph (c) of the final regulation. The Department
understands that working owners without employees generally would not
have a need for the employment services of PEOs, such as payroll,
compliance with federal and state workplace laws, and human resources
support. Thus, a trade or business without employees would not seem to
have a genuine business need for a relationship with a PEO.
Accordingly, the working-owner provision of the final rule only applies
for purposes of participation in MEPs sponsored by a bona fide group or
association.
One commenter, however, indicated there may be circumstances in
which a working owner without common law employees has a genuine need
to be in a PEO's MEP. This occurs if the working owner has had common
law employees and used a PEO, including joining the PEO's MEP, but was
later unable to afford to continue to employ others and did not want to
stop participating in the PEO plan, according to the commenter. The
Department declines to expand the working-owner provision in paragraph
(d) for this situation. In this situation, the working owner is still a
participant covered under the plan with respect to his individual
account balance because he is or may be eligible to receive a benefit,
without regard to whether the working-owner continues his contract with
the PEO. This status continues until the working-owner-participant is
no longer covered by the plan (e.g., receives a lump-sum distribution
or a series of distributions of cash or other property which represents
the balance of his or her credit under the plan, or a plan-to-plan
transfer has occurred).\38\ Thus, the working owner in this situation
is treated the same as a former employee of a client employer that has
an ongoing contract. The clause ``employees and former employees of
former client employers who became participants during the contract
period between the PEO and former client employers'' was added to
paragraph (c)(1)(iv) of the final rule to make this point clear.
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\38\ 29 CFR 2510.3-3(d)(2)(ii).
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6. Miscellaneous Topics
a. ERISA Fiduciary Status and Responsibilities of Sponsor and
Participating Employers
The Department received multiple comments on the application of
ERISA's fiduciary rules to bona fide groups and associations, PEOs, and
participating employers. Several commenters, for instance, asked the
Department to provide guidance on fiduciary liabilities and
responsibilities of a bona fide group or association or PEO that
sponsors a MEP and clarify that any individual charged with the
operation or management of a MEP is considered a fiduciary under ERISA.
These commenters stressed that it is important for groups and
associations and PEOs that sponsor a MEP to understand that they are
obligated to protect the interests of the participants of the plan, and
may be held individually liable if they fail to do so. Other
commenters, by contrast, focused on participating or client employers;
these commenters requested clarification of a participating or client
employer's duty to prudently select and monitor the MEP in which the
employer's employees participate.
A MEP offered by a bona fide group or association, or by a PEO,
under the final rule is subject to all of the provisions under title I
of ERISA applicable to employee pension benefit plans, including the
fiduciary responsibility and prohibited transaction provisions in part
4 of ERISA. Bona fide groups or associations and PEOs that sponsor a
MEP assume and retain responsibility for operating and administering
the MEP, including ensuring compliance with these requirements.\39\ As
an operational matter, the MEP's sponsor--and not the participating
employers--would generally be designated as the plan administrator
responsible for compliance with the requirements of title I of ERISA,
including reporting, disclosure, and fiduciary obligations. Under this
structure, the individual employers would not each have to act as plan
administrators under ERISA section 3(16) or as named fiduciaries under
section 402 of ERISA. Although participating employers would retain
fiduciary responsibility for choosing and monitoring the arrangement
and forwarding required contributions to the MEP, a participating
employer could keep more of its day-to-day focus on managing its
business, rather than on its plan.\40\ In the MEP context, although a
participating employer would no longer have the day-to-day
responsibilities of plan administration, the business owner would still
need to prudently select and monitor the MEP sponsor and get periodic
reports on the fiduciaries' management and administration of the MEP,
consistent with prior Department guidance on MEPs.\41\
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\39\ Association Health Plan Final Rule, 83 FR 28912, 28937
(June 21, 2018).
\40\ Association Retirement Plans and Other Multiple-Employer
Plans Proposed Rule, 83 FR 53534, 53535 (October 23, 2018).
\41\ 29 CFR 2509.2015-02, Interpretive Bulletin Relating to
State Savings Programs that Sponsor or Facilitate Plans Covered by
the Employee Retirement Income Security Act of 1974 (``As a state-
sponsored multiple employer plan (``state MEP''), this type of
arrangement could also reduce overall administrative costs for
participating employers in large part because the Department would
consider this arrangement as a single ERISA plan. Under a state MEP,
each employer that chose to participate would not be considered to
have established its own ERISA plan, and the state could design its
defined contribution MEP so that the participating employers could
have limited fiduciary responsibilities (the duty to prudently
select the arrangement and to monitor its operation would continue
to apply). The continuing involvement by participating employers in
the ongoing operation and administration of a 401(k)-type individual
account MEP, however, generally could be limited to enrolling
employees in the state plan and forwarding voluntary employee and
employer contributions to the plan.'').
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[[Page 37523]]
One commenter suggested that the Department should establish a
``fiduciary checklist'' to assist small employers in discharging their
selection and monitoring duties. According to this commenter, the
checklist could encourage or require employers to: (1) Consider at
least three plans; (2) examine how long the plan has been in existence;
(3) review how many other employers and employees are actively
enrolled; (4) consider the investment options and all employer and
participant fees; and (5) receive and review a report on plan
operations and periodically assess employee satisfaction and complaints
at least annually. The Department recognizes that small employers often
benefit from compliance guides of the type identified by the commenter.
To assist business owners in carrying out their responsibilities under
ERISA to prudently select and monitor plan service providers generally,
the Department's EBSA, several years ago, published a compliance guide
entitled ``Tips for Selecting and Monitoring Service Providers for your
Employee Benefit Plan.'' The Department's EBSA maintains this document
on its website and updates it periodically. The Department agrees with
this commenter that small businesses may benefit from a checklist or
similar guidance on how to discharge their duties to prudently select
and monitor the MEP sponsor. Accordingly, the Department will review
and possibly update the Tips document taking into consideration the
five factors identified by the commenter.
One commenter requested that the Department clarify that the duties
of selection and monitoring are essentially the same for employers that
decide to participate in a particular MEP as they are for employers
that sponsor their own plans and delegate various plan investment and
administrative functions to other plan fiduciaries. Otherwise,
according to this commenter, any deviation from the existing framework
for allocating fiduciary responsibility in the MEP context may create
an incentive for employers with existing plans to transition to a MEP
for the sole purpose of limiting their liability. One commenter
additionally requested that the Department make it clear that, apart
from a duty to select and monitor the operations of the MEP, if the
employer selects any investment options, the employer must act and be
liable in a fiduciary capacity for this act. Generally speaking, the
process of selecting and maintaining service providers will vary
depending on the plan and services to be provided. Thus, the
commenters' questions are too generic to be answered in a vacuum.
Nonetheless, the following principles are clear. The bona fide group or
association typically, or the PEO always, is responsible for prudently
selecting and monitoring the service providers of the MEP they hire,
including any fiduciary service providers. In comparison, the business
owner must prudently select and monitor the MEP sponsor and get
periodic reports on the fiduciaries' management and administration of
the MEP. Finally, the decision to include or delete funds from a plan's
investment lineup, or to invest plan assets on the participant's behalf
in a particular fund on that lineup, is a fiduciary decision, subject
to the fiduciary provisions in Title I of ERISA.
b. Need for Reporting and Disclosure Changes
(i) In General
The Proposed Rule solicited comments on whether any reporting or
disclosure requirements are needed to ensure that participating
employers, participants, and beneficiaries of MEPs are adequately
informed of their rights and responsibilities with respect to MEP
coverage and that the public has adequate information regarding the
existence and operations of MEPs. Most responsive comments stated
either that no new substantive requirements are needed, or that the
Department should delay rulemaking on this subject until there is more
experience with the types of MEPs described in this final rule.\42\ The
Department agrees with this position and, therefore, the final rule
does not contain modifications to the Department's reporting and
disclosure requirements.
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\42\ The Department received several comments regarding
electronic disclosures. Although electronic disclosures, like MEPs,
were the subject of Executive Order 13847, they are part of a
separate rulemaking process. The Department also received a comment
regarding recommended disclosure requirements in an ``open MEP'' or
``pooled employer plan'' context. As noted earlier in this preamble,
open MEPs are the subject of a separate RFI and are not part of this
final rule.
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Several commenters asked the Department to confirm that the group
or association or PEO sponsoring the MEP, and not the participating
employers, are generally responsible for the participant disclosures
required by part 1 of ERISA. The Department confirms that the
administrator of the MEP--and not the participating employers--is
responsible for discharging the reporting and disclosure requirements
under part 1 of ERISA. In most cases, the group or association
sponsoring the MEP, and in all cases the PEO, will be the ERISA 3(16)
plan administrator.
(ii) PEOs and Lists of Participating Employers
Several commenters focused on the public's ability to obtain access
to a MEP's annual report, including information regarding the identity
of individual participating employers or the employer of a single
participant. One commenter, for instance, requested that the
administrator of a MEP, such as a PEO, be permitted to file the
portions of the Form 5500 annual report that relate to participating
employers on a confidential or redacted basis. In this commenter's
view, PEOs will be less likely to sponsor a MEP (and participants will
suffer) if competitors in the PEO marketplace are able to use publicly
available information from the Form 5500 for targeted marketing aimed
towards the PEO's client employers identified in the annual report.
Conversely, other commenters favored public access to reported
information and recommended that the Department make it even easier to
locate and retrieve information about specific participating employers.
For example, some commenters requested that the Department's website be
modified to enable searches based on the name or EIN of a participating
employer, rather than the name or EIN of the sponsor. One commenter,
representing a state's department of child support services, stated
that such agencies frequently need improved search methods to locate
assets of non-custodial parents in order to pursue state domestic
relations orders. This commenter believed that reporting should be
strengthened to permit searches based not only on the name or EIN of
the participating employer, but also based on the name of the plan
participant.
After reviewing the comments, the Department concluded that the
subject matter is outside the scope of this rulemaking project. The
Department may address some or all of this topic in a different
rulemaking project in the future, or through subregulatory guidance,
but does not otherwise address the comments in this final rule.
[[Page 37524]]
(iii) Fee and Conflict of Information Disclosures
Commenters asked whether each participating employer must receive
the disclosures required by section 408(b)(2) of ERISA and the
regulations thereunder. ERISA section 408(b)(2) and 29 CFR 2550.408b-
2(c) require that certain service providers to pension plans disclose
to a ``responsible plan fiduciary'' information about service
providers' compensation and potential conflicts of interest. The
regulation defines responsible plan fiduciary as ``a fiduciary with
authority to cause the covered plan to enter into . . . the contract or
arrangement.'' Typically, the responsible plan fiduciary is the plan
administrator (within the meaning of section 3(16) of ERISA) or named
fiduciary (within the meaning of section 402 of ERISA) of the MEP, and
not the participating or client employer. Thus, to the extent
participating or client employers in a MEP do not have such authority,
the Department is of the view that section 408(b)(2) and the
regulations thereunder do not require the disclosure of this
information to them. At the same time, however, if the bona fide group
or association or PEO itself is a covered service provider (within the
meaning of 29 CFR 2550.408b-2(c)) with respect to the MEP, the group or
association or PEO must furnish the specified information about its
compensation and potential conflicts of interest to the participating
or client employer at the time the participating employer or client
employer is considering adopting or subscribing to the MEP and
thereafter at intervals specified in the regulation. This information
must be disclosed because when the participating or client employer
adopts the MEP by executing the participation agreement or subscription
document, the participating or client employer effectively is acting as
a responsible plan fiduciary with respect to the group or association
or PEO.
In addition, participating or client employers have a duty under
section 404 of ERISA to periodically monitor ongoing management and
administration of the MEP to ensure the prudence of continued
participation. Carrying out this duty may be aided by the periodic
receipt from the administrator or named fiduciary of the MEP of
information similar to that described in 29 CFR 2550.408b-2(c), with
respect to other of the MEP's service providers.\43\ If the
administrator or named fiduciary were to refuse to provide such
information to a participating employer, either periodically or on
request, such failure must be taken into account by the participating
employer when deciding whether to continue participating in the MEP
and, in and of itself, may justify or require a decision to cease
participation.
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\43\ For example, GAO has emphasized the need for small
businesses ``to understand plan fees in order to help participants
secure adequate retirement savings. See GAO Testimony before the
Senate Comm. on Health, Education, Labor and Pensions, Statement of
Charles A. Jeszeck, GAO Director of Education, Workforce and Income
Security, GAO-13-748T (July 16, 2013) at 16, https://www.gao.gov/assets/660/655889.pdf.
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c. Termination or Severance Situations
Several commenters asked for guidance on severance or termination
situations. Specifically, these commenters asked about situations where
the participating employer or client employer severs or terminates its
relationship with the bona fide group or association or the bona fide
PEO, respectively, after having adopted or joined the MEP. The
commenters stated that in these situations, while the relationship
between the participating employer or client employer and the bona fide
group or association or the bona fide PEO is severed, the MEP itself
does not necessarily terminate and, consequently, there may be no
distributable event on which to authorize distributions of benefits to
the employees of the employer. These commenters asked for guidance on
whether these benefits may or must remain in the MEP, or whether they
may or must be distributed or transferred to another plan, and for
clarification of the status of the MEP as a single plan following the
severance or termination.
The commenters gave a few examples of likely severance or
termination situations. In one example, an employer is a member of a
local chamber of commerce, which meets the requirements to be a bona
fide group or association, and the employees of this employer
participate in the MEP sponsored by the chamber of commerce. The
employer terminates its membership with the local chamber of commerce
in favor of a statewide chamber of commerce. The employer ceases to
have any control over the local chamber of commerce on cancelation of
membership, despite the fact that such control is required under
paragraph (b)(1)(iv) of the final rule. In another example, a different
employer enters into a contract with a PEO that meets the requirements
to be a bona fide PEO. This employer had 10 common law employees when
it entered the contract with the PEO and enrolled the employees in the
MEP sponsored by the PEO. Years later, after a business downturn, the
employer must terminate the 10 employees and the only remaining worker
is the owner. As a sole proprietor, the business no longer needs the
services of the PEO and terminates the contract with the PEO. After
termination of the contract, the PEO no longer performs substantial
employment functions on behalf of this employer, despite the fact that
the performance of substantial employment functions is required under
paragraph (c)(1)(i) of the final rule.
Whether the benefits of the employees of a severing or terminating
employer may or must remain in the MEP, or whether they may or must be
distributed or transferred to another plan should be memorialized in
the plan document.\44\ Nevertheless, when a participating employer or
client employer severs or terminates its relationship with a bona fide
group or association or PEO, the severance or termination ordinarily
extinguishes the nexus that supports the conclusion that the group or
association or PEO is acting as the ``employer'' under section 3(5) of
ERISA for purposes of sponsoring a plan for the employees of the
participating employer or client employer. In this situation,
therefore, the group or association or PEO and the participating
employer or client employer will commonly want to implement a spin-off
of the assets and liabilities of the employees of the severing or
terminating employer, or a plan-to-plan transfer of those assets and
liabilities to a separate plan meeting the requirements of the Code, if
applicable, as soon as is reasonably practicable.
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\44\ Information Letter to John N. Erlenborn from Dennis M.
Kass, Assistant Secretary, Pension and Welfare Benefits
Administration, Department of Labor (March 13, 1986) (``we believe
that the decision of whether to establish a successor plan, and if
so, the type of such a plan, are clearly business decisions not
subject to Title I of ERISA. As in the case of the decision to
terminate, the decision to establish a successor plan involves the
exercise of wholly voluntary settlor functions. Similarly, decisions
about the design and provisions of any successor plan are not
subject to Title I.''). Decisions on whether benefits may or must
remain in the MEP, or whether they may or must be distributed are
subject to applicable Code provisions.
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Importantly, when a participating employer or client employer
severs or terminates its relationship with a bona fide group or
association or PEO, the severance or termination does not extinguish
any fiduciary obligations that the group or association or PEO owes to
these participants as the plan administrator and named fiduciary of the
MEP; rather, these obligations persist until the participants are no
longer covered by the MEP. Pending a
[[Page 37525]]
spin-off or transfer, the MEP generally continues to constitute a
single plan for purposes of title I of ERISA. But if the arrangement
continues to operate in virtually the same manner as before the
severance or termination (including the making of contributions by the
participating employer or client employer that severs or terminates its
relationship) and no party (the group or association, the PEO, or the
participating employer or client employer, as applicable) takes action
toward a spin-off or transfer within a reasonable timeframe following
the severance or termination, the MEP will no longer constitute a
single plan for purposes of ERISA. In this situation, the participating
employer or client employer (i.e., the entity that severed or
terminated its relationship with the group or association or PEO,
failed to promptly implement a spin-off or transfer, and nevertheless
continued the arrangement in virtually the same manner as before the
severance or termination) will be considered to have established and
maintained its own separate employee benefit plan. The group or
association or PEO will be considered to be acting as a service
provider to the plan of the former participating employer or client
employer. The MEP--exclusive of the severed employer but inclusive of
all remaining non-severed participating employers or client employers--
will continue to constitute a single plan for purposes of title I of
ERISA.
d. Plan Governance Issues
Commenters suggested that the Department consider the establishment
of various new regulatory provisions governing certain aspects of MEP
governance and administration. For example, one commenter recommended
that the Department establish minimum standards in order for a person
to sponsor and administer a MEP, including a minimum number of years of
experience in providing retirement benefits, minimum staff
qualifications, and minimum capital reserves. The Department believes
it has appropriately addressed issues of MEP governance and
administration to the extent such issues fall within the scope and
subject of this rulemaking, the definition of ``employer'' in section
3(5) of ERISA. The Department, however, will give further consideration
to these recommendations in connection with the comments received in
response to the RFI on open MEPs and any further rulemaking in this
area.
