Question 300: Can "open multiple employer plans" be treated as multiple plans under ERISA?
Answer: How do you assess the argument that so-called "open multiple employer plans" (open MEPs) may be treated as multiple plans under ERISA?
Based on over 30 years of DOL opinions, there is a legitimate concern about single plan treatment. That is the substance of a detailed article I recently submitted to the Journal of Pension Benefits. At present, I anticipate that the article will appear in issue 19.2 of the Journal, which should be printed in December, 2011. While the Journal, quite properly, has first crack at publishing the article, they have graciously allowed me to summarize its contents.
Let me begin by making clear what I do not say in the article:
But I have reviewed scores of DOL advisory opinions relating to the status of multiple employer plans under ERISA. The article details my findings. Some of those opinions conclude that the MEP in question is legitimately a single ERISA plan. Many of those opinions conclude the opposite, that the MEP is simply a funding vehicle for the separate employer plans established by each of the co-sponsoring employers.
- I do not take a position on whether MEPs are wise or unwise. They are a technique that can accomplish valuable objectives in the right situation.
- I do not question the status of a MEP as a qualified plan. Because of Code §413(c), the tax qualification of a MEP is not in jeopardy (other than by a failure to follow the same rules that apply to other qualified plans in general or to MEPs in specific). However, there is no ERISA analog to Code §413(c).
- I am not suggesting the DOL has any plans to take a position on open MEPs, and am certainly not suggesting, if they do take a position, what that position will be, or should be.
Why does that matter? It matters because there are advisory opinions which suggest that if a MEP really is a series of separate ERISA plans, then each plan must file its own Form 5500, and satisfy separately the independent plan audit requirements. Since filing a single form with a single audit are two of the major benefits cited for MEPs, the loss of those benefits would be significant.
Why does the DOL care? The DOL cares because it is charged with enforcing a statute: the labor provisions of ERISA. ERISA defines an employee benefit plan as being a plan "established or maintained by an employer, an employee organization, or both." ERISA defines an employer as being "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." Most of the advisory opinions on the ERISA plan status of MEPs focus on whether the MEP is sponsored by "a bona fide group or association of employers."
Now this is different from the Internal Revenue Code, but that's nothing new to practitioners. For example, most practitioners know and are comfortable with the fact that owner-only plans do not file Form 5500, but rather file Form 5500-EZ. Why is that? It is because ERISA does not define a sole proprietor without any employees (for example) as an employee for purposes of determining ERISA plan status. And if the owner isn't an employee, then the proprietorship isn't an employer and cannot set up an ERISA plan. By contrast, Code §401(c) says very clearly that a self-employed individual is deemed to be an employee for qualified plan tax purposes, and the proprietorship or partnership is deemed to be the employer. There is no ERISA analog to that provision relating to plan status, and we take it all in stride. Ultimately, there may well exist such a disconnect between the Code and ERISA for open MEPs.
The DOL opinions on what constitutes a bona fide group or association of employers look at a variety of factors. Some of the private commentary that has come out in recent days, much of it funded by MEP promoters, suggests that the only factor is "commonality." That is untrue.
It is true that the DOL is looking for a common link between the sponsors other than their co-sponsorship of the plan. For example, an advisory opinion ruled that a plan co-sponsored by YWCA chapters was a single plan under ERISA. In another opinion, the DOL found a plan sponsored by companies involved in cleaning an environmental waste site was a single plan, because of the close operating relationships between the companies. On the other hand, plans open to anyone who buys insurance from a given firm, or who has a business in a given town, have been found to lack a sufficient business nexus to warrant single plan treatment under ERISA.
But commonality isn't all. Over a dozen DOL opinions say trade association plans that are open to any member of the trade association are not single ERISA plans. Why is that, when the trade association membership is real and it predates in the plan? Well, in virtually every case the association includes members who aren't employers for purposes of ERISA. For example, the American Dental Association includes dentists who are employers, and dentists who have no employees, and dentists who are themselves employees. So, the opinions challenge, how can the association be a "bona fide group" of employers when it includes non-employers?
