More about MEPs

About a year or so ago, there was much hub bub about multiple employer plans (MEPs). Sort of like the game of telephone, the story gets muddled and I am not interested in rehashing it. In short, an official at the Department of Labor (DOL) answered an off the cuff question about MEPs and expressed concerned how open MEPs (as opposed to closed MEPs, i.e., an association of employers of common interest, etc.) operated. The concern was not about the legality of open MEPs (they are allowed by the Internal Revenue Code), but about plan sponsorship and whether they were actual plan sponsors and not just a gimmick to avoid Form 5500 for the participating employers of the MEP. Of course, news of this off the cuff comment spread like wildfire and it got so crazy you had financial advisors out there saying they wouldn’t recommend their clients to consider MEPs. So you had quite a few reputable MEP providers who probably suffered a pecuniary loss as a result of rumor and hyperbole, not actual fact.

I didn’t buy into the panic because common sense dictated that if the DOL wanted to end open MEPs, they probably would have to rewrite the Internal Revenue Code and/or the regulations thereunder, which is a problem since they don’t have the power and the IRS is a division within the Department of Treasury.  I calmed financial advisors, MEP providers, and clients interested in the MEP business. My belief is that the concerns in the MEP business are like every other facet of the retirement plan business or any other business out there, people hawking services that were a bit unscrupulous and/or expensive.  A MEP is like any other feature or service within retirement plans, plan sponsors considering them have to conduct a due diligence review and make sure the MEP providers are up to snuff.

Well, don’t take my word for it, take Phyllis Borzi’s.

This was from her March 7th testimony to Congress:

“While it is clear from my testimony that the Department supports efforts to expand small business coverage, it is just as important that ERISA’s protections for workers’ pensions be maintained. In that regard, the Department has more recently become aware of promoters marketing multiple employer plans, or “MEPs,” that do not involve collective bargaining with an employee representative. These arrangements, often called “open MEPs,” purport to allow totally unrelated businesses to join together to offer a collective pension plan. Promoters claim that these arrangements relieve businesses of their ERISA reporting and fiduciary obligations in connection with administering the plan or monitoring the plan investments and service providers. Proponents say such arrangements can provide the participating employers with a way to pool resources and reduce administrative costs. There are several bills pending in Congress which call for the Department, in coordination with the Treasury Department, to provide fiduciary relief and simplified administrative, reporting and disclosure obligations for multiple employer plans. We are currently analyzing these proposals.

Under ERISA, employee benefit plans must be sponsored by an employer, by an employee organization, or by both. ERISA expressly recognizes the idea of a “multiple employer plan” by including in the definition of “employer” 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.”

For example, a MEP operated by a bona fide employer association or group of related employers is a well-established concept in ERISA. Such plans in fact can provide the participating employers with a way to pool resources and reduce administrative costs. The idea of “open MEPs,” however, is not an established concept in ERISA. Indeed, EBSA has had difficult experiences with similar “open” employee benefit structures in the group health area. These arrangements, called “MEWAs,” or multiple employer welfare arrangements, can be provided through legitimate organizations, but they sometimes are marketed using attractive, but unsound, organizational structures and generate large, often hidden, administrative fees for the promoters. In addition, certain promoters try to use ERISA’s general preemption of state laws as a way to avoid state insurance or other regulation. That fact, together with the claimed separation of the employer from accountability for the plan’s administration, too often put workers at risk of not getting the benefits they were promised. Bringing this type of product to the pension marketplace presents a number of complicated and significant legal and policy issues. We understand that the Government Accountability Office is actively studying this development in the pension marketplace.

We have also heard about this “open MEP” development from regulated financial institutions, including insurance companies and other financial service providers, who currently are allowed under Internal Revenue Code rules to offer “prototype” plan products to employers. These prototype plans are another way to reduce legal and administrative costs of offering employees a tax qualified pension plan. Some financial institutions have expressed reservations about developing competing “open MEP” products. Their lawyers, based on a review of the many Department of Labor opinions and other guidance on “open MEWAs,” have expressed concerns about whether these “open” benefit arrangements can fairly be classified as a “single” plan as opposed to a collection of separate plans being collectively administered much like the prototype plans they already offer. We have been informally asked to provide guidance in this area by some of those groups, and we have two formal requests for guidance, one directly presenting the open MEP issue and the other indirectly. We are actively working on answering these requests.”

I read between the lines and while there is concern about promotion about open MEPs, I think the concept that MEPs can help reduce a plan sponsor’s liability and costs is too irresistible for the DOL to refuse since plan costs have been at the top of the DOL’s hit list.

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