One commenter argued that MEPs should be required to have fair
rules that apply to all employers, participants and beneficiaries. That
commenter suggested that permitting MEPs to maintain multiple different
rules for different employers or classes of employers will increase
complexity and costs for all. As indicated, a MEP would be a single
plan under title I of ERISA. As such, ERISA would apply to the MEP in
the same way that ERISA applies to any employee benefit plan, but the
MEP sponsor, typically acting as the plan's administrator and named
fiduciary, would administer the MEP.\45\ This person will have
considerable discretion in determining, as a matter of plan design or a
matter of plan administration, how to treat the different interests of
the multiple participating employers and their employees. Accordingly,
this person, in distributing, investing, and managing the MEP's assets,
must be neutral and fair, dealing impartially with the participating
employers and their employees, taking into account any differing
interests.\46\ For example, when the fiduciary of a large MEP uses its
size to negotiate and secure discounted prices on investments and other
services from plan services providers, as is generally required by
ERISA, the fiduciary is bargaining on behalf of all participants
regardless of the size of their employer, and should take care to see
that these advantages are allocated among participants in an evenhanded
manner. Treating participating employers and their employees
differently without a reasonable and equitable basis would raise
serious concerns for the Department under sections 404(a)(1)(A) and (B)
of ERISA.
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\45\ As noted elsewhere, in the case of a PEO MEP under
paragraph (c) of the proposal, the PEO, as the plan sponsor, must
always act as the plan's administrator (within the meaning of
section 3(16)(A)) and a named fiduciary (within the meaning of
section 402 of ERISA) of the MEP.
\46\ See Field Assistance Bulletin No. 2003-03 (addressing what
rules apply to how expenses are allocated among plan participants in
a defined contribution pension plan). See also Varity Corp. v. Howe,
516 U.S. 489, 514 (1996) (``The common law of trusts recognizes the
need to preserve assets to satisfy future, as well as present,
claims and requires a trustee to take impartial account of the
interests of all beneficiaries.''); Restatement (Second) of Trusts
section 183 (``If a trust has two or more beneficiaries, the
trustee, in distributing, investing, and managing the trust
property, shall deal impartially with them, taking into account any
differing interests.'')
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One commenter recommended that the final rule govern the number of
designated investment alternatives under the MEP. One commenter
recommended that the final rule should provide that if an employer
fails to pay employee or employer required contributions, the MEP (or
the Federal or State licensed investment provider) should be required
to freeze the account and notify the employer, employee and the
Department. Limiting investment options and remedying delinquent
contributions are unrelated to the definition of ``employer'' in
section 3(5) of ERISA. Accordingly, the Department considers these
recommendations to be beyond the scope of this rulemaking.
Finally, many commenters recommended that the final rule expressly
permit MEPs to use electronic media as the default method of furnishing
disclosures to participating employers, plan participants, and
beneficiaries receiving benefits. Although improving the effectiveness
of retirement plan disclosures, including possibly through the broader
use of electronic delivery, is the subject of a different section of
the MEP Executive Order (E.O. 13847), the Department intends to address
this topic as part of a separate rulemaking process.
e. Corporate MEPs
The Proposed Rule solicited comments on whether the final rule
should address the status of so-called ``corporate MEPs,'' a term not
defined in ERISA. The Proposed Rule considered ``corporate MEPs'' to be
defined contribution plans that cover employees of employers related by
some level of common ownership, but that are not in the same controlled
group or affiliated service group within the meaning of 414(b), (c),
and (m) of the Code.
In response, one commenter provided an example of what it described
as a very common fact pattern that should be addressed by rulemaking or
other guidance. The example involves two companies, A and B, in
different industries and different parts of the country, where, as a
result of an acquisition, A now owns 60% of B but the remaining 40% of
B is owned by unrelated parties. If A and B jointly maintain a
retirement plan for the benefit of their employees, the commenter
stated that it does not appear that A and B would meet the commonality
of interest conditions in the Proposed Rule to qualify as a MEP and,
consequently, this ``corporate MEP'' would not be a single plan under
the Proposed Rule, but instead would be two plans for purposes of
ERISA.
The Department recognizes that meaningful levels of common
ownership may serve as an indicator that the members of the ownership
group have among themselves a sufficient relationship, unrelated to the
provision of benefits, such that one or more of these members can be
said to be acting ``indirectly in the interest of'' the others within
the meaning of ERISA
[[Page 37526]]
section 3(5) to sponsor a MEP for the group's participation. In DOL
Advisory Opinion 89-06A, for example, the Department opined that, a
member of a controlled group of corporations that establishes a benefit
plan for its employees and the employees of other members of the
controlled group, is considered to be an employer within the meaning of
ERISA section 3(5), such that only one plan exists for all members of
the group.\47\
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\47\ With respect to a plan maintained by one or more members of
a controlled group of corporations (within the meaning of section
1563(a) of the Code, determined without regard to sections
1563(a)(4) and (e)(3)(C)), all employees of such corporations shall
be treated as employed by a single employer. 29 U.S.C. 1060(c).
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On the record established thus far, however, the Department lacks a
meaningful basis on which to determine the precise level of ownership,
below the ownership thresholds of the aggregation rules in sections
414(b) and (c) of the Code, that conclusively distinguishes bona fide
ownership groups from commercial enterprises in which members have
nominal ownership levels and which exist primarily or solely to market,
distribute, underwrite or otherwise provide employee benefits to the
nominal owners. The Department, therefore, has decided to explore this
topic further in the RFI, published elsewhere in today's Federal
Register.
f. Interpretive Bulletin 2015-02
This final rule clarifies, through regulation, when an employer
group or association, or a PEO that meets certain conditions, may
sponsor a single MEP under title I of ERISA (as opposed to providing an
arrangement that constitutes multiple retirement plans). Based on its
comprehensive review, the Department, therefore, is finalizing this
regulation interpreting the term ``employer'' for purposes of ERISA
section 3(5). A number of commenters expressed concern regarding the
effect the rule, as proposed, could have on other guidance. Commenters
specifically indicated that they were concerned with the effect of the
proposed rule on State-sponsored MEPs subject to Interpretive Bulletin
2015-02. (29 CFR 2509.2015-02). Nothing in this final rule affects
prior guidance regarding how a State may act as an employer in relation
to an employee benefit plan. Instead, this final rule provides
additional regulatory certainty regarding when a group or association,
or a PEO, acts ``indirectly in the interest of an employer'' in
relation to a defined contribution multiple employer plan for purposes
of ERISA section 3(5). Whether a person acts ``indirectly in the
interest of an employer . . . in relation to an employee benefit plan''
for purposes of ERISA section 3(5) depends on the facts and
circumstances, including the type of employee benefit plan the entity
is acting in relation to, and the type of entity that is acting
indirectly in the interest of an employer. Based on its review, the
Department believes that this final rule will facilitate the adoption
and administration of MEPs and will expand access to workplace
retirement plans.
g. Plans Without Employees
The final rule contains an amendment to a different regulation, at
29 CFR 2510.3-3, to support the new working owner provision in
paragraph (d) of the final rule. That regulation states the general
principle that the term ``employee benefit plan'' shall not include any
plan, fund, or program under which no employees are participants
covered under the plan. The amendment makes it clear that this general
principle does not stand in the way of working owners who want to
participate in MEPs. The Proposed Rule sought comments on whether this
fix would be sufficient or whether additional or different regulatory
amendments should be made to confirm or clarify the long-established
exclusion from ERISA of plans covering only individual owners (such as
solo 401(k) plans), given the proposal to permit working owners to
participate in ERISA-covered MEPs and ARPs. No commenter suggested the
Proposed Rule was insufficient. One commenter, however, requested that
the Department make it clear that plans without employees continue not
to be covered by ERISA. In response to this comment, the Department
confirms that the final rule permits working owners to participate in
ERISA-covered MEPs without altering its position that a ``plan under
which . . . only a sole proprietor'' participates ``will not be covered
under title I.'' 29 CFR 2510.3-3(b). Thus, under the final rule,
working owners without employees can join an ERISA-covered MEP or they
can sponsor a defined contribution plans covering only themselves,
which are (and historically have been) outside the coverage of title 1
of ERISA.
h. Coordination With Other Federal Agencies
Several commenters raised issues involving the Code and other
federal laws beyond the Department's jurisdiction, and requested that
the Department coordinate and work with the relevant agencies to
provide guidance to facilitate and promote MEPs. For example, several
commenters requested that the Department work and coordinate with the
Department of the Treasury and the Internal Revenue Service (IRS) on
guidance regarding the circumstances under which a MEP may satisfy the
tax-qualification requirements in the Code, including the consequences
if one or more employers that sponsored or adopted the plan fails to
take one or more actions necessary to meet those requirements as
directed by Executive Order 13847. On July 3, 2019, after consultation
with the Department of Labor, the Department of the Treasury issued a
notice of proposed rulemaking addressing these tax qualification issues
in the Federal Register (84 FR 31777). Specifically, the proposed
regulations would provide an exception, if certain requirements are
met, to the application of the ``unified plan rule'' for a defined
contribution MEP in the event of a failure by an employer participating
in the plan to satisfy a qualification requirement or to provide
information needed to determine compliance with a qualification
requirement. These proposed regulations would affect MEPs, participants
in MEPs (and their beneficiaries), employers participating in MEPs, and
MEP plan administrators. The Department of Labor will continue to
consult with the Department of the Treasury and the IRS in connection
with their development of those regulations.
Other commenters focused on the need for guidance or special rules
on the Code's non-discrimination provisions more generally. One
commenter requested the Department to coordinate with the IRS to
clarify that MEPs are permitted to establish arrangements under section
403(b) of the Code (programs for the purchase of an annuity contract or
the establishment of a custodial account). One commenter requested that
the Department coordinate and work with the IRS and the Securities and
Exchange Commission to remove restrictions on the ability of 403(b)
plans to invest in certain investment vehicles. These comments are
beyond the scope of this final rule.
i. Severability
Finally, paragraph (e)(1) of the final rule includes a severability
provision that provides that if any of the provisions in the final rule
are found to be invalid or stayed pending further agency action, the
remaining portions of the rule would remain operative and available for
qualifying employer groups or associations or PEOs. Paragraph (e)(2) of
the final rule illustrates how the Department intends the severability
[[Page 37527]]
provision to apply in one specific situation. The example illustrates
that if a federal court were to find the substantial business purpose
test to be legally insufficient, then the substantial-business-purpose
safe harbor (viability) becomes the whole of that part of the rule
without the need for any further notice-and-comment rulemaking by the
Department. Although the example is detailed and specific, the
severability provision itself is not limited to the facts of the
example. For instance, a ruling by a federal court that the ``working
owners'' provision in section 2510.3-55(d) is void will not impact the
ability of an employer group or association to meet the ``commonality
of interest'' requirement in section 2510.3-55(b)(2) by being located
in the same geographic locale. This example has been added to paragraph
(e)(2) of the final rule to clarify the Department's intention that the
severability provision is one of general applicability and,
consequently, applies to the whole of the section and is not limited to
any specific provision.
C. Regulatory Impact Analysis
1. Summary
As discussed earlier in the preamble, this final rule is intended
to facilitate the creation and maintenance of MEPs by clarifying the
circumstances under which a person may act as an ``employer'' within
the meaning of ERISA section 3(5) in sponsoring a MEP. Workplace
retirement plans provide an effective way for employees to save for
retirement. Unfortunately, however, many hardworking Americans,
especially those employed by small businesses and those who are self-
employed, do not have access to a retirement plan at work. This has
become a more significant issue as employees are living longer and
facing the difficult prospect of outliving their retirement savings.
Expanding access to private sector MEPs could encourage the formation
of workplace retirement plans and broaden access to such plans among
small employers and among individuals who are ``working owners''
without employees, referred to herein as the ``self-employed''.
Many employer groups and associations have a thorough knowledge of
the economic challenges their members face. Using this knowledge and
the regulatory flexibility provided by this final rule, employer groups
and associations can sponsor MEPs tailored to the retirement plan needs
of their members at lower costs than currently available options. Thus,
the final rule provides employers with an important option to increase
access of workers, particularly those employed at small businesses and
the self-employed, to high-quality workplace retirement plans.
Small employers should benefit from economies of scale by
participating in MEPs, which could reduce their administrative costs
and plan fees. Like other large retirement plans, large MEPs created by
sponsors meeting the conditions set forth in this rule would enjoy
scale discounts and might exercise bargaining power with financial
services companies. Large MEPs could pass some of these savings through
to participating small employers. In particular, investment funds with
tiered pricing have decreasing expense ratios based on the aggregate
amount of money invested by a single plan.\48\ As a single plan, MEPs
should lower the expense ratio for investment management through the
pooling of investments from member employers, because the fee
thresholds would apply at the MEP level rather than at the member
employer level.\49\
---------------------------------------------------------------------------
\48\ According to Morningstar, nearly half of all investment
funds have management fee breakpoints at which fees are
automatically reduced upon reaching an investment threshold. See
Michael Rawson and Ben Johnson, ``2015 Fee Study: Investors Are
Driving Expense Ratios Down,'' Morningstar, 2015, available at
https://news.morningstar.com/pdfs/2015_fee_study.pdf.
\49\ MEPs create a pool of assets for investment that, at the
investment management level, are no different from pools of assets
from other employee benefit plans. Consistent with the Department's
view that the pool of assets is a single plan, the Department
expects that breakpoints for expense ratios would be applied at the
MEP level rather than at the member employer level.
---------------------------------------------------------------------------
Many well-established, geographically based organizations, such as
local chambers of commerce, are strong candidates to sponsor MEPs.
Currently, these geographically based organizations are restricted from
doing so as a sponsor of a single plan under title I of ERISA unless
their MEP meets the requirements of the Department's 2012 subregulatory
guidance for determining whether groups or associations of employers,
or PEOs were able to act as employers under section 3(5) of ERISA.\50\
Such previous guidance requires groups or associations to have a
particularly close economic or representational nexus to employers and
employees participating in the plan. Many groups or associations and
PEOs have identified these criteria, along with the absence of a clear
pathway for PEOs to sponsor MEPs, as major impediments to the expansion
of MEPs that are treated as single plans. By providing greater
flexibility governing the sponsorship of MEPs, the Department expects
this rule to reduce costs and increase access to workplace retirement
plans for many employees of small businesses and the self-employed.
---------------------------------------------------------------------------
\50\ EBSA Advisory Opinion 2012-04A (May 25, 2012).
---------------------------------------------------------------------------
Other potential benefits of the expansion of MEPs include: (1)
Increased economic efficiency as small firms can more easily compete
with larger firms in recruiting and retaining workers, (2) increased
acceptance of rollovers from other qualified plans, (3) enhanced
portability for employees that leave employment with an employer to
work for another employer participating in the same MEP, and (4) higher
quality data (more accurate and complete) reported to the Department on
the Form 5500.
The Department is aware that MEPs could be the target of fraud or
abuse. By their nature, MEPs have the potential to build up a
substantial amount of assets quickly and the effect of any abusive
schemes on future retirement distributions may be hidden or difficult
to detect for a long period. The Department, however, is not aware of
direct information indicating that the risk for fraud and abuse is
greater for MEPs than for other defined contribution pension plans. Nor
was such information received among the comments responding to the
proposal. Furthermore, the Department has compliance assistance and
enforcement systems in place to safeguard plan assets from fraud and
abuse.
The Department believes that participation in workplace retirement
plans will increase because of this rule; however, there is some
uncertainty regarding the extent of the increase. Participation levels
in workplace retirement plans depend on both how many employers decide
to offer plans and how many employees choose to participate in those
plans. An employer's decision to offer a retirement plan relies on many
factors, only some of which this final rule affects. If more employers
adopt MEPs, it is unclear how many of their employees will choose to
enroll and by how much aggregate retirement savings will increase.
Nevertheless, given the significant potential for MEPs to expand access
to affordable retirement plans, the Department has concluded that this
rule will deliver social benefits that justify their costs. The
Department's analysis is explained more fully below.
As discussed earlier in the preamble, some commenters argued that
to achieve an actual substantial increase in access to retirement
plans, the Department must expand the rule to allow (1) ``open MEPs''
or ``pooled employer plans,'' which generally are arrangements that
cover employees of employers with no
[[Page 37528]]
relationship other than their joint participation in the MEP, and (2)
so-called ``corporate MEPs,'' which are plans that cover employees of
related employers that are not in the same controlled group or
affiliated service group.\51\ Although the Department did not include
such arrangements in the final rule, it is simultaneously publishing
elsewhere in today's Federal Register a related RFI regarding whether
commercial service providers and corporate groups, other than employer
groups or associations and PEOs, should be able to sponsor MEPs to
develop a more robust record and obtain additional data regarding this
issue.
