The Many “Deaths” of Open MEPs

Khan: Kirk? You’re still alive, my old friend?
Kirk: Still, “old friend!” You’ve managed to kill everyone else, but like a poor marksman, you keep missing the target!

Like Khan Noonien Singh’s faulty aim, the Department of Labor (DOL) seems to have a faulty aim in trying to kill off the legality of multiple employer plans (MEPs) that are considered open, meaning it does involve belong to a trade group, PEO, or association. Of course, if you believe the DOL wants to kill off Open MEPs.

I am a firm believer in Open MEPs. If done correctly, they can lower plan expenses, which lowers the participant’s expenses, limits plan sponsor’s liability, and opens up plan participation to employers who might not have considered a plan if they had to go out on their own. As my good friend Tom will point out, I have helped third party administrators (TPAs) work on MEPS, as well as starting one on my own.

So while I’m certainly biased, those tooting the horn against Open MEPs tend to biased as well. While there are some that have no allegiance, some Open MEP critics are those that feel very threatened by them, namely some TPAs whose pricing would be threatened if they go head to head with TPAs offering a MEP solution as an alternative. Suppose you are a TPA whose bread and butter is cash balance plans and you charge $5,000 a plan document and $5,000 to $10,000 in administration, of course your business is threatened if someone offers a MEP where an employer joins for a fraction of that administrative expense. That being said, most everyone on either side of the argument has a bias and financial interest.

That being said, common sense should never lose out. The DOL is a governmental agency, so this is 2012, a political year (which year isn’t?). Does anyone think the Obama administration will kill off a plan that can offer on its best day, lower plan expenses, lower fiduciary liability, and more professional plan management? So when a certain ERISA attorney made claims that the DOL was cracking down on Open MEPs based on a comment made by a DOL official at a benefits conference, a lot of rumors, lies, and innuendoes were spread.

The DOL was looking at MEPs in terms of the plan sponsors. Did they meet the definition of the employer for purposes of ERISA, or where they offshoots of the service providers that can create a whole host of prohibited transaction rules? Are the plan sponsors being compensated from plan assets in excess of actual plan expenses? Thanks to a lack of developing some 36 year old rules set forth by the Internal Revenue Service, the Open MEP space delved into the Wild West and we needed some law and order. In those great Westerns, the Sheriff went after the folks with the black hats, not after the folks with the white hats, or the guy owning the general goods store. In the Western envisioned by an Open MEP critic, the Sherriff kills off the entire town including the women and children.

In the very recent Department of Labor ruling 2012-04A, the DOL took on a MEP or at least a MEP sponsor. It held that since the plan sponsor wasn’t a proper employer for ERISA and there was no commonality between the adopting employers (such as the association, trade group, “closed MEP”), then it wouldn’t be considered a single employer plan for ERISA which means every adopting employer of this MEP is going to need a 5500. Since it wasn’t an employer and had no commonality, then it was no good which means that an employer can maintain a MEP that has no commonality.

I am not going to bore you to death with the nuances here, but if the DOL wanted to kill off Open MEPs here, they could have, but they didn’t. They killed off one (or seriously wounded one) which had structures that were problematic, the plan sponsor was just an offshoot of the registered investment advisor, the RIA was the 3(16) administrator, and the plan fees from assets were high.

The DOL gave a blueprint to operate an Open MEP, or something resembling a blueprint. So if you get an email from someone killing off Open MEPs again, it’s alive. Just like Admiral Kirk, well at least in Wrath of Khan.

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