Question 320: Did the recent Advisory Opinion on MEPs actually say the underlying plans need to file separate 5500s, must be audited separately, and must increase the coverage amount on their fidelity bonds?
Answer: Advisory Opinion 2012-04A (herein referred to as the "Opinion") did four things and only four things:
- It explained why open MEPs are not single ERISA plans.
- It said that the employers sponsoring an open MEP are each sponsoring a separate ERISA plan for their covered employees.
- It differentiated open MEPs from designs involving multiple employers that would be a single ERISA plan.
- It discussed fiduciary responsibilities regarding an open MEP.
And that may be enough. Oh, there are some serious questions to answer, and things on which guidance would be extremely helpful. While this is a good start, it leaves us "working without a net."
Controlled group analogy
I really should be used to this by now: working without a net. I've done so for the last 20 years as I've developed my expertise in controlled groups, the primary topic of my book, Who's the Employer. The controlled group rules don't tell you whether you need to cover employees of controlled group members. They don't say whether group members have a single 415 limit. They don't talk about top-heavy testing, ADP testing, counting service, determining compensation, or a host of other issues.
The controlled group rules essentially do one thing. They say that for a whole bunch of Code sections, the members of the controlled group are deemed to be a single employer. It is up to us, then, to look at that principle and see how it applies in the context of all those other Code rules. We take a given conclusion (single employer status) and then apply general plan rules to make our determinations.
Understanding the Opinion
And that's what we have here. The DOL was asked a question: Are open MEPs in general (represented here by a specific open MEP) single ERISA plans? It was a very good question. It was the right question to ask. And the DOL answered that question. Although you wouldn't know it to read what MEP supporters are now saying, it was exactly and precisely the answer they did not want to hear.
Why? Why does it matter that open MEPs are not single ERISA plans but rather a series of separate plans? It matters because ERISA rules and form instructions (general plan rules) dictate certain results as a result of that conclusion. And frequently those results will make open MEPs more expensive to operate than they have been until now. Those expenses will be paid by employers participating in the MEP, will be paid (directly or indirectly) from participant accounts, or will eat into the profit margins of the MEP operators. Any way you slice it, open MEPs have lost a competitive advantage they previously claimed.
We will explore those results in future columns, but we'll be doing so largely without the help of Advisory Opinion 2012-04A as we look at the effect of that opinion on general ERISA rules. Please join me on the analytical tightrope. The view will be fascinating.
What the Opinion did not do
Before I leave this column, I should quickly address two things the Opinion did not do.
The Opinion did not disqualify open MEPs or affect their status as qualified plans in any way. There was no way the Opinion could have done so. There was never a risk of doing so. The DOL is the wrong agency to do so and the agency that deals with plan qualification (the IRS) has a different set of definitions to work with, under which an open MEP can be perfectly tax-qualified.
The Opinion did not kill open MEPs. There was and is no conceivable basis for the DOL to have issued guidance saying "open MEPs are inherently illegal." That was never in the cards. The DOL has accomplished exactly what it wanted to do. It applied DOL policies and precedents that have been on the books for 30 years, policies and precedents that were (erroneously) disregarded by MEP providers and their advisors who are now forced to confront the reality that some of the benefits they promised their customers can't be delivered. (Again, we'll talk about those more in future columns.)
But does that mean there are no benefits to an open MEP, or that the design itself has outlived its usefulness? Hardly. There still are some employers who would be well served by an open MEP. And I am confident, even after the industry shake-up that will doubtless take place as firms work through the consequences of the Opinion, there will be providers there to serve them. We'll discuss who benefits from an open MEP and why in a future column.