---------------------------------------------------------------------------
\51\ In Advisory Opinion 89-06A, the Department stated that it
would consider a member of a controlled group of corporations that
establishes a benefit plan for its employees and/or the employees of
other members of the controlled group to be an employer within the
meaning of ERISA section 3(5).
---------------------------------------------------------------------------
2. Executive Orders
Executive Orders 12866 \52\ and 13563 \53\ direct agencies to
assess all costs and benefits of available regulatory alternatives and,
if regulation is necessary, to select regulatory approaches that
maximize net benefits (including potential economic, environmental,
public health and safety effects; distributive impacts; and equity).
Executive Order 13563 emphasizes the importance of quantifying both
costs and benefits, of reducing costs, of harmonizing rules, and of
promoting flexibility.
---------------------------------------------------------------------------
\52\ 58 FR 51735 (Oct. 4, 1993).
\53\ 76 FR 3821 (Jan. 21, 2011).
---------------------------------------------------------------------------
Under Executive Order 12866, ``significant'' regulatory actions are
subject to review by the Office of Management and Budget (OMB). Section
3(f) of the Executive Order defines a ``significant regulatory action''
as an action that is likely to result in a rule: (1) Having an annual
effect on the economy of $100 million or more in any one year, or
adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''), (2) creating a serious
inconsistency or otherwise interfering with an action taken or planned
by another agency, (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof, or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order. It has been determined
that this rule is economically significant within the meaning of
section 3(f)(1) of the Executive Order. Therefore, OMB has reviewed the
rule pursuant to the Executive Order.
The background to the rule is discussed earlier in the preamble.
This section assesses the expected economic effects of the rule.
3. Introduction and Need for Regulation
While many Americans have accumulated significant retirement
savings, many others have little, if any, assets saved for retirement.
For example, the Employee Benefit Research Institute projects that 24
percent of the population aged 35 to 64 will experience a retirement
savings shortfall, meaning resources in retirement will not be
sufficient to meet their average retirement expenditures.\54\ If
uncovered long-term care expenses from nursing homes and home health
care are included in the retirement readiness calculation, 43 percent
of that population will experience a shortfall, and the projected
retirement savings deficit is $4.13 trillion.\55\
---------------------------------------------------------------------------
\54\ Jack VanDerhei, ``EBRI Retirement Security Projection
Model[supreg](RSPM)--Analyzing Policy and Design Proposals,''
Employee Benefit Research Institute Issue Brief, no. 451 (May 31,
2018).
\55\ Id.
---------------------------------------------------------------------------
Among all workers aged 26 to 64 in 2013, 63 percent participated in
a retirement plan either directly or through a working spouse. That
percentage ranged, however, from 52 percent of those aged 26 to 34 to
68 percent of those aged 55 to 64; and from 25 percent for those with
adjusted gross income (AGI) less than $20,000 per person to 85 percent
for those with AGI of $100,000 per person or more.\56\
---------------------------------------------------------------------------
\56\ Peter J. Brady, ``Who Participates in Retirement Plans,''
ICI Research Perspective, vol. 23, no. 05, (July 2017).
---------------------------------------------------------------------------
Workplace retirement plans often provide a more effective way for
employees to save for retirement than saving in their own IRAs.
Compared with saving on their own in IRAs, workplace retirement plans
provide employees with: (1) Higher contribution limits, (2) generally
lower investment management fees as the size of plan assets increases,
(3) a well-established uniform regulatory structure with important
consumer protections, including fiduciary obligations, recordkeeping
and disclosure requirements, legal accountability provisions, and
spousal protections, (4) automatic enrollment, and (5) stronger
protections from creditors.\57\ At the same time, workplace retirement
plans provide employers with choice among plan features and the
flexibility to tailor retirement plans that meet their business and
employment needs.
---------------------------------------------------------------------------
\57\ Section 522 of the Bankruptcy Code (11 U.S.C. 522),
provides an unlimited exemption for SEP and Simple IRAs, and
pension, profit sharing, and qualified plans, such as 401(k)s, as
well as plan assets that are rolled over to an IRA. However, other
traditional IRAs and Roth IRAs are protected up to a value of
$1,283,025 per person for 2018 (inflation adjusted).
---------------------------------------------------------------------------
In spite of these advantages, many workers, particularly those
employed by small employers and the self-employed, lack access to
workplace retirement plans. Table 1 below shows that at business
establishments with fewer than 50 workers, 49 percent of the workers
have access to retirement benefits.\58\ In contrast, at business
establishments with more than 500 workers, 88 percent of workers have
access to retirement benefits. Table 1 also shows that many small
employers do not offer a retirement plan to their workers.\59\
---------------------------------------------------------------------------
\58\ These statistics apply to private industry. U.S. Bureau of
Labor Statistics, National Compensation Survey, Employee Benefits in
the United States (March 2018).
\59\ Id.
Table 1--Retirement Plan Coverage by Employer Size
----------------------------------------------------------------------------------------------------------------
Workers Establishments
--------------------------------------------------------
Share
Establishment size: number of workers Share with access participating in Share offering a
to a retirement a retirement plan retirement plan %
plan % %
----------------------------------------------------------------------------------------------------------------
1--49.................................................. 49 34 45
50--99................................................. 65 46 75
100--499............................................... 79 58 88
500+................................................... 89 76 94
[[Page 37529]]
All.................................................... 66 50 48
----------------------------------------------------------------------------------------------------------------
Source: These statistics apply to private industry. U.S. Bureau of Labor Statistics, National Compensation
Survey, Employee Benefits in the United States (March 2018).
Surveys of employers have suggested several reasons employers--
especially small businesses--do not offer a workplace retirement plan
to their employees. Regulatory burdens and complexity add costs and can
be significant disincentives. A survey by the Pew Charitable Trusts
found that only 53 percent of small- to mid-sized businesses offer a
retirement plan, and 37 percent of those not offering a plan cited cost
as the main reason.\60\ Employers often also cite annual reporting
costs and exposure to potential fiduciary liability as major
impediments to plan sponsorship.\61\
---------------------------------------------------------------------------
\60\ The Pew Charitable Trusts, ``Employer Barriers to and
Motivations for Offering Retirement Benefits,'' Issue Brief (June
21, 2017), available at http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/06/employer-barriers-to-and-motivations-for-offering-retirement-benefits#0-overview.
\61\ See U.S. Government Accountability Office, GAO-12-326:
``Private Pensions: Better Agency Coordination Could Help Small
Employers Address Challenges to Plan Sponsorship'' (March 2012) at
18-19. (https://www.gao.gov/products/GAO-12-326).
---------------------------------------------------------------------------
Some employers may not offer retirement benefits because they do
not perceive such benefits as necessary to recruit and retain good
employees.\62\ In focus groups, many employers not offering retirement
benefits reported believing that their employees would prefer to
receive higher salaries, more paid time off, or health insurance
benefits than retirement benefits.\63\ Small employers themselves may
not have much incentive to offer retirement benefits because they are
not sure how long their businesses are going to survive. This may lead
them to focus on short-term concerns rather than their employees' long-
term well-being. In analyzing new establishments, researchers found
that 56 percent did not survive for four years.\64\
---------------------------------------------------------------------------
\62\ Employee Benefit Research Institute, ``Low Worker Take Up
of Workplace Benefits May Impact Financial Wellbeing'' (April 10,
2018).
\63\ The Pew Charitable Trusts, ``Employer Barriers to and
Motivations for Offering Retirement Benefits,'' 2017.
\64\ Amy E. Knaup and Merissa C. Piazza, ``Business Employment
Dynamics data: survival and longevity, II,'' Monthly Labor Review
(Sept. 2007).
---------------------------------------------------------------------------
Many small businesses may have not taken advantage of the existing
opportunities to establish workplace retirement savings plans because
they lack awareness. As found in a Pew survey, two-thirds of small- and
mid-sized employers that were not offering a retirement plan said they
were not at all familiar with currently available options such as
Simplified Employee Pension (SEP) and Savings Incentive Match Plan for
Employees (SIMPLE) plans.\65\
---------------------------------------------------------------------------
\65\ The Pew Charitable Trusts, ``Employer Barriers to and
Motivations for Offering Retirement Benefits,'' 2017.
---------------------------------------------------------------------------
MEPs may address several of these issues. Specifically, to the
extent that MEPs reduce the total cost of providing various types of
plans to small employers, market forces may lead MEPs to offer and
promote such plans to small employers that would otherwise have been
overlooked because of high costs. Moreover, groups or associations and
PEOs sponsoring MEPs sometimes may have more success raising awareness
among small employers of the retirement savings plan options that exist
and the benefits of establishing such plans as a tool for recruiting or
retaining qualified workers. MEP sponsors may be particularly effective
at raising awareness among small employers that are already members of
the group or association or clients of the PEO.
Small businesses typically have fewer administrative efficiencies
and less bargaining power than large employers do. The final rule
provides a way for small employers and the self-employed to band
together in MEPs that, as single, large plans, have some of the same
economic advantages as other large plans. As discussed above, the
Department's prior subregulatory guidance limits the ability of small
employers and self-employed individuals to join MEPs and thereby to
realize attendant potential administrative cost savings. With certain
exceptions, each employer operating a separate plan must file its own
Form 5500 annual report; and generally, if the plan has 100 or more
participants, an accountant's audit of the plan's financial position
instead of relying on the audit of a combined plan.\66\ Each small
employer also would have to obtain a separate fidelity bond satisfying
the requirements of ERISA.\67\
---------------------------------------------------------------------------
\66\ Note that ERISA regulations exempt small plans, generally
those with under 100 participants, from the audit requirement if
they meet certain conditions. 29 CFR 2520.104-46. In 2015, more than
99 percent of small defined contribution pension plans that filed
the Form 5500 or the Form 5500-SF did not attach an audit report.
\67\ ERISA section 412 and related regulations (29 CFR 2550.412-
1 and 29 CFR part 2580) generally require every fiduciary of an
employee benefit plan and every person who handles funds or other
property of such plan to be bonded. ERISA's bonding requirements are
intended to protect employee benefit plans from risk of loss due to
fraud or dishonesty on the part of persons who handle plan funds or
other property. ERISA refers to persons who handle funds or other
property of an employee benefit plan as plan officials. A plan
official must be bonded for at least 10 percent of the amount of
funds he or she handles, subject to a minimum bond amount of $1,000
per plan with respect to which the plan official has handling
functions. In most instances, the maximum bond amount that can be
required under ERISA with respect to any one plan official is
$500,000 per plan; however, the maximum required bond amount is
$1,000,000 for plan officials of plans that hold employer
securities.
---------------------------------------------------------------------------
As stated earlier in the preamble, on August 31, 2018, President
Trump issued Executive Order 13847, ``Strengthening Retirement Security
in America,'' stating that ``[i]t shall be the policy of the Federal
Government to promote programs that enhance retirement security and
expand access to workplace retirement savings plans for American
workers.'' The Executive Order directed the Secretary of Labor to
examine policies that would: (1) Clarify and expand the circumstances
under which United States employers, especially small and mid-sized
businesses, may sponsor or participate in a MEP as a workplace
retirement savings option offered to their employees, subject to
appropriate safeguards, and (2) increase retirement security for part-
time workers, sole proprietors, working owners, and other
entrepreneurial workers with
[[Page 37530]]
nontraditional employer-employee relationships by expanding their
access to workplace retirement savings plans, including MEPs. The
Executive Order further directed, to the extent permitted by law and
supported by sound policy, the Department to consider within 180 days
of the date of the Executive Order whether to issue a notice of
proposed rulemaking, other guidance, or both, that would clarify when a
group or association of employers, or other appropriate business or
organization could be an ``employer'' within the meaning of ERISA
section 3(5).
In response to the Executive Order, the Department has conducted a
thorough review of its current policies regarding MEPs and of comments
received in response to the proposal, and has determined that its
existing interpretive position is unnecessarily narrow. The Department
has concluded that regulatory action is appropriate to establish
greater flexibility in the regulatory standards governing the criteria
that must exist in order for an employer group or association or PEO to
sponsor a MEP.
The final rule generally provides this flexibility by making five
important changes to the Department's prior subregulatory guidance.
First, it clarifies the existing requirement in prior subregulatory
guidance that bona fide groups or associations must have at least one
substantial business purpose unrelated to the provision of benefits.
Second, it relaxes the requirement that group or association members
share a common interest, as long as they operate in a common geographic
area. Third, it makes clear that groups or associations whose members
operate in the same trade, industry, line of business, or profession
could sponsor MEPs, regardless of geographic distribution. Fourth, it
clarifies that working owners without employees are eligible to
participate in MEPs sponsored by bona fide employer groups or
associations that meet the requirements of the rule. Fifth, it
establishes criteria under which ``bona fide'' PEOs may sponsor MEPs
covering the employees of their client employers.
These criteria also result in more MEPs being treated consistently
under the Code and title I of ERISA, and such consistency removes
another barrier inhibiting the broader establishment of MEPs. As
discussed earlier in the preamble, a retirement plan covering employees
of multiple employers that satisfies the requirements of IRC section
413(c) is considered a single plan under IRC section 413(c), which
addresses the tax-qualified status of MEPs. Moreover, in Revenue
Procedure 2002-21, 2002-1 C.B. 911, the IRS issued guidance that
provided an avenue for PEOs to administer a MEP for the benefit of
worksite employees of client organizations and not violate the
exclusive benefit rule.\68\
---------------------------------------------------------------------------
\68\ See Internal Revenue Code (IRC) section 413(c)(2) and 26
CFR 1.413-2(c) of the Income Tax Regulations, which provide that, in
determining whether a MEP is for the exclusive benefit of its
employees (and their beneficiaries), all employees participating in
the plan are treated as employees of each such employer. IRC
sections 413(c)(1) and (3) provide that IRC sections 410(a)
(participation) and 411 (minimum vesting standards) also are applied
as if all employees of each of the employers who maintain the plan
were employed by a single employer. Under Treas. Reg. 26 CFR 1.413-
2(a)(2), a plan is subject to the requirements of IRC section 413(c)
if it is a single plan and the plan is maintained by more than one
employer. See generally Treas. Reg. 26 CFR 1.413-1(a)(2), 1.413-
2(a)(2), and 1.414(l)-1(b)(1). However, the minimum coverage
requirements of IRC section 410(b) and related nondiscrimination
requirements are generally applied to a MEP on an employer-by-
employer basis.
---------------------------------------------------------------------------
By establishing greater flexibility in the standards and criteria
for sponsoring MEPs than previously articulated in subregulatory
interpretive rulings under ERISA section 3(5), the final regulation
facilitates the adoption and administration of MEPs and should expand
access to, and lower the cost of, workplace retirement savings plans,
especially for employees of small employers and certain self-employed
individuals. At the same time, reflecting the position taken in its
subregulatory guidance, the Department intends that the conditions
included in the final rule will continue to distinguish plans sponsored
by entities that satisfy ERISA's definition of ``employer'' from
arrangements or services offered by other entities.
4. Affected Entities
The final rule has the potential to encourage both the creation of
new MEPs and the expansion of existing MEPs. As background for
estimating the number of entities that would be affected by this rule
and its impact, the Department has reviewed the characteristics of
existing MEPs that file Forms 5500.\69\ Since this rule is limited to
defined contribution pension plans, referred to in this document as
``MEPs'' or ``DC MEPs,'' Table 2 presents statistics for DC MEPs only.
Currently DC MEPs comprise only a small share of the private sector
retirement system, as shown in Table 2.\70\ Based on the latest
available data, about 4,630 DC MEPs exist with approximately 4.4
million total participants, 3.7 million of whom are active
participants. DC MEPs hold about $181 billion in assets.\71\
---------------------------------------------------------------------------
\69\ ``Forms 5500'' refers collectively to the Form 5500 (Annual
Return/Report of Employee Benefit Plan) and the Form 5500-SF (Annual
Return/Report of Small Employee Benefit Plan).
\70\ EBSA performed these calculations using the 2016 Research
File of Form 5500 filings. For these purposes, EBSA classified a
plan as a MEP if it indicated ``multiple employer plan'' status on
the Form 5500 Part I Line A and if it did not report collective
bargaining. The estimates are weighted and rounded, which means they
may not sum precisely.
\71\ Id.
Table 2--Current Statistics on MEPs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of MEPs Total participants Active participants Total assets
--------------------------------------------------------------------------------------------------------------------------------------------------------
MEP DC Plans......................... 4,630 4.4 million................... 3.7 million................... $181 billion.
As a share of all ERISA DC plans. 0.7% 4.4%.......................... 4.6%.......................... 3.2%.
MEP DC Plans......................... 4,630 4.4 million................... 3.7 million................... $181 billion.
401(k) Plans..................... 4,391 4.1 million................... 3.4 million................... $166 billion.
Other DC Plans................... 239 0.4 million................... 0.3 million................... $15 billion.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: EBSA performed these calculations using the 2016 Research File of Form 5500 filings. For these purposes, EBSA classified a plan as a MEP if it
indicated ``multiple employer plan'' status on the Form 5500 Part I Line A and if it did not report collective bargaining. The estimates are weighted
and rounded, which means they may not sum precisely.
