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BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Open MEPs and Form 5500

(Posted June 7, 2012)

Question 321: How does an open MEP handle Form 5500 filing requirements after the recent Advisory Opinion?

Answer: Little about Advisory Opinion 2012-04A (herein referred to as the "Opinion") is more universally agreed than the fact that, by declaring the underlying employers to have each established separate ERISA plans, the DOL effectively decreed that each of those plans must file a separate 5500-series form. While the Opinion never discusses Form 5500, earlier DOL opinions have. In Advisory Opinion 81-47A, the DOL stated that if a MEP consisted of separate ERISA plans:

each such plan must comply with the reporting and disclosure requirement of Part I of ERISA that are applicable to it. On the other hand, if one multiple employer plan can be recognized in this case, the designated administrator of the plan would be the proper person or entity to file that plan's annual report.
The purpose of this Q&A 321 is to explore that requirement, and determine how a MEP and its underlying plans can best satisfy that requirement. As I explained in Q&A 320, we are working here without guidance. On many issues on which I opine, I think there is a "right" answer. This is not one of them at the moment. So please view this Q&A 321 as an approach to the situation, but there may be other approaches which address what guidance we have. If and when the regulatory agencies do speak on the matter, all bets are off.

Pick a Year

One of the first questions concerns the first year to which the multiple plan requirement applies. I will begin with the technically correct answer: It has always been there. In other words, if an open MEP was established in 2006, then the underlying ERISA plans (generally one for each employer) should have filed a 5500-series form for 2006, 2007, 2008, 2009, and 2010. Of course, with no filing, there is no statute of limitations for the 5500, and in theory the DOL could assert late-filing penalties for each of those years.

I just don't think they will. I base that in part on a comment by a senior DOL official at the Benefits Conference of the South, who said in essence that the DOL would likely view the individual employers as innocent parties and not go after them for late filing penalties or to request the unfiled returns.

While that is by no means an official position, it is an entirely reasonable position. Even if the DOL were to pursue the unfiled returns, surely they would give the employers the opportunity to use the delinquent filer program. It is inconceivable that the DOL would simply "lower the boom" on them. As a result, there's really little or no reason to file the prior returns unless and until the DOL demands them.

What about 2011? Is there any chance the DOL will say "Since the ruling came out so close to the filing deadline, we'll give you a pass on 2011 as well?" There's a chance but it seems very unlikely. More to the point, if the DOL does not make such a statement, they would be very well within their rights to pursue each individual employer for the unfiled return plus penalties. In other words, I don't think the employers (or, more likely, the MEP organizers facing disgruntled employers) can afford the risk of not filing the 2011 returns (on time or with extension), unless the DOL makes an affirmative statement allowing consolidated filing.

Filing for the MEP Itself

Does the MEP itself need to file anything? Here we find one of our first dilemmas. The Opinion says the MEP is a series of separate plans for purposes of ERISA, but Code § 413(c) says it is one plan for qualification purposes. Code § 6058 demands that the one plan file a 5500-series form. So if the DOL doesn't require that the MEP itself file a return, the IRS might. And, unfortunately, we won't know one way or the other on this issue until one of the agencies speaks.

Of course, there is always the issue that the 2010 MEP return was not a final return. Without filing a final return, there is no graceful way to turn off the delinquency letters.

I have a suggestion that might handle both concerns and make life much easier when filing returns for underlying large plans. It involves an issue to which I alluded in Q&A 319. I think it is arguable that for DOL purposes the MEP, while not a plan itself, is an investment entity that holds plan assets, as defined in DOL Reg. § 2510.3-101. If so, then while it need not file Form 5500, it is eligible to do so as a Direct Filing Entity ("DFE"). Specifically, the MEP would be a "103-12 IE."

A 103-12 IE that chooses to file Form 5500 follows specific instructions detailed on page 11 of the 2011 Form 5500 instructions. As such, the MEP would include Schedules A, C, G (if relevant) and H, and an audit. The MEP also would file Schedule D, Part II, to list the separate plans that are part of the MEP. It also might need to complete Part I if the MEP invests in other DFEs such as pooled separate accounts.

When completing Schedule H, the DFE reports contributions as asset transfers in on line 2l(1), and distributions as asset transfers out on line 2l(2).

There are a few questions a 103-12 IE does not answer which would nonetheless be relevant for the IRS, such the participant count (lines 5 and 6) and type of plan information and codes (line 8). I suggest that the plan attach an "Other Attachment" explaining its status as an open MEP and providing the information from those lines.

Employer Plan Filing - Large or Small

Now we turn to the individual ERISA plans which make up the MEP. Each plan has a separate 5500 obligation. For convenience, I will focus on a single employer which, according to the Opinion, is maintaining an ERISA plan. As a preliminary question, we must determine whether this employer is maintaining a large plan or a small plan. This will be based on the number of employees of that employer who participate in the plan on the first day of the plan year (line 5 of the return). If at least 100 employees participate, it is a large plan.

