Question 329: What effect does the recent DOL Advisory Opinion on open MEPs have on MEPs sponsored by PEOs (professional employer organizations) or other staffing firms?
Advisory Opinion 2012-04A (herein referred to as the "Opinion") arose in the context of an open MEP. But the principles underlying the Opinion apply to any MEP. They are principles the DOL has referenced repeatedly throughout the years.
Perhaps the best way to illustrate that point is to look at another advisory opinion the DOL issued the same day. Advisory Opinion 2012-03A dealt with a totally different situation than an open MEP. A company wanted to start a multiple employer plan that would receive transfers of assets from abandoned plans. (Perhaps the most interesting question to me about their proposal is one that was never answered: If a plan has been abandoned, who is going to transfer its assets to this new plan?) The DOL used the same set of factors and the exact same reasoning as in the Opinion on open MEPs to hold that the proposed plan would be a series of separate ERISA plans.
That opinion cites Advisory Opinion 95-29A, which was directed to a staffing firm, or professional employer organization (PEO), for its welfare plan. The PEO adopted the plan for its worksite employees, the employees it was "leasing" out to its clients. The PEO took the position that it was the "co-employer" of these employees, and therefore the plan was a single plan under ERISA. The DOL's ruling is subtle:
It is the position of the Department of Labor . . . that ESA is acting either directly or indirectly in the interest of an "employer" in establishing and maintaining the ESA Program, which therefore is one or more employee welfare benefit plans within the meaning of section 3(1) of Title I of ERISA.
Did you catch that? The plan is at least one ERISA plan, but it may be more than one.
Reading on, the key issue becomes whether the PEO was the common law employer of the workers. If it was, then it was directly setting up a plan for its employees, and the plan would logically be a single ERISA plan. If the PEO was not the common law employer, then it was indirectly setting up a plan on behalf of the true employer, one of the clients of the staffing firm. ERISA section 3(5) allows this, but each of the underlying employers would thereby be (indirectly) establishing a separate plan.
Even though the plan might be a single ERISA plan, that would not necessarily keep it from being a multiple employer welfare arrangement (MEWA) under ERISA section 3(40), and therefore subject to state insurance regulation. The DOL ruled that the PEO's plan was a MEWA unless the PEO could demonstrate that it truly was the employer. The DOL found nothing in the PEO's paperwork to support the conclusion that the PEO was the employer.
I discuss PEOs at length in Chapters 5 and 6 of my book, Who's the Employer (now in its 6th edition), and conclude that in almost every situation involving a staffing firm and long-term worksite employees, the firm is not the true employer. Rather, the firm's client is the employer.
Of course, in the modern PEO multiple employer retirement plan, the MEP is cosponsored by the client employers. The IRS insisted on that in Rev. Proc. 2002-21. So the question of whether the PEO can indirectly set up the plan for its clients does not arise. But, based on the reasoning of the new Opinion (2012-04A), and the earlier Advisory Opinion 95-29A, a PEO MEP would be a single plan only if either:
- The PEO was the common law employer (exceedingly rare), or
- The client employers are a "bona fide group or association of employers," considering the following standards:
- How members are solicited;
- Who is entitled to participate and who actually participates in the association;
- The process by which the association was formed, the purposes for which it was formed, and what, if any, were the preexisting relationships of its members;
- The powers, rights, and privileges of employer members that exist by reason of their status as employers; and
- Who actually controls and directs the activities and operations of the benefit program.
These factors do not favor PEOs. Most PEOs serve all comers without regard to the business involved. The firm's clients can be from many fields and possibly several cities. There is no preexisting business relationship between the employers, other than that they share a service provider. There is no real "association" and no real purposes to the collected group of clients, other than efficiently running their businesses. The PEO clients overall have very little to do with the operation of the PEO's plan. Their only remedy if they are dissatisfied is to discontinue their relationship with the PEO and withdraw from the plan (if the plan allows for withdrawal).
Looking at all the factors, one concludes that the typical PEO plan is not a single ERISA plan, but is, like open MEPs, a series of separate plans under ERISA. This means the PEO plan is subject to the same rules we have discussed in earlier columns for separate ERISA plans, including the requirement to file separate Forms 5500 with seperate audits.
PEOs and other staffing firms would do well to have experienced ERISA counsel review their retirement plan arrangements in light of the Opinion.