Some DC MEPs are very large; 56 percent of total participants are
in MEPs with 10,000 or more participants.\72\ Furthermore, 98 percent
of total participants are in MEPs with 100 or more participants. There
are 40 MEPs holding over $1 billion in assets each.\73\ In existing DC
MEPs, 89 percent of participants direct all of the
[[Page 37531]]
investments, another 8 percent direct the investment of a portion of
the assets, and the remainder did not direct the investment of any of
the assets.\74\
---------------------------------------------------------------------------
\72\ Id.
\73\ Id.
\74\ Id.
---------------------------------------------------------------------------
There are caveats to keep in mind when interpreting the data
presented in Table 2 above. For example, under the Department's prior
subregulatory guidance, some plans established and maintained by groups
of employers that might meet the conditions of the final rule, would
have been deemed to be individual plans sponsored by each of the
employers in the group. In these circumstances, each participating
employer is required to file a Form 5500 just as it would if it
established its own plan. These filings are indistinguishable from
typical single-employer plans and do not appear in the data set as
identifiable multiple employer plans.\75\
---------------------------------------------------------------------------
\75\ In addition, there are some plans that are erroneously
indicating that they are ``multiple employer plans'' rather than
``single-employer plans'' under title I of ERISA. These plans may in
fact be group or association or PEO-type MEPs that do not meet the
conditions of the prior DOL subregulatory guidance. This distorts
the database and leads to inaccurate estimates. In particular, the
high number of plans erroneously reporting that they are MEPs likely
overestimates the number of existing MEPs for purposes of title I of
ERISA and underestimates the average size of MEPs.
---------------------------------------------------------------------------
As stated earlier in the preamble, PEOs generally are entities that
enter into agreements with client employers to perform certain
employment responsibilities, such as tax withholding, to the
individuals who perform services for the client employers. At the end
of 2017, there were 907 PEOs operating in the United States, providing
services to 175,000 client employers with 3.7 million employees.\76\
The final rule would allow certain PEOs meeting the requirements of
paragraph (c) to sponsor MEPs and offer coverage to their client
employers' employees.
---------------------------------------------------------------------------
\76\ Laurie Bassi and Dan McMurrer, ``An Economic Analysis: The
PEO Industry Footprint in 2018,'' National Association of
Professional Employer Organizations, September 2018, available at
https://www.napeo.org/docs/default-source/white-papers/2018-white-paper-final.pdf?sfvrsn=6.
---------------------------------------------------------------------------
This final rule should benefit many workers that might otherwise
tend to lack access to high-quality, affordable, on-the-job retirement
savings opportunities. These workers include self-employed individuals
without paid employees. Although there are other retirement savings
vehicles available to these self-employed workers, they are less likely
to access and participate in retirement plans. For example, only six
percent of self-employed individuals participated in retirement plans
in 2013.\77\ The final rule is expected to provide many of these self-
employed workers without employees with a new opportunity to access a
retirement plan by joining a MEP. Approximately 8 million self-employed
workers between ages 21 and 70, representing 6 percent of all similarly
aged workers, have no employees and usually work at least 20 hours per
week, and under this rule will become eligible to join MEPs.\78\ These
workers are involved in a wide range of occupations: lawyers, doctors,
real estate agents, childcare providers, as well as workers who provide
on-demand services, often through online intermediaries, such as ride-
sharing online platforms. In many respects, the self-employed are quite
different from employees in a traditional employer-employee
arrangement. For example, self-employed persons often have complex work
arrangements--they are more likely to work part-time or hold multiple
jobs.\79\ Similarly, some provide on-demand services part-time, or as a
second or third job.\80\
---------------------------------------------------------------------------
\77\ Craig Copeland, ``Employment-Based Retirement Plan
Participation: Geographic Differences and Trends, 2013,'' EBRI Issue
Brief, no. 405, October 2014. In this report, the self-employed are
mostly unincorporated.
\78\ DOL tabulations of the February 2019 Current Population
Survey basic monthly data.
\79\ For tax administrative data, see Emilie Jackson, Adam
Looney, and Shanthi Ramnath, ``The Rise of Alternative Work
Arrangements: Evidence and Implications for Tax Filing and Benefit
Coverage.'' U.S. Department of Treasury, Office of Tax Analysis,
Working Paper 114 (January 2017). For survey data, see the Survey of
Business Owners and Self-Employed Persons, 2012 from the Census
Bureau at https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=SBO_2012_00CSCBO04&prodType=table.
\80\ ``Gig Economy and the Future of Retirement,'' Betterment,
2018, available at https://www.betterment.com/wp-content/uploads/2018/05/The-Gig-Economy-Freelancing-and-Retirement-Betterment-Survey-2018_edited.pdf.
---------------------------------------------------------------------------
On-demand workers, in particular, may face obstacles to saving for
retirement. While a number of tax-preferred retirement savings vehicles
are already available to them, many might find it difficult and
expensive to navigate these options on their own.\81\ Relatively few of
those workers have access to employer-sponsored retirement plans, one
survey found.\82\ According to another survey, many traditional workers
who pursue on-demand work on the side do so at least partly to help
them save more for retirement. On the other hand, most of those for
whom on-demand work is their main job have less than $1,000 set aside
for retirement.\83\ MEPs should help raise awareness and ease entry to
retirement coverage for broad classes of these workers, such as on-
demand drivers.
---------------------------------------------------------------------------
\81\ For related information see, for example, Jonathan Kahler,
``Retirement planning in a `gig economy','' Vanguard, June 13, 2018,
available at https://vanguardblog.com/2018/06/13/retirement-planning-in-a-gig-economy/, which explains that working on demand is
``running your own HR department and you're the benefits manager,
which means taking sole responsibility for your retirement.''
\82\ ``Gig Workers in America: Profiles, Mindsets, and Financial
Wellness,'' Prudential, 2017, available at http://research.prudential.com/documents/rp/Gig_Economy_Whitepaper.pdf.
\83\ ``Gig Economy and the Future of Retirement,'' Betterment,
2018, available at https://www.betterment.com/wp-content/uploads/2018/05/The-Gig-Economy-Freelancing-and-Retirement-Betterment-Survey-2018_edited.pdf. This same survey found, however, that most
on-demand workers are paying off debt.
---------------------------------------------------------------------------
Electronically mediated workers obtain short jobs or tasks through
websites or mobile apps that both connect them with customers and
facilitate payment for the tasks. In May 2017, there were approximately
1.6 million electronically mediated workers (1 percent of total
employment) including all who performed electronically mediated work
for their main job, a second job, or for additional work for pay.\84\
Compared to the overall workforce, electronically mediated workers are
more likely to work part-time, more likely to have a bachelor's degree
or higher, and more likely to be self-employed, particularly
unincorporated self-employed.\85\ Independent contractors were more
likely to perform electronically mediated work (6 percent) than workers
in traditional employer-employee arrangements (less than 1 percent) in
2017.
---------------------------------------------------------------------------
\84\ ``Electronically mediated work: New questions in the
Contingent Worker Supplement'' Monthly Labor Review, September 2018,
Bureau of Labor Statistics.
\85\ Id.
---------------------------------------------------------------------------
Policymakers have expressed concern about how many workers
providing on-demand services, and self-employed workers more generally,
do not have access to retirement plans and appear to be ill-prepared
for retirement. By allowing self-employed individuals who meet the
requirements of the final rule to participate in MEPs, the rule will
increase their access to retirement plans.
5. Benefits
a. Expanded Access to Coverage
Generally, employees rarely choose to save for retirement outside
of the workplace, despite having options to save in tax-favored savings
vehicles, such as investing either in traditional IRAs or Roth IRAs.
Thus, the availability of workplace retirement plans is a significant
factor affecting whether workers save for their retirement. Yet,
despite the advantages of workplace retirement plans, access to
[[Page 37532]]
such plans for employees of small businesses is relatively low. The
final rule's expansion of access to certain MEPs enables groups of
private-sector employers to participate in a collective retirement plan
and provide employers with another efficient way to reduce some costs
of offering workplace retirement plans. Thereby, more plan formation
and broader availability of such plans should occur, especially among
small employers.
The MEP structure addresses significant concerns from employers
about the costs of setting up and administering retirement benefit
plans. In order to participate in a MEP, employers generally are
required to execute a participation agreement or similar instrument
setting forth the rights and obligations of the MEP and participating
employers. These employers will then participate in a single plan,
rather than sponsoring a separate ERISA-covered plan. Therefore the
employer group or association or PEO will act as the ``employer''
sponsoring the MEP within the meaning of section 3(5) of ERISA. That
employer group or association or PEO typically will assume the roles of
plan administrator and named fiduciary. The individual employers would
not be directly responsible for the MEP's overall compliance with
ERISA's reporting and disclosure obligations. Accordingly, the MEP
structure should address small employers' concerns regarding the cost
associated with fiduciary liability of sponsoring a retirement plan by
effectively transferring much of the legal risks and responsibilities
to professional fiduciaries who would be responsible for managing plan
assets and selecting investment menu options, among other things.
Moreover, there is potential that more of the fiduciary responsibility
will reside where it will be discharged more efficiently by qualified
professionals with more skill than otherwise would be expected, which
could ultimately lead to greater protection for plan participants and
beneficiaries. MEPs as large plans will generally be likely to work
with service providers with a high level of specialized expertise.
Participating employers' continuing involvement in the day-to-day
operations and administration of their MEP generally could be limited
to enrolling employees and forwarding voluntary employee and employer
contributions to the plan. Thus, participating employers could keep
more of their day-to-day focus on managing their businesses, rather
than their pension plans.
Congress has repeatedly enacted legislation intended to lower
costs, simplify requirements, and ease administrative burdens for small
employers to sponsor retirement plans. For example, the Revenue Act of
1978 \86\ and the Small Business Job Protection Act of 1996 \87\
established the SEP IRA plan and the SIMPLE IRA plan, respectively,
featuring fewer compliance requirements than other plan types. The
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) \88\
included provisions intended to increase access to retirement plans for
small businesses by: (1) Eliminating top-heavy testing requirements for
safe harbor 401(k) plans, (2) increasing contribution limits for
employer-sponsored IRA plans and 401(k) plans, and (3) creating tax
credits for small employers to offset new plan startup costs and for
individuals within certain income limits who make eligible
contributions to retirement plans. Despite these legislative efforts to
increase access to retirement savings plans for small employers, as
shown in Table 1, above, the percentage of the U.S. workforce
participating in a workplace retirement plan remains around 50 percent.
Therefore, a critical question is whether MEPs meeting the requirements
of the final rule will increase access to workplace retirement plans
when other initiatives have had limited effect. Several factors
indicate to the Department that they should.
---------------------------------------------------------------------------
\86\ Public Law 95-600, 152, 92 Stat. 2763, 2791.
\87\ Public Law 104-188, 1421, 110 Stat. 1755, 1792.
\88\ Public Law 107-16, 115 Stat. 38.
---------------------------------------------------------------------------
First, the Department believes that employers may be more likely to
participate in a MEP sponsored by a PEO, or a group or association of
employers, with whom they have a pre-existing relationship based on
trust and familiarity. For example, a PEO that performs payroll or
human resources services for an employer would have connected
information technology infrastructures that would facilitate efficient
transfers of employee and employer contributions. Similarly, small
employers obtaining health insurance coverage through an AHP sponsored
by a group or association may find it convenient and cost effective to
establish retirement plans offered by the same group or association. In
many cases, the group or association and small employers may link their
information technology systems to collect healthcare premiums from
participating employers,\89\ and that infrastructure could also be used
to collect retirement contributions, resulting in IT-related start-up
costs savings. In addition, small employers and self-employed
individuals may encounter fewer administrative burdens if the same
group or association administers both their health and retirement
plans.
---------------------------------------------------------------------------
\89\ In the analogous context of health plans, the Department
recently issued a final regulation that enhances the ability of
unrelated employers to band together to provide health benefits
through a single ERISA-covered plan called an AHP. The AHP Rule,
which was issued on June 21, 2018, expands access to more
affordable, quality health care by amending the definition of
``employer'' under section 3(5) of ERISA for AHPs. Similar to this
rule, the AHP Rule established alternative criteria under ERISA's
section 3(5) definition of employer to permit more groups or
associations of employers to establish a multiple employer group
health plan that is a single employee welfare benefit plan within
the meaning of ERISA section 3(1) of ERISA.
---------------------------------------------------------------------------
Second, employers may be incentivized to sponsor these plans based
on cost savings that may occur when payroll services are integrated
with retirement plan record-keeping systems. Several firms in the
market already provide payroll services and plan record-keeping
services particularly tailored to small employers.\90\ These firms can
afford to provide these integrated services at a competitive price,
suggesting that integrating these services could lead to some
efficiency gains. Since PEOs already provide payroll services to client
employers, a MEP sponsored by a PEO can reap the benefits of
integrating these services, which can in turn benefit participating
employers through lower fees and ease of administration.
---------------------------------------------------------------------------
\90\ Cerulli Associates, U.S. Retirement Markets 2016 (available
at https://www.cerulli.com/vapi/public/getcerullifile?filecid=Cerulli-US-Retirement-Markets-2016-Information-Packet).
---------------------------------------------------------------------------
As further discussed in the uncertainty section below, the
Department does not have sufficient data to determine precisely the
likely extent of participation by small employers and the self-employed
in MEPs due to the final rule. Nor did the comments submitted in
response to the proposed rule offer data on this topic. However,
overall, the Department believes that the rule will provide a new
valuable option for small employers and the self-employed to adopt
retirement savings plans for their employees, which should increase
access to retirement plans for many American workers.
b. Reduced Fees and Administration Savings
Many MEPs would benefit from scale advantages that small businesses
do not currently enjoy, and the Department expects that MEPs will pass
some of the attendant savings onto participating
[[Page 37533]]
employers and participants.\91\ Grouping small employers together into
a MEP could facilitate savings through administrative efficiencies
(economies of scale) and sometimes through price negotiation (market
power). The degree of potential savings may be different for different
types of administrative functions. For example, scale efficiencies can
be very large with respect to asset management, and may be smaller, but
still meaningful, with respect to recordkeeping.
---------------------------------------------------------------------------
\91\ See, e.g., BlackRock, ``Expanding Access to Retirement
Savings for Small Business,'' Viewpoint (Nov. 2015).
---------------------------------------------------------------------------
Large scale may create two distinct economic advantages for MEPs.
First, as scale increases, marginal costs for MEPs would diminish and
MEPs would spread fixed costs over a larger pool of member employers
and employee participants, creating direct economic efficiencies.
Second, larger scale may increase the negotiating power of MEPs.
Negotiating power matters when competition among financial services
providers is less than perfect and they can command greater profits
than in an environment with perfect competition. Very large plans may
sometimes exercise their own market power to negotiate lower prices,
translating what would have been higher revenue for financial services
providers into savings for member employers and employee participants.
There may be times when scale efficiencies would not translate into
savings for small employer members and their employee participants
because regulatory requirements applicable to large MEPs may be more
stringent than those applicable to most separate small plans. For
example, some small plans are exempt from annual reporting
requirements, and many others are subject to more streamlined reporting
requirements than larger plans. More often, however, the legal status
of MEPs as a single large plan will streamline certain regulatory
burdens. For example, a MEP can file a single annual return/report and
obtain a single bond in lieu of the multiple reports and bonds
necessary when other providers of bundled financial services administer
many separate plans.
As a result of these two types of scale efficiencies, MEPs
operating as a large single plan likely will secure substantially lower
prices from financial services companies than such firms would charge
separate small employer plans. Asset managers commonly offer
proportionately lower prices, relative to assets invested, to larger
investors, under so-called tiered pricing practices. For example,
investment companies often offer lower-priced mutual fund share classes
to customers whose investments in a fund surpass specified break
points.\92\ These lower prices may reflect scale economies in any or
all aspects of administering larger accounts, such as marketing,
distribution, asset management, recordkeeping, and transaction
processing. Large MEPs likely will qualify for lower pricing compared
with separate plans of small employers. MEP participants that benefit
from lower asset-based fees would enjoy superior investment returns net
of fees.
---------------------------------------------------------------------------
\92\ Sarah Holden, James Duvall, and Elena Barone Chism, ``The
Economics of Providing 401(k) Plans: Services, Fees, and Expenses,
2017,'' ICI Research Perspective 24: no. 4 (June 2018) (concluding
that 401(k) mutual fund investors pay lower expense ratios for a
number or reasons, including ``market discipline'' imposed by
performance- and cost-conscious plan sponsors). See also Russel
Kinnel, ``Mutual Fund Expense Ratio Trends,'' Morningstar, (June
2014), at https://corporate.morningstar.com/us/documents/researchpapers/fee_trend.pdf (accessed Aug. 21, 2018) (stating that
breakpoints are built into mutual fund management fees so that a
fund charges less for each additional dollar managed); Vanguard,
``What You Should Know About Mutual Fund Share Classes and
Breakpoints,'' at http://www.vanguard.com/pdf/v415.pdf (stating that
investors in certain class shares may be eligible for volume
discounts if their purchases meet certain investment levels, or
breakpoints).