But the opinions don't stop there. Many of the opinions turn on control. The co-sponsoring employers not only need to have a relationship outside the plan, they also need to control the association or group (or at the very least, the operation of the plan). They not only need to control the association on paper, they must control it in fact.
Therein open MEPs have a real problem. There is no relationship between the employers other than their participation in the plan, and the co-sponsors have little or no control over plan operations, selection of fiduciaries, or other matters. Frankly, that's part of the appeal of open MEPs: leave the tough decisions to the experts and cast your fiduciary responsibilities aside. And the DOL is not above looking at the way a MEP is marketed to determine that it is not sponsored by a bona fide employer association.
Let me here address two arguments that have been raised recently in articles published on the Internet:
Argument 1: The foregoing analysis includes opinions relating to welfare plans, and we should disregard those opinions. Welfare plans are more subject to abuse than retirement plans.
Response: Yes, I did review both welfare and retirement plan opinions. And they're the same. The standards for ERISA plan status do not differ in the slightest on this issue. The statutory provisions relating to employer sponsorship are identical. The DOL in its opinions has never once suggested "We're going to be tougher in determining single plan status on welfare plans because they might be abusive." The DOL cites welfare opinions in its retirement plan rulings, and cites retirement opinions in its welfare plan rulings.
Argument 2: Retirement plans easily can satisfy any commonality requirement because Code §413(c) mandates a certain level of common practice between co-sponsors. For example, each sponsor must credit service with the other sponsors for purposes of eligibility and vesting.
Response: There is not a single DOL opinion I have reviewed that suggests the DOL would find this argument valid. The "commonality" the DOL is looking for is a real connection outside of the plan.
For example, a local United Way organization co-sponsored a retirement program with other local charities. The United Way didn't control the charities; they merely had some joint fundraising. The application of Code §413(c) did not prevent the DOL from ruling that the plan was not an ERISA pension benefit plan, and as a result the audit requirement applied separately to each sponsoring employer.
Furthermore, such an argument ignores the other issues the DOL is looking for — most importantly, control.
Does the fact that past opinions have not, overall, been favorable to the single plan status of open MEPs mean that employers should steer clear of such arrangements? Not necessarily.
So, why am I publishing this summary if I'm not trying to kill MEPs (and I'm not)? I do so because there is so much opinion on this issue in the public domain at the moment that is more based in argument about what the law should be rather than a statement of what the law is. Employers considering co-sponsoring a MEP, and TPAs considering establishing an open MEP for their clients are better served by understanding what the DOL has said the law is, rather than what MEP promoters would like it to be. One author went so far as to suggest that all of the gray areas have been resolved by some of those private opinions. That is not accurate.
- As I said at the beginning, I know of no DOL plans to pursue this issue. There are published reports that senior DOL officials have confirmed that the DOL is reviewing the situation, but it is too soon to tell what the outcome will be.
- It is entirely possible that policy and political considerations may take precedence over the prior legal arguments in the DOL advisory opinions.
- But let's suppose the DOL ultimately decides to opine on the situation and rules that open MEPs are really separate plans, and therefore each must file a separate 5500, with separate audits. That does not mean plans will be required to go back and amend prior returns. It would be quite reasonable to suppose that such a requirement would apply prospectively only.
- There is always the possibility that Congress will step in and deal with the issue directly. In fact, one bill introduced in Congress specifically would allow retirement plan MEPs to be treated as single ERISA plans. Although the prospects for the bill are doubtful, anything can happen.
I'm certainly not suggesting a resolution here. I'm simply reporting my conclusions after a detailed review of over 30 years of DOL opinions. For details and citations, read the full article when it comes in the Journal.
Finally, as a side note, let me mention to readers of this column that, after a long absence forced by the pressures of business, I plan to resume writing this Who's the Employer column, dealing with the issues I've long addressed: employee status, related employers, leased employees, compensation, and similar issues.
Like a man who, to strengthen his good resolves, announces that he's going on a diet, my plan is to issue a new column weekly, at least for the next several months. We'll see how that works out, but I hope you'll join me here!