But wait! What about the 80/120 rule? That rule allows a plan with fewer than 121 participants to continue filing as a small plan so long as it filed as a small plan the prior year. But that's the rub. If the plan did not file last year (and the individual plans did not file for 2010), then you cannot use the 80/120 rule. If the plan had 95 participants on January 1, 2010, and 105 on January 1, 2011, for example, the plan might find it advisable to file for both years (paying the $750 late filing penalty for 2010).

Employer Plan Filing - Large Plan

A large plan must file Form 5500 with Schedule H and an audit. However, those requirements are simplified to the extent the plan invests in a DFE (such as a 103-12 IE like the MEP), and the DFE files Form 5500. I will discuss audits further in a future Q&A.

  • Schedule A. If the MEP files a Schedule A to report an insurance contract the MEP holds, the underlying plan does not need to file a Schedule A to report it again.
  • Schedule C. If the MEP reports a service provider on Schedule C, the underlying plan does not need to report the provider. This may eliminate Schedule C filing altogether by the underlying plans.
  • Schedule D. The underlying plan reports the MEP as a 103-12 IE on Part 1 of Schedule D.
  • Schedule H. The underlying plan reports the investment in the MEP on line 1c(12). Because the MEP filed as a DFE, the plan need not break down its investment into subcategories. In addition to the investment in the DFE, the plan might need to report participant loans or contributions receivable. The plan's share of the MEP's income, including unrealized gains or losses, would be reported on line 2b(9).
  • Schedule R. Because a DFE need not file Schedule R, the underlying plan must, unless an exception applies. A profit-sharing or stock bonus plan (including a 401(k) plan) need not file Schedule R if there were no distributions.

Employer Plan Filing - Small Plan

For a small plan, the question is whether the plan is eligible to file Form 5500-SF. Typically, the plan will meet most of the requirements. It will not include employer securities, it is not a multiemployer plan, and it will qualify for the small plan audit exemption (discussed in a future Q&A). The only remaining requirement is that 100% of the plan assets consist of eligible plan assets.

In one sense, the assets of the employer's plan consist of an interest in the MEP trust, which would not be an eligible plan asset. But DOL Reg. § 2520.103-12 (the section that gives 103-12 IE's their curious name) says the plan has an election regarding how it treats a DFE and its assets. In other words, the plan can choose to disregard the DFE, and instead treat the plan as owning a pro rata portion of the underlying assets. Those underlying assets generally would be eligible plan assets. In other words, while the large plan embraces the DFE concept to simplify reporting, the small plan welcomes the "look-through" approach and disregards the DFE, also to achieve simplicity.

Owner-Only Plan Filing

In an earlier Q&A, I mentioned the possibility that a business with no employees, such as a sole proprietor working on his or her own, might choose to participate in an open MEP. Such an employer is exempt from filing (and indeed cannot file) Form 5500, but generally will file Form 5500-EZ or 5500-SF. However, because the IRS views the MEP itself as the plan, and an only-owner plan is not subject to ERISA's reporting and disclosure obligations, it is possible that the plan need not file anything at all.

Specific Questions

Let us briefly consider answers to some specific questions for the underlying plans. I assume 500 employers are cosponsoring a MEP, and none of the 500 employers has ever filed a return for the MEP before.

  • Preliminary information. Each plan would check that it is a single-employer plan and that this is the first return/report.
  • Line 1. This is the name of the plan that appears on the plan document. The 500 employers will all show the same plan name. The plan number might differ among those 500 employers, depending on other plans that employer has adopted. The effective date is the date the plan was effective for that employer.
  • Line 2. As discussed in an earlier Q&A, in the case of a single employer ERISA plan, the plan sponsor is the adopting employer. So each of the 500 employers will enter its own name and identifying information on line 2.
  • Line 3. The plan document names the plan administrator, usually one of the MEP organizers. All 500 employers would enter the name of the plan administrator designated in the document.
  • Line 4. Leave it blank. None of the 500 plans has previously filed a return so there is no information to change.
  • Lines 5 and 6. Enter the employees of the plan sponsor who are participants.
  • Line 8. Enter the codes that apply to the employer. Since different employers may be allowed to elect different features, these codes may differ from employer to employer.
  • Signature. The plan administrator must sign the return. If the employer wishes to sign as well, as the plan sponsor, it can do so.
For further discussion of the qualification issues related to MEPs in general, see Chapter 18 of the new 6th Edition of my book, Who's the Employer. For a comparison of the Code and ERISA issues relating to open MEPs, see my article, Multiple Employer Plans: An ERISA Enigma, appearing in the Winter 2012 issue of the Journal of Pension Benefits (Vol. 19, No. 2, p. 6).

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.

Copyright 1999-2017 S. Derrin Watson
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