---------------------------------------------------------------------------
The availability and magnitude of scale efficiencies may be
different with respect to different retirement plan services. For
example, asset management generally enjoys very substantial large-scale
efficiencies. Investors of all kinds generally benefit by investing in
large comingled pools. Even within large pools, however, small
investors often pay higher prices than larger ones. Mutual funds often
charge lower ``asset management'' fees for larger investors, in both
retail and institutional markets. The Department invited but did not
receive comments in response to the proposal regarding the degree to
which large MEPs would provide small employers with scale advantages in
asset management larger than those provided by other large pooled asset
management vehicles, such as mutual funds, available to separate small
plans.
As with asset management, scale efficiencies often are available
with respect to other plan services. For example, the marginal costs
for services such as marketing and distribution, account
administration, and transaction processing often decrease as customer
size increases. MEPs, as large customers, may enjoy scale efficiencies
in the acquisition of such services. It is also possible, however, that
the cost to MEPs of servicing their small employer-members may diminish
or even offset such efficiencies. Stated differently, MEPs scale
efficiencies may not always exceed the scale efficiencies from other
providers of bundled financial services used by small employers that
sponsor separate plans. For example, small pension plans sometimes
incur high distribution costs, reflecting commissions paid to agents
and brokers who sell investment products to plans. MEPs, unlike large
single-employer plans, must themselves incur some cost to distribute
retirement plans to large numbers of small businesses. But relative to
traditional agents and brokers, MEPs should reduce costs if they are
able to take economic advantage of members' existing ties to a
sponsoring group or association of employers or PEO. This can be a more
efficient business model than sending out brokers and investment
advisers to reach out to small businesses one-by-one, which could
result in lower administrative fees for plan sponsors and participants.
For much the same reason, MEPs sponsored by groups or associations
of employers that perform other functions for their members in addition
to offering retirement benefits (such as chambers of commerce or trade
associations) and PEOs have the potential to realize administrative
savings. These existing organizations may already have extensive
memberships and relationships with small employers; thus, they may have
low marginal costs for recruitment, setup, marketing, and
administration. These organizations may have been limited in their
ability to offer MEPs to some or all of their existing members and
clients (for example, to working owners, workers outside of a common
industry, or employers contracting with PEOs) by the Department's prior
subregulatory guidance. Under the requirements of this final rule,
however, they can newly provide such members and clients with access to
MEPs.
All of this suggests that many MEPs will enjoy scale efficiencies
greater than the scale efficiencies available from other providers of
bundled financial services. The scale efficiencies of MEPs, however,
will still likely be smaller than the scale efficiencies enjoyed by
very large single-employer plans. The Department invited but did not
receive comments in response to the proposal on the nature, magnitude,
and determinants of MEPs' potential scale advantages, and on the
conditions under which MEPs will pass more or less of the attendant
savings to different participating employers.
[[Page 37534]]
By enabling MEPs to comprise otherwise unrelated small employers
and self-employed individuals (1) who are in the same trade, industry,
line of business, or profession, or (2) have a principal place of
business with a region that does not exceed the boundaries of the same
State or metropolitan area (even if the area includes more than one
State), this rule will allow more MEPs to be established and to claim a
significant market presence and thereby pursue scale advantages.
Consequently, this rule should extend scale advantages to some MEPs
that otherwise might have been too small to achieve them and to small
employers and working owners that absent the rule would have offered
separate plans (or no plans) but that under this final rule may join
large MEPs.
While MEPs' scale advantages may be smaller than the scale
advantages enjoyed by very large single-employer plans, it nonetheless
is illuminating to consider the deep savings historically enjoyed by
the latter. Table 3 shows how much investment fees vary based on the
amount of assets in a 401(k) plan.\93\ The table focuses on mutual
funds, which are the most common investment vehicle in 401(k) plans,
and shows that the average expense ratio for several dominant types of
mutual funds is much lower for large plans than for smaller plans. And
these data show the fees actually paid, rather than the lowest fees
available to a plan. It is unclear what features and quality aspects
accompanied the fees.
---------------------------------------------------------------------------
\93\ Average expense ratios are expressed in basis points and
asset-weighted. The sample includes plans with audited 401(k)
filings in the BrightScope database for 2015 and comprises 15,110
plans with $1.4 trillion in mutual fund assets. Plans were included
if they had at least $1 million in assets and between 4 and 100
investment options. BrightScope/ICI, ``The BrightScope/ICI Defined
Contribution Plan Profile: A Close Look at 401(k) Plans, 2015''
(March 2018).
Table 3--Average Expense Ratios of Mutual Funds in 401(k) Plans in Basis Points, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
Balanced
Domestic International Domestic bond International Target date mutual funds
Plan assets equity mutual equity mutual mutual funds bond mutual mutual funds (non-target
funds funds funds date)
--------------------------------------------------------------------------------------------------------------------------------------------------------
$1M-$10M................................................ 81 101 72 85 79 80
$10M-$50M............................................... 68 85 59 77 68 64
$50M-$100M.............................................. 55 72 44 66 54 50
$100M-$250M............................................. 52 68 40 64 55 45
$250M-$500M............................................. 49 63 36 67 50 42
$500M-$1B............................................... 45 60 33 65 50 39
More than $1B........................................... 36 52 26 65 48 32
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Average expense ratios are expressed in basis points and asset-weighted. The sample includes plans with audited 401(k) filings in the
BrightScope database for 2015 and comprises 15,110 plans with $1.4 trillion in mutual fund assets. Plans were included if they had at least $1 million
in assets and between 4 and 100 investment options. BrightScope/ICI, ``The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k)
Plans, 2015'' (March 2018).
There are some important caveats to interpreting Table 3. The first
is that it does not include data for most of the smallest plans
because, generally, plans with fewer than 100 participants generally
are not required to submit audited financial statements because they
file a Form 5500-SF. The second is that there is variation across plans
in whether and to what extent recordkeeping costs are included in the
mutual fund expense ratios paid by participants. In plans where
recordkeeping is not entirely included in the expense ratios, it may be
paid by employers, as a per-participant fee, or as some combination of
these. These caveats mean that the link between fees and size could be
either stronger or weaker than Table 3 suggests, creating some
uncertainty about how large an advantage MEPs will offer.
An alternative method of comparing potential size advantages is a
broader measure called ``total plan cost'' calculated by
BrightScope.\94\ Total plan cost likely provides a better way to
compare costs because, in addition to costs paid in the form of expense
ratios, it includes fees reported on the audited Form 5500. It
comprises all costs regardless of whether they are paid by the plan,
the employer, or the participants. Total plan cost includes
recordkeeping services for all plans, for example, which is one reason
that it is a more comparable measure than the data presented above in
Table 3. When plans invest in mutual funds and similar products,
BrightScope uses expense data from Lipper, a financial services firm.
When plans invest in collective investment trusts and pooled separate
accounts, BrightScope generates an estimate of the investment fees.
---------------------------------------------------------------------------
\94\ Id.
---------------------------------------------------------------------------
Using total plan cost yields generally very similar results about
the cost differences facing small and large plans. Table 4 shows that
very few of the smaller plans are enjoying the low fees that are
commonplace among larger plans.\95\
---------------------------------------------------------------------------
\95\ Id. Data is plan-weighted. The sample is plans with audited
401(k) filings in the BrightScope database for 2015, which comprises
18,853 plans with $3.2 trillion in assets. Plans were included if
they had at least $1 million in assets and between 4 and 100
investment options.
Table 4--Larger Plans Tend To Have Lower Fees Overall
----------------------------------------------------------------------------------------------------------------
Total plan cost (in basis points)
Plan assets --------------------------------------------------------
10th percentile Median 90th percentile
----------------------------------------------------------------------------------------------------------------
$1M-$10M............................................... 75 111 162
$10M-$50M.............................................. 61 91 129
$50M-$100M............................................. 37 65 93
$100M-$250M............................................ 22 54 74
$250M-$500M............................................ 21 48 66
[[Page 37535]]
$500M-$1B.............................................. 21 43 59
More than $1B.......................................... 14 27 51
----------------------------------------------------------------------------------------------------------------
Source: Data is plan-weighted. The sample is plans with audited 401(k) filings in the BrightScope database for
2015, which comprises 18,853 plans with $3.2 trillion in assets. Plans were included if they had at least $1
million in assets and between 4 and 100 investment options. BrightScope/ICI, ``The BrightScope/ICI Defined
Contribution Plan Profile: A Close Look at 401(k) Plans, 2015'' (March 2018).
Deloitte Consulting LLP conducted a survey of 361 defined
contribution plans for the Investment Company Institute. The study
calculates an ``all-in'' fee that is comparable across plans including
both administrative and investment fees paid by the plan and the
participant. Generally, small plans with 10 participants are paying
approximately 50 basis points more than plans with 1,000
participants.\96\ Small plans with 10 participants are paying about 90
basis points more than large plans with 50,000 participants. Deloitte
predicted these estimates by analyzing the survey results using a
regression approach calculating basis points as a share of assets.
---------------------------------------------------------------------------
\96\ Deloitte Consulting and Investment Company Institute,
``Inside the Structure of Defined Contribution/401(k) Plan Fees,
2013: A Study Assessing the Mechanics of the `All-in' Fee'' (Aug.
2014).
---------------------------------------------------------------------------
These research findings have shown that small plans and their
participants generally pay higher fees than large plans and their
participants. Because this rule will give many small employers the
opportunity to join a MEP, some of which are very large plans, many of
these employers will likely incur lower fees. Many employers that are
not currently offering any retirement plan may join a MEP, leading
their employees to save for retirement. Many employers already
sponsoring a retirement plan might decide to join a MEP instead,
seeking lower fees and reduced fiduciary liability exposure. If there
indeed are lower fees in the MEPs than in their previous plans, those
lower fees could translate into higher savings.
c. Reporting and Audit Cost Savings
The potential for MEPs to enjoy reporting cost savings merits
separate attention because it is shaped not only by economic forces but
also by the reporting requirements applicable to different plans. On
the one hand, a MEP that is a large, single plan can file a single
report and conduct a single audit, while separate plans may be required
to file separate reports and conduct separate audits. On the other
hand, a MEP that is a large plan is generally subject to more stringent
reporting and audit requirements than a small plan, which likely files
no or streamlined reports and undergoes no audits. Therefore with
respect to reporting and audits, MEPs generally can offer substantial
savings to employers that would otherwise be subject to stringent
reporting and audit requirements in their own plan and modest savings
to small employers that would not be subject to such requirements. In
fact, under some circumstances small employers might actually incur
slightly higher reporting and audit costs by joining a MEP. This cost
increase may still be offset by benefits described in other sections.
From a broader point of view, if auditing becomes more prevalent
because small employers join MEPs, that would lead to more and better
quality data that would improve security for employers, participants
and beneficiaries.
Sponsors of ERISA-covered retirement plans generally must file a
Form 5500 annually, including all required schedules and attachments.
The cost burden incurred to satisfy the Form 5500 related reporting
requirements varies by plan type, size, and complexity. Analyzing the
2016 Form 5500 filings, the Department estimates that the average cost
to file the Form 5500 is as follows: $276 Per filer for small
(generally fewer than 100 plan participants) single-employer DC plans
eligible for Form 5500-SF, $435 per filer for small single-employer DC
plans not eligible to file Form 5500-SF, and $1,686 per filer for large
(generally 100 participants or more) single-employer DC plans.
Additional schedules and reporting may be required for large and
complex plans. For example, large retirement plans are required to
attach auditor's reports with Form 5500. Most small plans are not
required to attach such reports.\97\ Hiring an auditor and obtaining an
audit report can be costly for plans, and audit fees may increase as
plans get larger or more complex. A recent report states that the fee
to audit a 401(k) plan ranges between $6,500 and $13,000.\98\ One
comment letter responding to the proposal reported that their audit
cost $24,000.\99\ Incorporating the comment, the Department adjusted
the estimated audit cost range.\100\ The Department uses the
intermediate value of $13,000 as the estimated audit cost in order to
calculate cost savings estimates.
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\97\ Under certain circumstances, some small plans may still
need to attach auditor's reports. For more details, see https://www.dol.gov/sites/default/files/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2017-instructions.pdf. In 2015, approximately 3,600 small plans that
filed the Form 5500 and not the Form 5500-SF submitted audit reports
as part of their Form 5500 filing.
\98\ See https://www.thayerpartnersllc.com/blog/the-hidden-costs-of-a-401k-audit.
\99\ See comment letter #6 Employers Association of New Jersey,
EANJ.
\100\ In estimating the range of the audit cost, $6,500 is
assumed to be a lower end, $24,000 is assumed to be a higher end,
and $13,000 is assumed to be a good intermediate estimate.
---------------------------------------------------------------------------
If an employer joins a MEP, it can save some costs associated with
filing Form 5500 and fulfilling audit requirements because a MEP is a
single plan. Thus, one Form 5500 and audit report will satisfy the
reporting requirements. This means each participating employer would
not need to file its own, separate Form 5500 and, for large plans or
those few small plans that do not meet the small plan audit waiver, an
audit report. According to a GAO report, most of the association MEPs
that they interviewed had over 100 participating employers.\101\ PEOs
also tend to have a large number of client employers, at least 400
participating employers in their PEO-sponsored DC plans.\102\ Assuming
reporting costs are equally shared by participating employers within a
MEP, an employer joining a MEP can save virtually all the reporting
costs discussed above. As PEOs seem to have, on average, more
participating employers than associations, an employer might save
slightly more by joining a PEO MEP compared to joining
[[Page 37536]]
a group or association MEP, but the additional savings are
minimal.\103\ Large plans could enjoy even higher cost savings if audit
costs are taken into account. The Department estimates that reporting
cost savings associated with Form 5500 and an audit report would be
approximately $14,539 per year for a large plan joining an association
MEP and $14,649 per year for a large plan joining a PEO MEP.\104\
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\101\ U.S. Government Accountability Office, GAO-12-665,
``Federal Agencies Should Collect Data and Coordinate Oversight of
Multiple Employer Plans,'' (Sept. 2012) (https://www.gao.gov/products/GAO-12-665).
\102\ Id.
\103\ In terms of cost savings associated with Form 5500 filings
without accounting for audit costs, cost savings for small single-
employer DC plans filing Form 5500-SF would be $259.50 per filer if
it joins an association-sponsored MEP or $272.15 per filer if it
joins a PEO-sponsored MEP; for small single employer DC plans not
eligible for Form 5500-SF cost savings would be $417.76 per filer if
it joins an association-sponsored MEP as opposed to $430.40 per
filer if it joins a PEO-sponsored MEP; for large single employer DC
plans cost savings would be $1,668.91 per filer if it joins an
association-sponsored MEP as opposed to $1,681.55 per filer if it
joins a PEO-sponsored MEP.
\104\ These are estimated using an estimated audit cost of
$13,000. If the lower end of the audit cost, $6,500 is assumed, then
the estimated annual cost savings are $8,104 per filer (for an
association MEP) or $8,165 per filer (for a PEO MEP). If the
information provided by the commenter, $24,000, is assumed as the
audit cost, then the estimated annual cost savings significantly
increase to $25,429 per filer (for an association MEP) or $25,622
per filer (for a PEO MEP).
---------------------------------------------------------------------------
The extent to which small plans experience costs savings from
joining a MEP may not be as large as discussed above.\105\ This is
because small plans eligible for Form 5500-SF bear relatively less
burden and generally are not required to conduct audits. By joining a
MEP, however, those small plans would share the MEP's cost of audits
and more complicated Form 5500 filings. For lower audit costs or for
small plans not eligible to file Form 5500-SF, joining a MEP could
yield higher savings.
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\105\ For example, assuming audit costs of $13,000, then a small
plan eligible for Form 5500-SF would save $130 by joining an
association MEP or $240 by joining a PEO MEP. If the lower-end audit
cost of $6,500 is assumed, a small plan eligible for Form 5500-SF
would save $195 by joining an association MEP or $256 by joining a
PEO MEP. If the higher-end audit costs, $24,000 is assumed, a small
plan eligible for Form 5500-SF would save $20 by joining an
association MEP or $212 by joining a PEO MEP. In general, a small
plan not eligible to file Form 5500-SF would experience higher cost
savings than a small plan eligible to file Form 5500-SF.
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Similarly, it is less clear whether the self-employed will
experience large reporting cost savings by joining a MEP. The
Department estimates these potential cost savings by comparing the
reporting costs of an employer that participates in a MEP rather than
sponsoring its own plan. Several retirement savings options are already
available for self-employed persons and most have minimal or no
reporting requirements. For example, both SEP IRA and SIMPLE IRA plans
are available for small employers and the self-employed, and neither
option requires Form 5500 filings.\106\ Solo 401(k) plans are also
available for self-employed persons, and they may be exempt from Form
5500-EZ reporting requirement if the plans assets are less than
$250,000.\107\ Thus, if self-employed individuals join a MEP, they will
be unlikely to realize reporting costs savings. In fact, it is possible
that their reporting costs will slightly increase, because the self-
employed would share reporting costs with other MEP participating
employers that they otherwise would not incur.
---------------------------------------------------------------------------
\106\ SEPs that conform to the alternative method of compliance
in 29 CFR 2520.104-48 or 2520.104-49 do not have to file a Form
5500; SIMPLEs do not have to file. For more detailed reporting
requirements for SEPs and SIMPLE IRAs, see https://www.irs.gov/pub/irs-tege/forum15_sep_simple_avoiding_pitfalls.pdf; see also https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people.
