MEPs and PEPs

Art by Tim Bower

Previously, I wrote in this column that excellent opportunities to establish multiple employer plans (MEPs) were forthcoming due to pending regulatory and legislative action. Those opportunities have finally arrived. They are included in the final regulation promulgated by the Department of Labor (DOL) expanding the availability of association MEPs and Congress’ enactment of a spending bill that contains the provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which also provides for pooled employer plans (PEPs).

In response to President Donald Trump’s Executive Order 13847 calling for the DOL to increase access to workplace retirement plans, last July the agency issued a final regulation expanding its interpretation of a “bona fide association.” First, the DOL broadened its commonality of interest requirements found in prior MEP guidance. The final regulation requires that employers participating in the plan either: 1) be “… in the same trade, industry, line of business or profession …,” or 2) have “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).”

Additionally, the regulation provides that a bona fide association exists so long as plan sponsors engage in at least one common activity other than providing employee benefits, even if the association’s primary purpose was to provide benefits. Finally, the DOL broadened the definition of “employee” to include sole proprietors so that plans otherwise intended to meet the regulation could be made available to sole proprietors.

In some respects, the regulation broadened the availability of MEPs, particularly association MEPs, but not as much as many advisers had wished. For example, local chambers of commerce could now create an association MEP for their members, which generally are small businesses—including sole proprietorships—in a geographic or metropolitan area. However, the DOL specifically stated that a bona fide association could not be a financial services company—e.g., bank, adviser, broker/dealer (B/D)—thus prohibiting such companies from sponsoring the MEP.

Further, the regulation did not go so far as to allow for open MEPs. And, finally, last year, a federal district court, in New York v. U.S. Department of Labor, in reviewing the DOL’s association health plan regulation, stated that it too broadly interpreted the terms “employee benefit plan,” “employer” and “employee organization.” Thus, the DOL struck down a good portion of that regulation. The court’s decision has led some to be concerned that the association retirement plan regulation is also subject to legal challenge on such grounds.

The SECURE Act, beginning in 2021, allows for the creation of PEPs, which are closer to the open MEPs many advisers had envisioned making available to employers. A PEP is a single plan under the Employee Retirement Income Security Act (ERISA) and need file only one Form 5500 and receive only one annual audit by an independent Certified Public Accountant (CPA). There need not be a commonality of interests among the employers that participate, and the PEP’s sole purpose is to provide employee retirement benefits.

The PEP also may be offered by a pooled plan provider and may be an adviser or other financial institution. The pooled plan provider acts as the PEP’s plan administrator and may act as the plan’s named fiduciary for purposes of ERISA, effectively assuming those responsibilities from the participating employers. For the adviser, to manage and administer a single PEP could be much more efficient than managing and administering multiple, small retirement plans.

In deciding whether and how to implement a PEP, advisers should consider a number of issues. For example, participating employers act as fiduciaries in selecting and monitoring any party that acts as the PEP’s named fiduciary; thus, employers likely will evaluate a number of pooled plan providers before selecting a PEP. Also, the PEP must have a trustee that is a financial institution responsible for collecting plan contributions and assuring plan assets are held in trust. The PEP must be registered and meet a number of requirements in the statute, which will be affected by future DOL and Treasury regulations and guidance.

Moreover, advisers who offer a PEP may wish to use affiliates to provide services to it and offer proprietary investment products as investment options under it. Doing so raises complex fiduciary and prohibited transaction issues that must be addressed.

In view of the opportunities both plans present, advisers and other providers should look carefully at these options and determine how they might offer them to their clients.

David Kaleda is a principal in the fiduciary responsibility practice group at Groom Law Group, Chartered, in Washington, D.C. He has an extensive background in the financial services sector. His range of experience includes handling fiduciary matters affecting investment managers, advisers, broker/dealers, insurers, banks and service providers. He served on the DOL’s ERISA Advisory Council from 2012 through 2014.