\107\ Sometimes solo 401(k) is called as ``individual 401(k),''
or ``one-participant 401(k)'' or ``uni-401(k).'' For more
information about solo-401(k) plans, including reporting
requirements, see https://www.irs.gov/retirement-plans/one-participant-401k-plans. Because solo 401(k) plans do not cover any
common law employees, they are not required to file an annual report
under title I of ERISA, but must file a return under the Code. Such
plans may be able to file a Form 5500-SF electronically to satisfy
the requirement to file a Form 5500-EZ with the IRS.
---------------------------------------------------------------------------
Compared to the alternative of sponsoring single-employer plans,
joining a MEP may not save small employers and the self-employed as
much as larger employers. Reporting and audit costs, however, are only
a part of the costs associated with providing retirement plans. As
discussed in other sections, MEPs provides participating employers with
other benefits and cost savings. Employers will decide whether to join
MEPs based on a broad array of factors.
The Department's estimated reporting and audit cost savings is
based on the assumption that all participating employers share costs
equally regardless of their size. Thus, these estimated cost savings
imply how much, on average, participating employers would save in
reporting and audit costs. If a MEP adopts a fee arrangement where
costs are distributed among participating employers according to their
size, smaller employers could experience higher reporting cost savings
than those estimated above. One commenter supported a tiered pricing
arrangement over a level fee arrangement, making the assertion that
tiered pricing leads to a more equitable distribution among
participating employers.\108\
---------------------------------------------------------------------------
\108\ See comment letter #47 Slavic 401K.
---------------------------------------------------------------------------
d. Reduced Bonding Costs
The potential for bonding cost savings in MEPs merits separate
attention. As noted above, ERISA section 412 and related regulations
\109\ generally require every fiduciary of an employee benefit plan and
every person who handles funds or other property of such plan to be
bonded. ERISA's bonding requirements are intended to protect employee
benefit plans from risk of loss due to fraud or dishonesty on the part
of persons who handle plan funds or other property, generally referred
to as plan officials. A plan official must be bonded for at least 10
percent of the amount of funds he or she handles, subject to a minimum
bond amount of $1,000 per plan with respect to which the plan official
has handling functions. In most instances, the maximum bond amount that
can be required under ERISA with respect to any one plan official is
$500,000 per plan; however, the maximum required bond amount is
$1,000,000 for plan officials of plans that hold employer
securities.\110\
---------------------------------------------------------------------------
\109\ 29 CFR 2550.412-1 and 29 CFR part 2580.
\110\ See DOL Field Assistance Bulletin 2008-04, https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2008-04.
---------------------------------------------------------------------------
Under the final rule, MEPs generally should enjoy lower bonding
costs than would an otherwise equivalent collection of smaller,
separate plans, for two reasons. First, it might be less expensive to
buy one bond covering a large number of individuals who handle plan
funds than a large number of bonds covering the same individuals
separately or in smaller more numerous groups. Second, the number of
people handling plan funds and therefore subject to ERISA's bonding
requirement in the context of a MEP may be smaller than in the context
of an otherwise equivalent collection of smaller, separate plans.
e. Increased Retirement Savings
The various effects of this final rule should lead in aggregate to
increased retirement savings. As discussed above, many workers likely
will go from not having any access to a retirement plan to having
access through a MEP. This has the potential to result in an increase
in retirement savings, on average, for this group of workers. While
some workers may choose not to participate, surveys indicate that a
large number could. For a defined contribution pension plan, about 73
percent of all workers with access take up the plan.\111\
[[Page 37537]]
Among workers whose salary tends to be in the lowest 10 percent of the
salary range, this figure is about 40 percent.\112\ One reason that
these take-up rates are relatively high is that many plans use
automatic enrollment to enroll newly hired workers, as well as,
sometimes, existing workers. Automatic enrollment is particularly
prevalent among large plans; in 2017 about 74 percent of plans with
1,000-4,999 participants use automatic enrollment, while only about 27
percent of plans with 1-49 participants do.\113\ MEPs often allow
participating employers to decide whether they want to use automatic
enrollment and to select their other plan design features. It is
unclear, however, whether employers participating in MEPs formed under
this final rule will be more likely than employers sponsoring single-
employer DC plans to use automatic enrollment.
---------------------------------------------------------------------------
\111\ These statistics apply to private industry. U.S. Bureau of
Labor Statistics, National Compensation Survey, Employee Benefits in
the United States (March 2018).
\112\ Id.
\113\ Plan Sponsor Council of America, ``61st Annual Survey of
Profit Sharing and 401(k) Plans, Reflecting 2017 Plan Experience''
(2018), Table 111.
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Some workers may be saving in an IRA, either in an employer-
sponsored IRA, payroll deduction IRA, or on their own. If they begin
participating in a MEP 401(k), they would have the opportunity to take
advantage of higher contribution limits, and some might begin receiving
employer contributions.
In general, MEPs could offer participants a way to save for
retirement with lower fees. In particular, the fees are likely to be
lower than in most small plans and in retail IRAs. The savings in fees
could result in higher investment returns and thus higher retirement
savings.
f. Improved Portability
In an economy where workers may change jobs many times over their
career, portability of retirement savings is an important feature that
can help workers keep track of their savings, retain tax-qualified
status, and gain access to the investment options and fees that they
desire. Some plan sponsors are not willing to accept rollovers from
other qualified plans, which impedes portability. This is seen more
often among small plan sponsors that do not want to confront the
administrative burden and complexity associated with processing
rollovers.\114\ While some MEPs may allow participating employers to
choose whether to accept rollovers from other qualified plans, it is
likely that more participating employers will be willing to do so since
the MEP sponsor will handle the administration. It is also possible
that some MEPs will be designed such that all participating employers
accept rollovers. Moreover, MEPs could facilitate increased portability
for employees that leave employment to work for another employer that
adopted the same MEP.\115\ This might occur when the employers that
adopted the MEP are in the same industry or are located in the same
geographic area.
---------------------------------------------------------------------------
\114\ A survey of plan sponsors indicates that in 2017, about 86
percent of 401(k) plans with 1-49 participants accepted rollovers
from other plans. Among larger plans, the figure is higher; for
example, approximately 97 percent of plans with 1,000-4,999
participants accept rollovers. The full details are more complex
because many 401(k) plans responding yes accept rollover from some
sources, such as another 401(k) plan, but not others, such as a
defined benefit pension or an IRA. Id., Table 37.
\115\ Paul M. Secunda, ``Uber Retirement,'' Marquette Law School
Legal Studies Paper No. 17-1, (Jan. 2017).
---------------------------------------------------------------------------
g. Increased Labor Market Efficiency
The increased prevalence of MEPs would allow small employers the
opportunity to offer retirement benefits that are comparable to those
provided by large employers. Since employees value retirement benefits,
this development would tend to shift talented employees toward small
businesses. Such a shift would make small businesses more competitive.
The reallocation of talent across different sectors of the economy
would increase efficiency.\116\
---------------------------------------------------------------------------
\116\ John J. Kalamarides, Robert J. Doyle, and Bennett
Kleinberg, ``Multiple Employer Plans: Expanding Retirement Savings
Opportunities,'' Prudential (Feb. 2017).
---------------------------------------------------------------------------
h. Improved Data Collection
This final rule also has the potential to improve the Department's
data collection for purposes of ERISA enforcement. As noted above, the
expansion of MEPs is likely to lead some employers who currently file
their own Forms 5500 \117\ as participating employers in a MEP to
belong to a MEP that files a single Form 5500. Since MEPs are usually
large plans, they likely will have a much more detailed filing with the
associated schedules including an audit report. This filing will tend
to contain higher quality, more accurate data than the Department
currently receives when a collection of participating employers files
as single-employer plans. That is because (1) the required filing for
plans with more than 100 participants requires more detail and (2)
participating employers will be included in an audit when they were not
previously. The same situation occurs when a small employer who is
currently sponsoring a single-employer plan joins a large MEP in the
future. When auditing becomes more prevalent, the increased oversight
should help to prevent fraud and abuse. On the whole, the final rule
will lead to more robust data collection for the Department to use in
conducting its research, oversight, and enforcement responsibilities
under ERISA.
---------------------------------------------------------------------------
\117\ Although the participating employers are filing their own
Forms 5500 (or Forms 5500-SF), the MEP may be providing Form 5500
preparation and filing services for all the participating employers
and be acting as a ``batch submitter'' and otherwise taking
advantage of certain economies of scale.
---------------------------------------------------------------------------
The Department also believes that this final rule will
substantially improve the quality of information the Department
collects. For example, the Department has encountered instances of
participating employers in a MEP filing separate Forms 5500 that fail
to account properly for each employer's financial and demographic
information on a granular enough level to accurately report its
proportion of the whole MEP. The Department has at times received
identical filings for each participating employer within a MEP. This
duplication can lead to an overstatement or understatement of
participant counts, amount of assets, amount of fees, and other
important financial and demographic data for the participating
employers in some MEPs.
6. Costs
The final rule does not impose any direct costs because it merely
clarifies which persons may act as an ``employer'' within the meaning
of section 3(5) of ERISA in sponsoring a MEP. The rule imposes no
mandates but rather is permissive relative to baseline conditions.
Concerns have been expressed, however, that MEPs could be vulnerable to
abuse, such as fraud, mishandling of plan assets or charging excessive
fees. Abuses might result from the fact that employers are not directly
overseeing the plan. For example, employers acting as plan sponsors of
single-employer plans can be effective fiduciaries as they have
incentives to protect their plans. In the case of a MEP, however, an
adopting employer will have limited fiduciary duties and may assume
other participating employers are more thoroughly policing the plan. In
fact, GAO found that some MEPs' marketing materials, and even MEP
representatives, mislead employers about fiduciary responsibilities
with claims that joining a MEP removes their fiduciary responsibility
entirely.\118\ Less
[[Page 37538]]
monitoring provides an environment where abuses can occur. On the other
hand, having multiple participating employers monitoring a MEP plan
sponsor may actually lead to heightened protections for the collective.
---------------------------------------------------------------------------
\118\ U.S. Government Accountability Office, GAO, ``12-665,
``Private Sector Pensions--Federal Agencies Should Collect Data and
Coordinate Oversight of Multiple Employer Plans,'' (Sept. 2012)
(https://www.gao.gov/products/GAO-12-665).
---------------------------------------------------------------------------
MEPs have the potential to build up a substantial amount of assets
quickly, particularly where employers that already offer plans join
MEPs and transfer existing retirement assets to the MEP, thus making
them a target for fraud and abuse. Because the assets are used to fund
future retirement distributions, such fraudulent schemes could be
hidden or difficult to detect for a long period. A 2012 GAO report
regarding federal oversight of data and coordination of MEPs discusses
potential abuses by MEPs, such as charging excessive fees or
mishandling plan assets.\119\ If MEPs are at greater risk for fraud and
abuse than single-employer plans, and some employers who are currently
sponsoring single-employer retirement plans decide to join a MEP more
participants and their assets could be at greater risk of fraud and
abuse. But single-employer DC plans are also vulnerable to these abuses
and to mismanagement, and some MEPs may be more secure than some
single-employer plans. The Department is not aware of any direct
information indicating whether the risk for fraud and abuse is greater
for MEPs than other plans, nor did it receive information on this topic
in the comments submitted in response to the proposal. Many small
employers have relationships based on trust with trade associations
that the Department expects to sponsor MEPs under the final rule, and
those associations have an interest in maintaining these trust
relationships by ensuring that fraud does not occur in MEPs they
sponsor. Nevertheless, employers exercise a fiduciary duty in choosing
to begin and continue participating in a MEP and should exercise
appropriate care, prudence, and loyalty to ensure that the MEP is
sponsored and operated by high quality, reputable providers.
---------------------------------------------------------------------------
\119\ Id.
---------------------------------------------------------------------------
The Department does not have a basis to believe that there will be
increased risk of fraud and abuse due to the final rule's PEO
provisions. As stated earlier in the preamble, the final rule requires
PEOs to have substantial control over the functions and activities of
the MEP, as the plan sponsor (within the meaning of section 3(16)(B) of
ERISA), the plan administrator (within the meaning of section 3(16)(A)
of ERISA), and a named fiduciary (within the meaning of section 402 of
ERISA). Requiring PEOs to act as MEP fiduciaries mitigates fraud
concerns related to the expansion of PEO-sponsored plans, because the
final rule ensures that PEOs will assume ERISA fiduciary status and
bear all associated responsibilities.
7. Transfers
Several transfers are possible as a result of this final rule. To
the extent the expansion of MEPs leads employers that previously
sponsored other types of retirement plans to terminate or freeze these
plans and adopt a MEP, there may be a transfer between the employer and
the employees, although the direction of the transfer is unclear.
Additionally, if employers terminate or freeze other plans to enroll in
a MEP, and if that MEP utilizes different service providers and asset
types than the terminated plan, those different service providers would
experience gains or losses of income or market share. Service providers
that specialize in providing services to MEPs might benefit at the
expense of other providers who specialize in providing services to
small plans.
The rule could also result in asset transfers if MEPs invest in
different types of assets than small plans. For example, small plans
tend to rely more on mutual funds, while larger plans have greater
access to other types of investment vehicles such as bank common
collective trusts and insurance company pooled separate accounts, which
allow for specialization and plan specific fees. This movement of
assets could see profits move from mutual funds to other types of
investment managers.
Finally, the Code generally gives tax advantages to certain
retirement savings over most other forms of savings.\120\ Consequently,
all else being equal, a worker who is saving money in tax qualified
retirement savings vehicles generally can enjoy higher lifetime
consumption and wealth than one who does not. The magnitude of the
relative advantage generally depends on the worker's tax bracket, the
amount contributed to the plan, the timing of contributions and
withdrawals, and the investment performance of the assets in the
account. Workers that do not contribute to a qualified retirement
savings vehicle due to lack of access to a workplace retirement plan do
not reap this relative advantage. This rule would likely increase the
number of American workers with access to a tax-qualified workplace
retirement plan, which would spread this financial advantage to some
people who are not currently receiving it. If access to retirement
plans and savings increase as a result of this final rule, a transfer
will occur flowing from all taxpayers to those individuals receiving
tax preferences as a result of new and increased retirement savings.
---------------------------------------------------------------------------
\120\ Employer contributions to qualified pension plans and,
generally, employee contributions made at the election of the
employee through salary reduction are not taxed until distributed to
the employee, and income earned on those amounts is not taxed until
distributed. The tax expenditure for ``net exclusion of pension
contributions and earnings'' is computed as the income taxes forgone
on current tax-excluded pension contributions and earnings less the
income taxes paid on current pension distributions.
---------------------------------------------------------------------------
8. Impact on the Federal Budget
The effects of the rule on the federal budget are uncertain.
Because the rule increases access to retirement plans, retirement
savings likely also will increase. Given the tax deferral associated
with retirement savings, tax revenues would likely decrease in the
short run. The vast majority of dollars being contributed to defined
contribution plans are pre-tax rather than Roth contributions. Pre-tax
contributions include approximately 95 percent of participant
contributions \121\ and all employer contributions. To the degree that
Roth contributions may become more common in the future, there would be
less short-term reduction in federal revenue.
---------------------------------------------------------------------------
\121\ This estimate refers to 2014, the most recent year
available. IRS, Statistics of Income Division, Form W-2 study,
February 2018, Table 7.A.
---------------------------------------------------------------------------
If people begin saving more for retirement, it is unclear if that
would be accompanied by people consuming less, taking on more debt,
saving less in nonretirement accounts, or saving less for retirement
during future working years. Consequently, the long run net changes in
consumption and investment, and the effect on the federal budget, are
uncertain.
9. Uncertainty
As discussed above, the Department expects this rule to expand
workers' access to employment-based retirement plans by easing the
burden of offering retirement benefits for employers--particularly
small employers. However, the exact extent to which access to
employment-based retirement plans will increase under this final rule
is uncertain.
Several reports suggest that, although important, employers may not
consider offering retirement plans a priority as compared to other
types of benefits. The most commonly offered benefit is paid leave,
followed by health insurance; retirement plans rank third.\122\ This
[[Page 37539]]
order holds true for small employers, as well.\123\ Another survey of
employers confirms that small employers offer health insurance more
often than retirement plans.\124\ That study also suggests that company
earnings and the number of employees affect the decision of whether or
not to offer retirement plans. Employers that experience increases in
earnings or the number of employees are more likely to offer retirement
plans.\125\ The top reason provided for employers to start offering a
retirement plan is an increase in business profits.\126\ Similarly, in
another survey, employers not offering retirement plans cited ``the
company is not big enough'' most frequently as the reason.\127\
Although this rule will make it easier and less costly for employers to
offer a workplace retirement savings vehicle, these surveys suggest
that small employers are not likely to adopt a MEP unless their
business is in a strong financial position and generating sufficient
revenue streams. Also, it can be quite challenging for a small employer
or self-employed individual to determine which plan is most
appropriate. Business owners must understand the characteristics and
features of the available options in order to choose the most suitable
plan. A discussion of some of these options and their features follows.
---------------------------------------------------------------------------
\122\ Board of Governors of the Federal Reserve System, ``Report
on the Economic Well-Being of U.S. Households in 2017'' (May 2018).
\123\ The Pew Charitable Trusts, ``Employer Barriers to and
Motivations for Offering Retirement Benefits,'' 2017.
\124\ Transamerica Center for Retirement Studies, ``All About
Retirement: An Employer Survey, 17th Annual Transamerica Retirement
Survey'' (Aug. 2017).
\125\ The Pew Charitable Trusts, ``Employer Barriers to and
Motivations for Offering Retirement Benefits,'' 2017.
\126\ Id.
\127\ Transamerica Center for Retirement Studies, ``All About
Retirement,'' 2017.
---------------------------------------------------------------------------
SEP: Simplified Employee Pensions can be established by sole
proprietors, partnerships, and corporations to provide retirement plan
coverage to employees. SEPs must be offered to all employees who are at
least 21 years old, were employed by the employer in three out of the
last five years, and received compensation for the year ($600 for 2019
\128\).
---------------------------------------------------------------------------
\128\ IRS Notice 2018-83, 2018-47 I.R.B. 774 (11/19/2018).
---------------------------------------------------------------------------
SEPs are completely employer funded and they cannot accept employee
contributions.\129\ Each year the employer can set the level of
contributions it wants to make, if any. The employer usually makes a
contribution to each eligible employee's IRA (referred to as a SEP-IRA)
that is equal to the same percentage of salary for each employee. The
annual per-participant contribution cannot exceed the lesser of 25
percent of compensation or $56,000 in 2019.\130\
---------------------------------------------------------------------------
\129\ This rule does not apply to a SEP in effect on December
31, 1996, if the SEP provided for pre-tax employee contributions
(commonly referred to as a SARSEP) as of that date.
\130\ IRS Notice 2018-83, 2018-47 I.R.B. 774 (11/19/2018).
---------------------------------------------------------------------------
Participants can withdraw funds from their SEP-IRA at any time
subject to federal income taxes. A 10 percent additional tax may apply
if the employee is under age 59\1/2\. Participants cannot take loans
from their SEP-IRAs.
Generally, these plans are easy to set up; the business owner may
use IRS Form 5305-SEP to establish the plan, and in some circumstances
there are no set-up fees or annual maintenance charges. SEPs normally
do not have to file a Form 5500.
SIMPLE IRA Plan: The Savings Incentive Match Plan for Employees of
Small Employers allows businesses with fewer than 100 employees to
establish an IRA (referred to as a SIMPLE IRA) for each employee. The
employer must make the plan available to all employees who received
compensation of at least $5,000 in any prior two years and are
reasonably expected to earn at least $5,000 in the current year. In
2019, employees are allowed to make salary deferral contributions up to
the lesser of 100 percent of compensation or $13,000.\131\ Employees 50
or older may also make additional (``catch-up'') contributions of up to
$3,000.\132\ The employer also must generally make a matching
contribution dollar-for-dollar for employee contributions up to three
percent of compensation (or a nonelective contribution set at two
percent of compensation up to no more than $280,000 of compensation in
2019).\133\
---------------------------------------------------------------------------
\131\ Id.
\132\ Id.
\133\ Id.
---------------------------------------------------------------------------
Participants can withdraw funds from their SIMPLE IRAs at any time
subject to federal income taxes. A 25 percent additional tax may apply
to withdrawals occurring within two years of commencing participation,
if the participant is under age 59\1/2\. A 10 percent additional tax
may apply after the two-year period, if the participant is under age
59\1/2\. Participants cannot take loans from their SIMPLE IRAs.
Similar to SEPs, SIMPLE IRA plans are easy to set up and have few
administrative burdens. The employer may use IRS Form 5304-SIMPLE or
5305-SIMPLE to set up the plan, and there is no annual filing
requirement for the employer. Banks or other financial institutions
handle most of the paperwork. Similar to SEPs, some companies offer to
set up SIMPLE IRA plans with no set-up fees or annual maintenance
charges.
Payroll Deduction IRAs: An easy way for small employers to provide
their employees with an opportunity to save for retirement is by
establishing payroll deduction IRAs. Many people not covered by a
workplace retirement plan could save through an IRA, but do not do so
on their own. A payroll deduction IRA at work can simplify the process
and encourage employees to get started. The employer sets up the
payroll deduction IRA program with a bank, insurance company or other
financial institution. Then each employee chooses whether to
participate and if so, the amount of payroll deduction for contribution
to the IRA. Employees are always 100 percent vested in (have ownership
in) all the funds in their IRAs. Participant loans are not permitted.
Withdrawals are permitted anytime, but they are subject to income tax
(except for certain distributions from Roth IRAs and the portion of a
distribution that constitutes the distribution of after-tax
contributions from nondeductible IRAs). A 10 percent additional tax may
apply if the employee is under age 59\1/2\.
Employees' contributions are limited to $6,000 for 2019.\134\
Additional ``catch-up'' contributions of $1,000 per year are permitted
for employees age 50 or over.\135\ Employees control where their money
is invested and also bear the investment risk.
---------------------------------------------------------------------------
\134\ Id.
\135\ IRC section 219(b)(5)(B).
---------------------------------------------------------------------------
Payroll deduction IRAs are not covered by ERISA if:
No contributions are made by the employer;
Participation is completely voluntary for employees;
The employer's sole involvement in the program is to
permit the IRA provider to publicize the program to employees without
endorsement, to collect contributions through payroll deductions, and
to remit them to the IRA provider; and
The employer receives no consideration in the form of cash
or otherwise, other than reasonable compensation for services actually
rendered in connection with payroll deductions.\136\
---------------------------------------------------------------------------
\136\ 29 CFR 2510.3-2(d).
---------------------------------------------------------------------------
Solo 401(k): Self-employed individuals with no employees other than
themselves and their spouses may establish a 401(k) plan, colloquially
referred to as a solo 401(k). As an
[[Page 37540]]
employee, a self-employed individual may make salary deferrals up to
the lesser of 100 percent of compensation or $19,000 in 2019.\137\ They
also can make nonelective contributions up to 25 percent of
compensation provided that, when added to any salary deferrals, the
total contribution does not exceed the lesser of 100 percent of a
participant's compensation or $56,000 \138\ (for 2019). In addition,
those aged 50 or older can make additional (``catch-up'') contributions
of up to $6,000.
---------------------------------------------------------------------------
\137\ IRC section 402(g). IRS Notice 2018-83, 2018-47 I.R.B. 774
(11/19/2018).
\138\ IRC section 415(c). IRS Notice 2018-83, 2018-47 I.R.B. 774
(11/19/2018).
---------------------------------------------------------------------------
Withdrawals are permitted only upon the occurrence of a specified
event (retirement, plan termination, etc.), and they are subject to
federal income taxes. A 10 percent additional tax may apply if the
participant is under age 59\1/2\. The plan may permit loans and
hardship withdrawals.
Solo 401(k) plans are more administratively burdensome than other
types of plans available to small employers. A model form is not
available to establish the plan. A Form 5500 must be filed when plan
assets exceed $250,000.
Credit for Pension Start-Up Costs: A tax credit is available for
small employers to claim part of the ordinary and necessary costs to
start a SEP, SIMPLE IRA, or 401(k) plan. To be eligible for the credit,
an employer must have had no more than 100 employees who received at
least $5,000 of compensation from the employer during the tax year
preceding the first credit year. The credit is limited to 50 percent of
the qualified cost to set up and administer the plan, up to a maximum
of $500 per year for each of the first three years of the plan.\139\
---------------------------------------------------------------------------
\139\ IRC section 45E(b).
---------------------------------------------------------------------------
Saver's Credit: A nonrefundable tax credit for certain low- and
moderate-income individuals, including self-employed individuals, who
contribute to their plans is also available. The amount of the Saver's
Credit is 50 percent, 20 percent, or 10 percent of the participant's
contribution to an IRA, or an employer-sponsored retirement plan such
as a 401(k), depending on the individual's adjusted gross income
(reported on Form 1040 series return). The maximum annual contribution
eligible for the credit is $2,000 ($4,000 if married filing
jointly).\140\
---------------------------------------------------------------------------
\140\ IRC section 25B.
---------------------------------------------------------------------------
Discussion: The options discussed above may better serve an
employer's needs than a MEP would in some circumstances. Some companies
offer to set up solo 401(k) plans with no set-up fees.\141\ Despite
these currently available options for self-employed workers, about 94
percent of self-employed workers did not participate in retirement
plans in 2013.\142\ Although these low levels of take-up with these
other options create some uncertainty that this rule will persuade many
self-employed individuals to join a MEP, this uncertainty alone is no
basis to ignore MEPs' potential to improve the retirement preparedness
of America's workers.
---------------------------------------------------------------------------
\141\ Kerry Hannon, ``The Best Retirement Plans for the Self-
Employed.'' Forbes, (April 1, 2011).
\142\ Copeland, ``Employment-Based Retirement Plan
Participation, 2013.''
---------------------------------------------------------------------------
SEP and SIMPLE IRA plans, for example, could meet the needs of many
small employers. As discussed above, they are easy to set up and have
low start-up and administrative costs. Furthermore, small employers can
claim tax credits for part of the costs of starting up SEP or SIMPLE
IRA plans, and certain employees may take advantage of the Saver's
Credit. Despite these advantageous features, these plans did not gain
much traction in the market. It is possible that, similar to existing
options, MEPs will only be modestly attractive to small employers,
resulting in only a small increase in retirement coverage.
In addition to these plan options, there are other ways that
existing small employers can offer retirement plans at low costs. For
micro plans with assets less than $5 million, employers can use
providers of bundled financial services that include both payroll and
recordkeeping services on their 401(k) products. In 2016, about 69
percent of plans with less than $1 million in assets used these bundled
providers.\143\ Given that multiple low-cost options already exist for
small employers, the Department is uncertain to what degree small
employers and their workers would benefit from also having the option
to join various MEPs, but it expects that the increased availability of
plans will provide these employers and their workers with greater
access to retirement plans.
---------------------------------------------------------------------------
\143\ Cerulli Associates, U.S. Retirement Markets 2016
(available at https://www.cerulli.com/vapi/public/getcerullifile?filecid=Cerulli-US-Retirement-Markets-2016-Information-Packet).
---------------------------------------------------------------------------
Although this rule would ease the burden on employers, particularly
small employers, in offering retirement plans for their workers, it is
uncertain how many more employers would offer retirement plans to their
workers and how many more employees would chose to participate in those
retirement plans. To begin, workers employed by small employers not
offering retirement plans tend to be younger workers, lower-paid
workers, part-time workers, or immigrants,\144\ characteristics that at
least one survey suggests reduce the lack of demand for retirement
benefits.\145\ Indeed, one study found that large employers not
sponsoring retirement plans tend to have similar characteristics among
their employees: Higher proportions of part-time or part-year
employees, younger employees, employees with lower earnings, and
employees with less education.
---------------------------------------------------------------------------
\144\ Copeland, ``Employment-Based Retirement Plan
Participation, 2013.'' Constantijn W.A. Panis & Michael J. Brien,
``Target Populations of State-Level Automatic IRA Initiatives,''
(August 28, 2015) (available at https://www.dol.gov/sites/default/files/ebsa/researchers/analysis/retirement/target-populations-of-state-level-automatic-ira-initiatives.pdf).
\145\ The Pew Charitable Trusts, ``Employer Barriers to and
Motivations for Offering Retirement Benefits,'' 2017.
---------------------------------------------------------------------------
Several additional factors may influence employer participation in
expanded or newly established MEPs. For large employers, even though
the potential cost savings associated with filing Form 5500s and audit
reports discussed earlier can be substantial, the savings may not be
large enough to persuade them to join a MEP. Switching from an existing
well-established plan to a MEP could be a difficult and costly
procedure in the short term.
In summary, there are many challenges and inherent uncertainties
associated with efforts to expand the coverage of retirement plans, but
this final rule would provide another opportunity for small employers
and the self-employed to adopt a retirement savings plan. By reducing
some of the burdens associated with setting up and administering
retirement plans, this final rule should lower costs and encourage
employers, particularly small employers, to establish a retirement
savings plan for their workers.
10. Regulatory Alternatives
As required by E.O. 12866, the Department considered various
alternative approaches in developing this final rule, which are
discussed below.
Covering Other Types of MEPS: Executive Order 13847 called on the
Department to consider whether businesses or organizations other than
groups or associations of employers and PEOs should be able to sponsor
a MEP by acting indirectly in the interest of participating employers
in relation to the plan within the meaning of section 3(5) of ERISA.
Consistent with the Executive Order, the Department specifically
solicited public comments
[[Page 37541]]
at the proposed rule stage regarding whether, and under what
circumstances, it should address so-called ``open MEPs'' or ``pooled
employer plans.'' These arrangements cover employees of employers with
no relationship other than their joint participation in the MEP. The
solicitation asked commenters who believe these arrangements should be
addressed in this or a future rulemaking to include a discussion of why
they should be treated as one employee benefit plan with the meaning of
title I of ERISA rather than a collection of separate employer plans
being serviced by a commercial enterprise that provides retirement plan
products and services.
As discussed earlier in the preamble, more than half of the
comments received on the proposed rule addressed this issue, and the
vast majority supported a rule that would facilitate these
arrangements. After reviewing the comments, the Department is persuaded
that open MEPs deserve further consideration. The Department received a
variety of different ideas and comments, some of which were
contradictory. Given the wide range of possibilities, the Department
does not believe it has developed a sufficient public record, or
obtained sufficient data, to understand thoroughly the complete range
of issues presented by these arrangements. Therefore, the Department
has published a RFI elsewhere in today's Federal Register to develop a
more robust public record and to obtain sufficient data to support a
future rulemaking.
The Department also solicited comments on whether the final rule
should address the MEP status of so-called ``corporate MEPs,'' which
are plans that cover employees of related employers that are not in the
same controlled group or affiliated service group within the meaning of
414(b), (c), and (m) of the Code.\146\ While using the commonality of
interest provisions in this final rule to determine bona fide group or
association status may not be the appropriate path for corporate MEPs,
the Department recognizes that meaningful levels of common ownership
may serve as an indicator of genuine economic or representational
interests unrelated to the provision of benefits among the ownership
group, such that one or more of the group members is acting
``indirectly in the interest of'' the others within the meaning of
ERISA section 3(5) in sponsoring a MEP for the group's participation.
---------------------------------------------------------------------------
\146\ In Advisory Opinion 89-06A, the Department stated that it
would consider a member of a controlled group that establishes a
benefit plan for its employees and/or the employees of other members
of the controlled group to be an employer within the meaning of
ERISA section 3(5).
---------------------------------------------------------------------------
On the record established thus far, however, the Department lacks a
meaningful basis on which to determine the precise level of ownership
that conclusively distinguishes these bona fide ownership groups from
commercial enterprises in which members have nominal ownership levels
that exist primarily or solely to market, distribute, or otherwise
provide employee benefits to members. The Department, therefore, also
has decided to explore the corporate MEP topic in the RFI.
PEO Safe Harbor: The proposed rule contained two regulatory safe
harbors for PEOs to determine whether they will be considered as
performing substantial employment functions on behalf of their client-
employers. The first safe harbor provides that a PEO will satisfy the
requirement if, among other things, it is a Certified PEO (CPEO) under
the Code and meets at least two criteria in the list in paragraph
(c)(2)(ii)(D) through (I) of the proposal. The second safe harbor is
for PEOs that do not satisfy the CPEO safe harbor but meet five or more
criteria from the list in paragraph (c)(2)(ii) of the proposal.
In response to the proposed safe harbor, a commenter argued that
the safe harbor standards should be the same for CPEOs and non-CPEOs
and not more or less favorable for one business model rather than
another. The commenter expressed concern that non-CPEOs would be unable
to meet the ``substantial employer functions'' criteria in the proposed
rule, and thus, unable to avail themselves of the non-CPEO safe harbor.
The commenter viewed the proposal as favoring CPEOs and asserted that
the Department should adopt a safe harbor that works for the entire PEO
industry.
As discussed earlier in the preamble, in response to the comment,
the Department streamlined the safe harbor in the final rule by
providing only one safe harbor that applies to CPEOs and non-CPEOs. The
Department determined that the complexity inherent in the proposal's
safe harbor could be reduced by combining the essential elements of the
two safe harbors into a single safe harbor that both CPEOs and non-
CPEOs can rely on. The Department believes these changes will allow
both CPEOs and non-CPEOs to meet the requirements of the safe harbor
and provide optimum choices for employers that are considering joining
MEPs sponsored by PEOs.
Working Owner Definition: The final rule's definition of a working
owner requires a person to work a certain number of hours (i.e., 20
hours per week or 80 hours per month) or have wages or self-employment
income above a certain level (i.e., wages or income must equal or
exceed the working owner's cost of coverage to participate in the group
or association's health plan if the individual is participating in that
plan). In considering possible alternatives, the Department considered
relying only on the hours worked threshold. However, the Department
chose the formulation in this final rule (i.e., allowing either the
hours worked threshold or the income level threshold), because it best
clarified when a working owner could join a group or association
retirement plan. Additionally, based on its expectation that certain
groups and associations may offer both AHPs and MEPs, the Department
chose this formulation because it parallels the working owner
definition from the AHP Rule.
11. Paperwork Reduction Act
The final rule is not subject to the requirements of the Paperwork
Reduction Act of 1995 (PRA 95) (44 U.S.C. 3501 et seq.) because it does
not contain a collection of information as defined in 44 U.S.C.
3502(3).
12. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely
to have a significant economic impact on a substantial number of small
entities. Unless an agency determines that a final rule is not likely
to have a significant economic impact on a substantial number of small
entities, section 603 of the RFA requires the agency to present a final
regulatory flexibility analysis (FRFA) of the final rule. The
Department has determined that this final rule, which would clarify the
persons that may act as an ``employer'' within the meaning of section
3(5) of ERISA in sponsoring a MEP, is likely to have a significant
impact on a substantial number of small entities. Therefore, the
Department provides its FRFA of the final rule below.
a. Need for and Objectives of the Rule
As discussed earlier in the preamble, the rule is necessary to
expand access to MEPs, which could enable groups of private sector
employers to participate in a collective retirement plan. MEPs meeting
the requirements of the final rule are presented with an efficient
[[Page 37542]]
option to reduce the costs and complexity associated with establishing
and maintaining defined contribution plans. This could encourage more
plan formation and broader availability of affordable workplace
retirement savings plans, especially among small employers and certain
working owners. Thus, the Department intends and expects that the rule
will deliver benefits primarily to the employees of many small
businesses and their families including many working owners, as well as
many small businesses themselves.
b. Affected Small Entities
The Small Business Administration estimates that firms with 1-499
employees plus nonemployer firms comprise 99.9 percent of U.S.
businesses.\147\ The rule applies to firms of all sizes. Small
businesses, including sole proprietors, can join MEPs as long as they
are eligible to do so and as long as the MEP sponsor meets the
requirements of the rule. The Department believes that the smallest
firms, those with less than 100 employees, are most likely to be
attracted to the reduced costs and fiduciary responsibilities that are
associated with offering retirement benefits through a MEP. The
Department also believes that many self-employed workers will find MEPs
attractive. Approximately 8 million self-employed workers between ages
21 and 70, representing six percent of all similarly aged workers, have
no employees and usually work at least 20 hours per week. These self-
employed workers will become eligible to join MEPs under the rule.\148\
---------------------------------------------------------------------------
\147\ The Small Business Administration, Office of Advocacy,
2018 Small Business Profile. https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf. Last accessed on
10/03/2018. The SBA reports that there are 5,881,267 business with
1-499 employees. Many of these firms will have the option to join a
MEP under this rule.
\148\ DOL tabulations of the February 2019 Current Population
Survey basic monthly data.
---------------------------------------------------------------------------
c. Impact of the Rule
As stated above, by expanding MEPs, this final rule will provide a
more affordable option for retirement savings coverage for many small
businesses, thereby potentially yielding economic benefits for
participating small businesses and their employees. Some advantages of
an ERISA-covered retirement plan (including MEPs, SEP-IRAs, and SIMPLE
IRAs) over IRA-based savings options outside the workplace include: (1)
Higher contribution limits, (2) potentially lower investment management
fees, especially in larger plans, (3) a well-established uniform
regulatory structure with important consumer protections, including
fiduciary obligations, recordkeeping and disclosure requirements, legal
accountability provisions, and spousal protections, (4) automatic
enrollment, and (5) stronger protections from creditors. At the same
time, they provide employers with choice among plan features and the
flexibility to tailor retirement plans to meet their business and
employment needs.
There are no new recordkeeping or reporting requirements for
compliance with the rule. In fact, the recordkeeping and reporting
requirements would likely decrease for most small employers under the
rule. For example, if an employer joins a MEP meeting the requirements
of the rule, it can save some costs associated with filing Form 5500
and fulfilling audit requirements because a MEP is considered a single
plan. Thus, one Form 5500 and audit report satisfies the reporting
requirements. Accordingly, each participating employer would not need
to file its own, separate Form 5500 and, for large plans or those few
small plans that do not meet the small plan audit waiver, audit report.
These reports are normally prepared by a combination of legal
professionals, human resource professionals, and accountants.
The Department considered several alternatives, such as whether to
cover other types of MEPs, in developing its formulation of the PEO
Safe Harbor. The ``Regulatory Alternatives'' section of the RIA above
discusses these significant regulatory alternatives in more detail.
d. Duplicate, Overlapping, or Relevant Federal Rules
The final rule would not conflict with any relevant federal rules.
As discussed above, the rule will merely broaden the conditions under
which the Department will view a group or association as acting as an
``employer'' under ERISA for purposes of offering a MEP and make clear
the conditions for PEO sponsorship. As such, the criteria could also
result in more MEPs being treated consistently under the Code and title
I of ERISA, including MEPs administered by PEOs for the benefit of the
employees of their client employers, as described in IRS Rev. Proc.
2002-21.
13. Congressional Review Act
The final rule is subject to the Congressional Review Act (CRA)
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the
Comptroller General for review. The rule is a ``major rule'' as that
term is defined in 5 U.S.C. 804(2), because it is likely to result in
an annual effect on the economy of $100 million or more.
14. Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4) requires each federal agency to prepare a written statement
assessing the effects of any federal mandate in a proposed or final
agency rule that may result in an expenditure of $100 million or more
(adjusted annually for inflation with the base year 1995) in any one
year by State, local, and tribal governments, in the aggregate, or by
the private sector. For purposes of the Unfunded Mandates Reform Act,
as well as Executive Order 12875, this final rule does not include any
federal mandate that the Department expects will result in such
expenditures by State, local, or tribal governments, or the private
sector. This is because the rule merely clarifies which persons may act
as an ``employer'' within the meaning of section 3(5) of ERISA in
sponsoring a MEP and does not require any action or impose any
requirement on the public sector or states.
15. Federalism Statement
Executive Order 13132 outlines fundamental principles of
federalism. E.O. 13132 requires federal agencies to follow specific
criteria in forming and implementing policies that have ``substantial
direct effects'' on the States, the relationship between the national
government and States, or on the distribution of power and
responsibilities among the various levels of government. Federal
agencies promulgating regulations that have federalism implications
must consult with State and local officials and describe the extent of
their consultation and the nature of the concerns of State and local
officials in the preamble to the final rule.
In the Department's view, the final rule does not have federalism
implications because it does not have a direct effect on the States,
the relationship between the national government and the States, or on
the distribution of power and responsibilities among various levels of
government.
16. Executive Order 13771 Reducing Regulation and Controlling
Regulatory Costs
Executive Order 13771, titled Reducing Regulation and Controlling
Regulatory Costs, was issued on January 30, 2017. This final rule is an
E.O. 13771 deregulatory action, because it
[[Page 37543]]
provides critical guidance that expands small businesses' access to
high quality retirement plans at lower costs than otherwise are
available, by removing certain Department-imposed restrictions on the
establishment and maintenance of MEPs under ERISA.
List of Subjects in 29 CFR Part 2510
Employee benefit plans, Pensions.
For the reasons stated in the preamble, the Department of Labor is
amending 29 CFR part 2510 as follows:
PART 2510--DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, G,
AND L OF THIS CHAPTER
0
1. The authority citation for part 2510 is revised to read as follows:
Authority: 29 U.S.C. 1002(1), 1002(2), 1002(3), 1002(5),
1002(16), 1002(21), 1002(37), 1002(38), 1002(40), 1002(42), 1031,
and 1135; Secretary of Labor's Order No. 1- 2011, 77 FR 1088 (Jan.
9, 2012); Sec. 2510.3-101 and 2510.3-102 also issued under sec. 102
of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. At 237 (2012),
(E.O. 12108, 44 FR 1065 (Jan. 3, 1979) and 29 U.S.C. 1135 note. Sec.
2510.3-38 is also issued under sec. 1, Pub. L. 105-72, 111 Stat.
1457 (1997).
0
2. Section 2510.3-3 is amended by revising paragraph (c) introductory
text to read as follows:
Sec. 2510.3-3 Employee benefit plan.
* * * * *
(c) Employees. For purposes of this section and except as provided
in Sec. 2510.3-5(e) and Sec. 2510.3-55(d):
* * * * *
0
3. Section 2510.3-5 is amended by revising the section heading to read
as follows:
Sec. 2510.3-5 Definition of Employer--Association Health Plans.
* * * * *
0
4. Section 2510.3-55 is added to read as follows:
Sec. 2510.3-55 Definition of Employer--Association Retirement Plans
and Other Multiple Employer Pension Benefit Plans.
(a) In general. The purpose of this section is to clarify which
persons may act as an ``employer'' within the meaning of section 3(5)
of the Act in sponsoring a multiple employer defined contribution
pension plan (hereinafter ``MEP''). The Act defines the term ``employee
pension benefit plan'' in section 3(2), in relevant part, as any plan,
fund, or program established or maintained by an employer, employee
organization, or by both an employer and an employee organization, to
the extent 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. For
purposes of being able to establish and maintain an employee pension
benefit plan within the meaning of section 3(2), an ``employer'' under
section 3(5) of the Act includes any person acting directly as an
employer, or any person acting indirectly in the interest of an
employer in relation to an employee benefit plan. A group or
association of employers is specifically identified in section 3(5) of
the Act as a person able to act directly or indirectly in the interest
of an employer, including for purposes of establishing or maintaining
an employee benefit plan. A bona fide group or association of employers
(as defined in paragraph (b) of this section) and a bona fide
professional employer organization (as described in paragraph (c) of
this section) shall be deemed to be able to act in the interest of an
employer within the meaning of section 3(5) of the Act by satisfying
the criteria set forth in paragraphs (b) and (c) of this section,
respectively.
(b)(1) Bona fide group or association of employers. For purposes of
title I of the Act and this chapter, a bona fide group or association
of employers capable of establishing a MEP shall include a group or
association of employers that meets the following requirements:
(i) The primary purpose of the group or association may be to offer
and provide MEP coverage to its employer members and their employees;
however, the group or association also must have at least one
substantial business purpose unrelated to offering and providing MEP
coverage or other employee benefits to its employer members and their
employees. For purposes of satisfying the standard of this paragraph
(b)(1)(i), as a safe harbor, a substantial business purpose is
considered to exist if the group or association would be a viable
entity in the absence of sponsoring an employee benefit plan. For
purposes of this paragraph (b)(1)(i), a business purpose includes
promoting common business interests of its members or the common
economic interests in a given trade or employer community and is not
required to be a for-profit activity;
(ii) Each employer member of the group or association participating
in the plan is a person acting directly as an employer of at least one
employee who is a participant covered under the plan;
(iii) The group or association has a formal organizational
structure with a governing body and has by-laws or other similar
indications of formality;
(iv) The functions and activities of the group or association are
controlled by its employer members, and the group's or association's
employer members that participate in the plan control the plan. Control
must be present both in form and in substance;
(v) The employer members have a commonality of interest as
described in paragraph (b)(2) of this section;
(vi) The group or association does not make plan participation
through the association available other than to employees and former
employees of employer members, and their beneficiaries; and
(vii) The group or association is not a bank or trust company,
insurance issuer, broker-dealer, or other similar financial services
firm (including a pension recordkeeper or third-party administrator),
or owned or controlled by such an entity or any subsidiary or affiliate
of such an entity, other than to the extent such an entity, subsidiary
or affiliate participates in the group or association in its capacity
as an employer member of the group or association.
(2) Commonality of interest. (i) Employer members of a group or
association will be treated as having a commonality of interest if
either:
(A) The employers are in the same trade, industry, line of business
or profession; or
(B) Each employer has a principal place of business in the same
region that does not exceed the boundaries of a single State or a
metropolitan area (even if the metropolitan area includes more than one
State).
(ii) In the case of a group or association that is sponsoring a MEP
under this section and that is itself an employer member of the group
or association, the group or association will be deemed for purposes of
paragraph (b)(2)(i)(A) of this section to be in the same trade,
industry, line of business, or profession, as applicable, as the other
employer members of the group or association.
(c)(1) Bona fide professional employer organization. A professional
employer organization (PEO) is a human-resource company that
contractually assumes certain employer responsibilities of its client
employers. For purposes of title I of the Act and this chapter, a bona
fide PEO is capable of establishing a MEP. A bona fide PEO is an
organization that meets the following requirements:
(i) The PEO performs substantial employment functions on behalf of
its client employers that adopt the MEP, and maintains adequate records
relating to such functions;
[[Page 37544]]
(ii) The PEO has substantial control over the functions and
activities of the MEP, as the plan sponsor (within the meaning of
section 3(16)(B) of the Act), the plan administrator (within the
meaning of section 3(16)(A) of the Act), and a named fiduciary (within
the meaning of section 402 of the Act), and continues to have employee-
benefit-plan obligations to MEP participants after the client employer
no longer contracts with the organization.
(iii) The PEO ensures that each client employer that adopts the MEP
acts directly as an employer of at least one employee who is a
participant covered under the MEP; and
(iv) The PEO ensures that participation in the MEP is available
only to employees and former employees of the PEO and client employers,
employees and former employees of former client employers who became
participants during the contract period between the PEO and former
client employers, and their beneficiaries.
(2) Safe harbor criteria for substantial employment functions. For
purposes of paragraph (c)(1)(i) of this section, whether a PEO performs
substantial employment functions on behalf of its client employers is
determined on the basis of the facts and circumstances of the
particular situation. As a safe harbor, a PEO shall be considered to
perform substantial employment functions on behalf of its client-
employers that adopt the MEP if it meets the following criteria with
respect to each client-employer employee that participates in the MEP--
(i) The PEO assumes responsibility for and pays wages to employees
of its client-employers that adopt the MEP, without regard to the
receipt or adequacy of payment from those client employers;
(ii) The PEO assumes responsibility for and reports, withholds, and
pays any applicable federal employment taxes for its client employers
that adopt the MEP, without regard to the receipt or adequacy of
payment from those client employers;
(iii) The PEO plays a definite and contractually specified role in
recruiting, hiring, and firing workers of its client-employers that
adopt the MEP, in addition to the client-employer's responsibility for
recruiting, hiring, and firing workers. A PEO is considered to satisfy
this standard if it recruits, hires, and fires, assumes responsibility
for recruiting, hiring, and firing, or retains the right to recruit,
hire, and fire workers of its client-employers that adopt the MEP, in
addition to the client-employer's responsibility for recruiting,
hiring, and firing workers; and
(iv) The PEO assumes responsibility for and has substantial control
over the functions and activities of any employee benefits which the
service contract may require the PEO to provide, without regard to the
receipt or adequacy of payment from those client employers for such
benefits.
(d) Dual treatment of working owners as employers and employees.
(1) A working owner of a trade or business without common law employees
may qualify as both an employer and as an employee of the trade or
business for purposes of the requirements in paragraph (b) of this
section, including the requirement in paragraph (b)(1)(ii) of this
section that each employer member of the group or association adopting
the MEP must be a person acting directly as an employer of one or more
employees who are participants covered under the MEP, and the
requirement in paragraph (b)(1)(vi) of this section that the group or
association does not make participation through the group or
association available other than to certain employees and former
employees and their beneficiaries.
(2) The term ``working owner'' as used in this paragraph (d) means
any person who a responsible plan fiduciary reasonably determines is an
individual:
(i) Who has an ownership right of any nature in a trade or
business, whether incorporated or unincorporated, including a partner
or other self-employed individual;
(ii) Who is earning wages or self-employment income from the trade
or business for providing personal services to the trade or business;
and
(iii) Who either:
(A) Works on average at least 20 hours per week or at least 80
hours per month providing personal services to the working owner's
trade or business, or
(B) In the case of a MEP described in paragraph (b) of this
section, if applicable, has wages or self-employment income from such
trade or business that at least equals the working owner's cost of
coverage for participation by the working owner and any covered
beneficiaries in any group health plan sponsored by the group or
association in which the individual is participating or is eligible to
participate.
(3) The determination under this paragraph (d) must be made when
the working owner first becomes eligible for participation in the
defined contribution MEP and continued eligibility must be periodically
confirmed pursuant to reasonable monitoring procedures.
(e) Severability. (1) If any provision of this section is held to
be invalid or unenforceable by its terms, or as applied to any person
or circumstance, or stayed pending further agency action, the provision
shall be construed so as to continue to give the maximum effect to the
provision permitted by law, unless such holding shall be one of
complete invalidity or unenforceability, in which event the provision
shall be severable from this section and shall not affect the remainder
thereof.
(2) Examples. (i) If any portion of paragraph (b)(1)(i) of this
section (containing the substantial business purpose requirement) is
found to be void in a manner contemplated by paragraph (e)(1) of this
section, then the whole of paragraph (b)(1)(i) of this section shall be
construed as follows: ``The group or association must be a viable
entity in the absence of offering and providing MEP coverage or other
employee benefits to its employer members and their employees.''
(ii) If any portion of paragraph (d) of this section (containing
the ``working owner'' provision) is found to be void in a manner
contemplated by paragraph (e)(1) of this section, such a decision does
not impact the ability of a bona fide group or association to meet the
``commonality of interest'' requirement in paragraph (b)(2) of this
section by being located in the same geographic locale.
Signed at Washington, DC, on July 22, 2019.
Preston Rutledge,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2019-16074 Filed 7-29-19; 8:45 am]
BILLING CODE 4510-29-P